June 22, 2001

John Hutchison, Senior Policy Analyst
Air Policy and Climate Change
Ontario Ministry of the Environment
4th Floor, 135 St. Clair Ave. West
Toronto, Ontario  M4V 1P5

Re:  EBR Registry Number RA01E0009

Comments on Reduced Emission Limits for the Electricity Sector and an Emissions Reduction Trading System for Ontario

Pollution Probe appreciates the opportunity to formally respond to the Ministry of the Environment’s proposed electricity sector emission limits and emissions trading programme, and to outline our concerns about this proposal.

When examined alone, the proposed cap on emissions of nitrogen oxides (NOx)  represents a positive step toward cleaner air.  By Pollution Probe’s calculation this cap would bring Ontario into compliance with the recently signed Canada-US Ozone Annex.

With the present emissions trading proposal, however, the electricity sector can exceed the Ozone Annex commitment by up to 33%.  If other NOx emission reductions are guaranteed and we are assured that Ontario’s Anti-Smog Action Plan (ASAP) will meet the provincial NOx target (45% reduction from 1990 emission levels by 2010) this may be acceptable.  Unfortunately, we have no legal or firmly binding guarantee that ASAP will meet its target.  Therefore we cannot accept the trading system as proposed.

For now, the electricity sector should be required to meet the targets that have been set, without emissions trading.  This should remain the case until such time as the ASAP is benchmarked in law or in acceptable sector and/or company-specific NOx reduction agreements.  Trading emissions reduction credits with such companies may be acceptable, depending upon the details of the legal requirements and/or agreements.

On the suggested emission caps for SO2, Pollution Probe does not believe that what is proposed is good enough to result in meaningful  improvement in SO2 emission levels.  We do not believe it is appropriate to support an emissions trading programme for SO2 until such time as the caps can be demonstrated to be significantly below current emission levels for this pollutant.

The Proposed Emissions Caps:

On March 26, 2001, the Ministry of the Environment proposed to reduce the SO2  emissions cap from the present 157.5 kilotonnes (kt) to 131 kt in 2007.

The Ministry also proposed a reduction of the NOx emission cap from the present 36 kt  emissions cap to 18 kt  for coal and oil burning power plants, with an additional 10 kt for other electricity generation, bringing the total NOx  emission cap to 28 kt in 2007.

It is important to note that the emission caps described above are for net emissions and that the NOx emissions are measured as Nitric Oxide (NO).  When counted as Nitrogen Dioxide (NO2), which is the measure used for most other NOx emissions in Ontario, including provincial inventories, the 36 kt cap becomes 55.08 kt and the 28 kt cap becomes 42.84 kt.

If the NOx cap were to be separated from the emissions trading provision, Pollution Probe believes that the cap would result in significant progress toward the reduction of this pollutant, but because of concerns that we have with the proposed emissions trading system, we cannot support this proposal as it currently stands.


 Proposed Emissions Caps

Pollutants

Current Caps

(coal & oil)

Net Caps 2007

(coal, oil & natural gas)

Gross Caps 2007

(coal, oil & natural gas)

 

NOx  (As NO2)

 

 

55.08 kt

 

27.54 kt

 

42.84 kt

 

SO2

 

 

157.5 kt

 

131 kt

 

144.1 kt

 

The Ozone Annex to the Canada – U.S Air Quality Agreement:

In December 2000 Canada signed a smog treaty with the United States, which is commonly referred to as the Ozone Annex.  In this agreement Canada made a  commitment to cap electricity sector NOx emissions in the Pollutant Emission Management Area (PEMA) for both Ontario and Quebec.  The commitment from Ontario was an annual cap on NOx emissions from fossil fuel power plants in central and southern Ontario (Ontario PEMA region) at 39 kt (measured as NO2) by 2007.

By Pollution Probe’s calculation Ontario’s proposed cap for all NOx emissions from the electricity sector would comply with our international commitments under the Ozone Annex, but would not do so with the trading provisions that have been proposed.  The fact that the Province’s proposal is only for net emission targets, after emissions trading allowances, is of concern to Pollution Probe and we believe this may contravene the Canada – U.S. Ozone Annex agreement.

Detail of Pollution Probe’s Concerns about the Emissions Trading Proposal:

In theory, trading emission credits that are created as the result of real (gross) emission reductions in different sectors of the economy could facilitate emission reductions, but creating credits to offset  emission reductions in the electricity sector would only be appropriate if there was some assurance that total emissions from all sources were to decrease.  Pollution Probe does not see those assurances in the MOE proposal.

