Ontario’s Carbon Emissions Standards to Replace the Federal Regime for Large Emitters in the Province

On September 21, 2020, the Ontario Minister of the Environment, Conservation and Parks (MECP) announced that the federal government has accepted Ontario’s Emissions Performance Standards (EPS) as an alternative to the federal carbon pricing regime. The federal regime, which is called the Output-Based Performance System (OBPS), applies to large emitters in all provinces that do not have a carbon-pricing regime which the federal government has accepted. Up until September 21, Ontario was one of these provinces. For the purposes of the federal OBPS, large emitters include both facilities reported as emitting 50kt CO2e or more of greenhouse gases, and other facilities that are primarily engaged in any of an enumerated list of industry activities, such as oil and gas production or food processing.

The newly-accepted Ontario EPS regulates the emissions of greenhouse gas by the same high-emitting industrial facilities. These facilities are required to meet standards set out by the EPS for lowering emissions. Where the facility lowers its emissions beyond the EPS-required standard, it receives “compliance units”. Where the facility does not meet the required standard, it is required to purchase compliance units.

Jeff Yurek, the Ontario Minister of the Environment, stated in his news release that the Ontario regime differs from the federal regime in that it phases in the emission-lowering requirements more gradually over time. He stated Ontario’s EPS takes into account specific industry and facility conditions in its standards and does not enforce a blanket cap on emissions. Minister Yurek emphasized that the province’s goal was to help achieve 2030 emission reduction targets pursuant to the Paris climate agreement while supporting the overall growth of the Ontario economy and not driving away business to other jurisdictions.

Just as in Ontario, the federal government has recently also accepted New Brunswick’s carbon pricing system. For both provinces, the transition date remains uncertain. As a result, the federal OBPS continues to apply and all compliance obligations under the OBPS, including the annual and verification reporting requirements for the 2019 year, must continue to be met for the time being. It remains uncertain whether the federal government will continue to collect the amounts payable for emissions until the transition date for facilities covered by the Ontario EPS.

The federal OBPS, which came into effect on January 1, 2019, after the cancellation of Ontario’s Cap and Trade program in 2018, has faced constitutional challenges in the courts. The federal carbon pricing regime has been challenged not only in Ontario’s Court of Appeal, but also in Saskatchewan and Alberta, on the grounds that the federal government has exceeded its jurisdiction and is encroaching on provincial, constitutionally-mandated powers. The provincial appeal courts have come to different results: Ontario and Saskatchewan courts upheld the federal carbon levy as constitutional pursuant to the Parliament’s peace, order and good government powers, while the Albertan court found the levy unconstitutional.

This week, the Supreme Court of Canada heard the appeal of these three decisions over the duration of two days, the first in-person hearing it has had since the COVID-19 shut down in March. The Supreme Court reserved its decision.

The outcome of the Supreme Court decision remains relevant as it determines the constitutionality of the federal fuel charge as well as the federal OBPS regime that continues to apply to provinces which do not have their own carbon pricing system. The Supreme Court’s decision will also provide guidance about the scope of Parliament’s power in the coming years to legislate over climate change measures within the provinces.