Canada Informs Ontario of Intent to Transition Output-Based Pricing System (OBPS) to the Ontario Emissions Performance Standards (EPS) on January 1, 2022

The big news around carbon pricing continued this week. On March 29, 2021, the federal Minister of Environment and Climate Change informed the Government of Ontario of his intent to take the necessary measures to transition the federal Output-Based Pricing System (OBPS) to the Ontario Emissions Performance Standards (EPS) on January 1, 2022.

This follows the initial announcement in late September 2020 that Environment and Climate Change Canada (ECCC) had accepted the Ontario EPS as an approved alternative to the OBPS as a carbon pollution pricing system for large industrial emitters in Ontario, after a lengthy period of discussion between the two levels of government. This was followed by a Notice of Intent that was issued by the federal Minister of Environment and Climate Change to make regulations in response to the stated intention to stand down the federal OBPS in Ontario and New Brunswick and in order to improve the implementation of the OBPS Regulations.

As noted in previous posts from Sussex regarding this topic, the federal carbon pricing system is detailed in the Greenhouse Gas Pollution Pricing Act (GGPPA). It has two parts:

• a regulatory charge on fuel (federal fuel charge)
• a regulatory trading system for industry – the federal Output-Based Pricing System (OBPS)

While the OBPS will be replaced by the Ontario EPS in January 2022 (pending completeness of the transition process), the federal fuel charge remains in place.

The intended transition date will provide some clarity to those large emitters that are obligated under the systems, as there has been consideration of a retroactive start date of January 1, 2021.

With the intended transition date now shared by Canada with Ontario, there is much work to do in Ontario by both government and stakeholders to prepare for the official transition to the EPS. The Ontario Ministry of Environment, Conservation and Parks (MECP) started this work with proposed regulatory amendments to the EPS regulations in late 2020, with an intention of proposing further amendments to ensure alignment with federal benchmarks and other related components to ensure equivalency with the federal system post-2021. Some components of the EPS will require updates to reflect the intended start date of January 1, 2022, including updated stringency factors for various sectors. It remains unclear if the Ontario EPS will be amended to include the use of compliance-grade offset credits to be used to fulfill compliance requirements or how this aligns with the development of the Federal Greenhouse Gas Offset System by ECCC.

Sussex anticipates that stakeholders will also be interested in learning more about the intended use of revenues that will be generated in Ontario through the EPS; in the 2018 Made-in-Ontario Environment Plan, MECP indicated that an Emissions Reduction Fund will be established as a vehicle for this revenue, which would then be used to support Ontario projects and initiatives that would reduce emissions.

The revenue generated up to December 2021 under the OBPS by Ontario participants will be returned to Ontario (i.e. the jurisdiction of origin) to support industrial projects to cut emissions and use new cleaner technologies and processes, per the GGPPA. We anticipate further details about in the coming months.

In short, there continues to be many moving parts involved in the development of Ontario’s carbon pricing system, further layered by the recent Supreme Court of Canada ruling that held up the ability of the federal government to apply its carbon pricing legislation across the country.