In brief, our primary concern with what has been proposed is that, although electricity sector emissions will be set and, at least in the case of Nitrogen Oxides, will decrease, there is every likelihood that emissions from other sectors will increase.  This problem is confounded by the fact that emission reduction credits (ERCs) can be created by sectors, companies or facilities that are actually recording emissions increases.

The proposal to create ERCs through emission rate reductions, i.e., reductions from projected emissions, rather than reductions from previous emission totals, does not guarantee any overall reductions in the total provincial emissions, or any improvement in air quality.

Pollution Probe supports efforts by industrial emitters to reduce emission rates by installing emissions abatement equipment, or changing processes, but the total volume of emissions must decrease. The only way to ensure this is to set binding emissions reduction targets that provide ceilings or caps on total emissions.

Pollution Probe believes that the provision of incentives for emission reductions from industrial sources can be a legitimate part of an overall emission reduction strategy, but we do not believe that emission reduction credit creation is the appropriate incentive in all cases.

We believe that it is inappropriate to allow for credit creation when no mechanism exists to ensure that overall emissions of the pollutant in question are going to decrease.

Basing credits on emission rate reductions, rather than actual emission reductions, without providing any other assurances that total emissions will decrease is an obvious weakness in the MOE proposal.

Detailed Comments specific to the text of MOE’s March 2001 discussion paper entitled Emissions Reduction Trading System for Ontario.

 From the discussion paper

Pollution Probe’s comments

 

1.     The Pilot Emission Reduction Trading (PERT) Program has demonstrated that emissions trading can achieve emissions reductions effectively, sometimes even beyond regulatory requirements. (p. 3)

 

 

There is no clear evidence that this is true. Where is this demonstrated? Can references be provided for these claims?

 

2.     The US EPA Acid Rain SO2 trading program has stimulated early emissions reductions that went far beyond regulatory requirements. (p. 3)

 

 

This has not yet been fully evaluated. If the MOE has new studies from the EPA on this, please reference them.

 

3.     Broad support for emissions trading from industry, universities, governments and non-governmental organizations (NGOs). (p. 3)

 

 

This is not the case.  Environmental NGOs are on the whole quite uncomfortable with emissions trading.

 

4.     The six OPG plants will continue to be covered by the emissions cap imposed on them even if they are sold. (p. 5)

 

 

How is the cap allocated to each plant? Can OPG change the plant allocations? 

 

5.     Capped facilities will have to meet all other environmental regulations or requirements, including limited emissions rates of NOx , SO2  and other substances. (p. 5)

 

 

What about missing pollutants such as Mercury and carbon dioxide?

 

6.     All credits are produced through investments or operational measures that reduce emissions below any regulatory requirements. (p. 6)

 

 

These regulatory requirements are not immediately apparent. What are they? They must be spelled out for all emitters in an appendix or schedule.

 

 

7.     Allowances for capped facilities will be distributed according to governmentally determined process. (p. 6)

 

 

As yet undefined, no way to comment. What options are being considered?

 

8.     Credit trading, along with extending caps to other sectors and reducing existing caps for future years, ensures that incentives for continuous emission improvements remains strong. (p. 6)

 

 

There is no information about what other sectors may be capped, when, and at what emission levels. Nothing about what this will do to the validity of existing emission credits. No clear path or commitment for future reduction of caps.

 

 

9.     The government sets caps based on an assessment of the costs and benefits of different limits applied to different sets of emitters, after considering the impacts of various emissions limits on factors such as health and environmental issues, industrial competitiveness, and fairness. (p. 9)

 

 

It is essential that this process be transparent and open to public. The cost-benefit analysis should be subject to public review.

 

10.            Allowances are allocated to capped emitters based on issues of fairness, efficiency, time-frames, etc. (p. 9)

 

 

Not at all transparent, public needs more definition. How are issues of fairness, efficiency, etc., to be decided.

 

11.            The government will facilitate development of structure/processes that provide guidance for credit creation…will develop rules to define verification and certification requirements, which will be described in codes developed by or for the ministry. (p. 9)

 

 

The Ministry is suggesting that a third party will be developing the protocols for the trading system.  If this is solely an industry-led endeavour it would be inappropriate.  PERT/CACI is not an appropriate “structure” to guide this process. 

