Cap and trade

PHOTO: THINKSTOCK

Regulations to manage carbon emissions have been described as a competitive threat to manufacturers; however, they represent an opportunity for companies that take the right steps to gain advantage.

For several years facilities emitting greenhouse gases (GHG) above certain regulatory thresholds in Alberta, BC, Quebec and Ontario have been required to provide reports. Many companies have already gathered several years of baseline data on their carbon impacts, but most still have some work to do preparing for a carbon-constrained world.

Carbon cap and trade, an idea now common in many European countries, as well as in Quebec and California, involves comparing a facility’s GHG emissions to a government-imposed “cap” or upper limit. A facility that emits above its cap must purchase allowances or offset credits to cover the gap. Reducing emissions could result in extra allowances that can be banked for future use or sold on the open market.

Many firms are already compliant with GHG reporting rules; however, regulations are likely to change if cap and trade is implemented. For example, requirements to report certain production information may be introduced, or third party verification may become mandatory. In Ontario, where cap and trade is imminent, additional source types are being added to the scope of the regulation and the reporting threshold is being lowered from 25 to 10 kilotons.

As more facilities are subject to carbon trading legislation, manufacturers must improve the reliability and credibility of the information used in GHG reports. Two areas for improvement are:

• Data gathering and analysis reliability. It needs to be done correctly and by current standards. Assess the required level of effort and make plans to ensure the availability of sufficient resources well ahead of reporting deadlines.
• Information reliability. It must be acceptable to regulatory authorities and investors who will rely on the information to make important policy and investment decisions. Regulators will require reporters engage a credible third-party to provide independent assurance that reported information meets required standards. In Quebec, Ontario and BC assurance providers must be accredited to ISO 14065.

Calculating GHG emissions is relatively straightforward – perhaps based on natural gas consumption, using bills from a natural gas provider.

In other cases, the emissions inventory may be more complex than identifying all the sources, calculating their emissions and finding a way to monitor any changes.

Some companies will find that opportunities to reduce their emissions are plentiful. This can be through a combination of capital expenditures such as replacing a simple-cycle with a combined-cycle boiler, and operating changes, such as making sure bay doors are kept closed in very hot or very cold weather.

Other companies that have worked hard to squeeze out unnecessary expenditures should consider turning to the open market. This means looking for allowances from other regulated facilities that have found ways to reduce emissions below their caps. Another option is finding offset credits from third-party validated and verified offset projects related to activities outside the regulatory scope of the cap and trade program, such as waste, forestry or destruction of ozone depleting substances.

Setting a price

There may also be benefit to planning for potential cap and trade costs by using “shadow” prices for carbon. Proposed cap and trade rules will likely include a price collar on carbon to restrict prices from falling too low or climbing too high. This price collar can be used to estimate future carbon liabilities for discussion with those responsible for planning operating and capital expenditures.

There is wisdom in dealing with these issues sooner rather than later. Good planning allows companies to use dollar cost averaging of investment confidently and conservatively purchase allowances over time. Planning also helps budgeting for allowances in a way that matches the company’s revenue stream.

Mike Kennedy is administrator of the GHG Validation and Verification Program for consulting firm RWDI, based in Guelph, Ont.

This article appears in the November/December 2015 issue of PLANT.