By Stephen Kishewitsch
The supply of carbon credits for Ontario companies that would like to minimize the price they will have to pay for carbon emissions under the federal carbon pricing system is currently low to non-existent, and seems likely to remain that way for more than a year. Emitters under the program can expect to be stuck with paying the full price for their emissions for the duration. That was one of the messages during a webinar in mid-June by 360energy. Some follow-on effect seems likely as well on the price for energy generally, or products with a large embodied energy component.
Currently, while Ontario has an Emissions Performance Standard (EPS) on the books as a way of addressing provincially-generated emissions involved in climate change, the only operational system in place with offset trading options is the federal Output-Based Pricing System (OBPS). Under the system, heavy emitters – steel plants, cement manufacturers and the like, as well as generators, including large industrials with their own behind-the-meter gas-fired generation, face a carbon intensity factor vs their output, beyond which they must pay a levy. When the system became active in 2019, the levy was set at $20 per tonne of carbon equivalent GHG emissions, rising by $10 each successive year: $30 for emissions this year, $40 in 2021, until it reaches $50 in 2022.
As is usual in such systems, emitters can also obtain offsets, created mostly by other entities – biogas generators, agricultural and forestry programs that store carbon in the soil or in biomass, for example. Very efficient generators who also emit less than their Annual Emissions Limit could also create credits, but most are unlikely to be able to. Emitters over their limit, as most are expected to be, can purchase credits at a lower price to comply at a lower cost than the levy imposed.
The difficulty lies in the fact that, while the OBPS program came into effect in 2019, the counterpart program at the federal level that will be needed to define, authorize and certify the needed offsets is still under development. No federally-defined offsets yet exist.
In the meantime, Quebec, Alberta and British Columbia each have their own, operational offset systems. The federal program is to be a single, Canada-wide market, in which the provincially-created offsets and the eventual federally-created offsets are all to be equal. For the present, the federal system will allow Ontario emitters to use offsets created in other provinces.
Canada has several carbon pricing systems, whose compatibility has yet to be determined. Graphics courtesy ClearBlueMarkets.
However, as Michael Berends at ClearBlueMarkets explains, there remain at least two complications. One, each province’s offsets were created under the province’s own carbon-equivalency principles, rules, standards and accounting system. It’s not yet clear whether four separate carbon accounting systems can readily be merged into one, or how long that might take. Second, there may be some resistance by each province’s emitters to see the locally created credits leave the province – “We’ve done all the hard work to create and approve these offsets, why do I want that offset to go outside my province to the federal program?”
Any province may of course have a surplus of offsets, in which case their sale would at least bring in revenue from outside. Otherwise, the emitters in the given province will wind up paying more as they compete for offsets in a short market with Ontario facilities regulated under the OBPS. Ontario, as the largest economy, will have the largest demand for them.
In this kind of system it’s carbon offset developers who will aggressively be looking for projects, but they will all have to wait for certainty as to what will be an acceptable project, and until then only small volumes of credits can be created, if any can be created at all. There will be a lag time between investment, followed by project development, and finally generating certified credits. And even though the deadline for credit submission for the 2019 compliance year has been moved to April of 2021, it seems unlikely that anything will be available for at least a year, perhaps two. Mr. Girod suggested during his presentation that the OBPS system is likely to be short more than 7 million compliance units for compliance year 2019.
Eventually a full market should emerge, with supply enough to meet demand, and as Nicolas Girod, also from ClearBlueMarkets, noted during the webinar, it will be important for companies under such systems to be aware of how prices can change and how their competitive advantage will be affected. For example, an emitter will want to keep an eye on whether it can buy credits at, say $20 today, and lock it in for when they need to pay $50. They will want to know where supplies are coming from, whether there will be volumes to secure and if they can be secured in timely fashion. For example, an emitter might know it needs to secure 100,000 tonnes a year for each of the next four years. If someone offers 400,000 tonnes at $25 a tonne, that will be valuable when the price is $50 a tonne.
For the present, emitters will be left paying the levy price until credits are available, and even then there will be so few that their prices will be very close to the levy anyway and the advantage of finding any will be trivial, given the extra paperwork involved.
“We haven’t worked out what that means in dollar terms yet. There will be no cost savings in electricity for a while yet,” Mr. Berends commented.