 

12.            All capped emitters over a specified size will be required to install continuous emission monitors (CEMs) or parametric emissions monitoring equipment which has a demonstrated accuracy conforming to that specified in the regulation.  Smaller emitters will use estimation methods proven to be conservative and approved by the MOE. (p.12)

 

 

 

Emissions measurement and estimation methods should be clearly specified in a CSA or provincial standard well before any introduction of a trading market.  This should apply to all market participants and meet US EPA reporting requirements.

 

13.            ERC and foreign allowance use for NOx  will be limited to 33% and for SO2  to 10%. (p. 13)

 

How were these numbers determined? Apparently arbitrary choices which significantly impact proposed caps.  As stated elsewhere, this contravenes the Ozone Annex commitment for NOx emissions. 

 

 

14.            Capped emitters whose emissions exceed the sum of their allowances plus acceptable ERCs will face penalties. (p. 13)

 

 

It is important to outline what these penalties will be.  If  fines, how much?

 

15.            Allowances issued by Ontario will not be subject to a directionality rule for use in Ontario. (p. 14)

 

 

Analysis needed. Nanticoke or Lambton Generating facilities should surely not be permitted to buy credits from eastern Ontario.

 

16.            Figure 1: Upwind Wedge for NOx delineates the geographical range of upwind sources of emissions that can trade emissions into Ontario.  (p. 15)

 

 

The wedge of upwind sources is possibly too wide. A public review of the analysis and justification for this decision is needed.  Both directionality and distance rationale must be provided.

 

 

17.            Figure 2: Upwind Wedge for SO2 sets out the geographical range of upwind sources for SO2. (p. 17) 

 

 

The wedge is much too wide. SO2 reductions in the Laurentians or Washington are unlikely to affect Ontario.

 

18.            Formula discounts for credit creations from distant upwind sources – Figures 3 & 4 (p. 17 & 18)

 

Data analysis and public review are needed to evaluate the discount schedules outlined in these figures.  It would seem that a 3,000 km limit for SO2 credit creations is a little distant, as it seems to include Baffin Island, Chihuahua, Mexico and Port au Prince, Haiti in its catchment radius. (Noted that emissions from these points would be greatly discounted.)

 

 

19.            Banking of ERCs and allowances will be allowed without restrictions. (p. 18)

 

Restrictions on the banking of allowances/ERCs are necessary. The purpose of banking should be to increase flexibility in capital stock turnover to cleaner technology, fuels, etc. It should not allow old technologies to be perpetuated. No banking is an option. But if banking provisions remain, there should be significant value discounting over time.

 

 

20.            Mandatory depreciation of ERCs could impair economic efficiency by creating a “use ‘em or lose ‘em” decision making behaviour. (p. 20)

 

 

We disagree. What evidence supports this claim?

 

21.            OPG distributes allowances to each generating station, and as stations are sold, OPG determines future allowance transfers to new owner. (p. 21)

 

 

We are concerned that OPG will have control of the majority of the allowances.

 

22.            Credits result from actions taken at a project level rather than a corporate level. (p. 25)

 

A corporation could increase its emission rates overall and still claim credit for a specific project. If credit creation is based solely on project-specific emission rate improvements, there is still a chance that the corporation’s overall emissions would increase.

 

 

23.            Using emissions rates rather than emissions levels encourages companies who are expanding production to exploit market opportunities to seek out ways to reduce the emissions intensity of their products. (p. 25)

 

 

There is no way to ensure overall reductions if there is no cap.

 

24.            A consideration is other jurisdictions may allow the use of ERCs after the 5 year eligibility period established for the use of ERCs in Ontario. (p. 27)

 

 

Unclear what this means?  Can a 5 year old ERC be sold to a US coal plant then re-sold back to Ontario?

 

25.            Question for discussion on the cap, credit and trade systems being used to provide more incentives for new renewable energy sources and demand side management while still respecting short term emissions caps. (p. 37)

 

 

A more detailed examination is needed, likely a detailed discussion paper and public consultation.

Please review Pollution Probe’s earlier response (February 2000) to EBR postings of provincial Electricity Sector Caps and Emissions Trading plans.

Should you have any questions, please contact John Wellner at Pollution Probe, 416-926-1907 ext. 236.

  

   
 

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