Cap and Trade Primer on NS Emissions

January 31, 2019

In October 2017, Nova Scotia amended the Environment Act (Nova Scotia) allowing the province to implement a cap and trade program. With the program’s regulations now coming into effect, the impact of this program will be felt intensely within the Nova Scotia business community and in particular the energy sector. Companies must now report their greenhouse gas (“GHGs”) emissions, have them verified by a third party, and participate in the province’s cap and trade program

Companies affected include:

  • Facilities that generate 50,000 tonnes, or more, of GHG emissions per year from one or more specified activities;
  • Petroleum product suppliers that place or produce 200 litres, or more, of fuel per year for consumption in the Nova Scotia market;
  • Natural gas distributors that deliver natural gas for consumption in Nova Scotia that, when combusted, produces 10,000 tonnes, or more, of GHG emissions per year; and
  • Electricity importers with 10,000 tonnes, or more, of GHG emissions per year from imported electricity consumed in Nova Scotia.

What is Cap and Trade?

Under a Cap and Trade program, a ‘cap’ on GHG emissions is put in place on the emitter. This means industries that produce large amounts of GHG emissions will need to remain underneath this cap. Normally, the cap reduces over time.

The ‘trade’ part is a market for companies to buy and sell the allowances they have within the cap that let them emit only a certain amount, as supply and demand set the price. Trading gives companies a strong incentive to save money by cutting emissions in the most cost-effective ways, which should lead to practices that help reduction in GHG emissions and pollution over time.

Legislative Authority

Amendments to the Environment Act (Nova Scotia) were passed in October 2017, and proclaimed on February 15, 2018. These amendments allowed the provincial government to create this cap-and-trade program and the regulations to support it. The first businesses affected will be 20 large industrial emitters including Nova Scotia Power, Northern Pulp, Lafarge, and large oil and gasoline companies including Exxon Mobil and Irving.

As the caps currently in place will be reduced over time meaning smaller businesses could also be brought into the fold of regulation in the future.

Cap and Trade Nova Scotia

The Nova Scotia system differs from other provincial cap and trade approaches. First, there will be no option to trade allowances across other jurisdictions and most of the allowances will be given out for free. If a company emits more than is covered by their allowances, they can buy more allowances from another company that has emitted less or buy more allowances from the Province by participating in an auction/sale process which will be established by the Province. Over time, the cap will be reduced, increasing the disincentive to emit. This has the potential to allow for a smoother, less costly transition while still providing for a long term overall reduction in provincial emissions.

Regulations on Cap and Trade

There are two sets of regulations that have been promoted under the Environment Act on the subject:

  1. Quantification, Reporting and Verification Regulations (the “Quantification Regulations”), and;
  2. Cap and Trade Program Regulations (the “Program Regulations”).

The Quantification Regulations, which came into effect in February 2018, outline how emissions are to be quantified, calculated and reported. The regulations require that all emissions reporting is verified by an accredited third party.

The Program Regulations came into effect on November 14, 2018 and provide for a robust regime in respect of the cap and trade system. Some of the salient features of the Program Regulations include regulations on:

  1. Creation and grant of initial allowances to emitters;
  2. Establishment of an account registration system for emitters to manage their emissions allowances;
  3. Auction and Sale Process for sale/auction of additional emissions allowance by the Province to emitters; and
  4. Transfer of emission allowances between emitters.

In addition, there are provisions that establish which types of emitters will be exempt from the program, deadlines for registration, and the information required of emitters to register.

The Program Regulations also mandate a number of mechanisms seeking to limit insider trading, collusion, and market manipulation for emission allowances. For example, the Program Regulations imposes obligations on auction participants restricting disclosure of the participant’s intent to participate in the auction, bid amounts, bidding strategies, and other information to other parties. Moreover, transfer of emissions allowance between the emitters is heavily regulated with such transfer being subject to approval of the Minister of Environment (the “Minister”). Furthermore, the Program Regulations require disclosure of details of the transfer transaction to the Minister, including, the price to be paid and methodology used to price the emission allowance.

For any queries on how Nova Scotia’s cap and trade regime may impact your business, please contact Mohammad Ali Raza, energy and natural resources lawyer in the Halifax office of Cox & Palmer at mraza@coxandpalmer.com or 902-491-6845.

This article was written with contributions by Jeremy Power, Articled Clerk. This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc.

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