What is a Cap and Trade Program?
Under a cap and trade program, the provincial government sets a limit or “cap” on the total amount of greenhouse gas (GHG) emissions allowed in the province and then issues GHG allowances to regulated companies. If a company wants to emit more than its allowance, it can buy allowances from other companies that have emitted less than their respective cap. Over time, the cap is reduced, leaving fewer allowances, creating an incentive for companies to find ways of cutting their GHG emissions.
Why is Nova Scotia implementing a Cap and Trade Program?
On December 9, 2016, Nova Scotia endorsed the Pan-Canadian Framework on Clean Growth and Climate Change. It builds on the actions of the provinces and territories to grow their economy and reduce emissions. Within it, Nova Scotia committed to establish a cap and trade program to comply with the federal government’s requirement that every province and territory adopt a carbon pricing mechanism (either a cap and trade program or a carbon tax). If a jurisdiction does not comply, the federal government will impose a federal carbon tax in that jurisdiction. A carbon tax would be a more expensive alternative for Nova Scotians.
Nova Scotia chose to implement a cap and trade program because it allows government to protect the pocketbooks of Nova Scotians and build on actions already taken within the electricity sector that have proven to be effective in reducing GHGs. Nova Scotia has already reached the national GHG emission reduction target of 30 per cent below 2005 levels by 2030. Under Nova Scotia’s proposed cap and trade program the province will be able to continue this work by addressing additional sources of GHGs.
How will Nova Scotia’s proposed cap and trade program differ from others?
There are two major differences:
First, Nova Scotia does not plan to link its program with another cap and trade program in other jurisdictions. This means that all trading of allowances and emission credits occur within the province. It also ensures that all GHG reductions occur within Nova Scotia. We will evaluate the opportunity to link with other jurisdictions on a regular basis.
Second, Nova Scotia will be distributing most of the GHG allowances under its new GHG cap at no cost, which will lower the cost of compliance for companies. It also helps address competitiveness and trade concerns and give companies time to invest in efficiency and adopt newer technology.
Who will be required to participate in the Cap and Trade Program?
The proposed cap and trade program will include:
- Industrial facilities with annual GHG emissions equal to or greater than 100,000 tonnes CO2e covered at the point of emission.
- Electricity sector at the point of emission
- Petroleum product suppliers (i.e. diesel, gasoline, fuel oil, propane, etc.) that place more than 200 L of fuel per year into the Nova Scotia marketplace
- Natural gas distributors
It is expected that there will be fewer than 20 companies that will be required to participate in the cap and trade program.
How will Cap and Trade impact Nova Scotia’s economy, business and competitiveness?
Reducing GHGs whether through regulation, carbon tax or cap and trade will have some economic impacts while encouraging innovation and enhancing competitiveness to the benefit of Nova Scotia’s economy. Cap and trade programs are designed to reduce emissions at the lowest cost to companies and consumers. Nova Scotia’s program will also fully recognize the significant investments already made by the electricity sector and minimize costs to companies by issuing most allowances at no cost. The province will work with stakeholders to lower costs and increase benefits while ensuring there is flexibility so that companies can seize the innovation and economic opportunities that arise. The proposed program will require participation as appropriate and will not target individual small businesses directly. The program will not create paperwork for households and small businesses.
How will emission allowances be distributed?
Nova Scotia is in the process of determining how best to distribute allowances to the companies that must participate. Most allowances will be provided at no cost to participants up to the GHG cap. This reduces compliance costs while meeting the emissions cap. Some businesses use large amounts of energy, others have competition across jurisdictions, so issuing allowances at no cost will help address competitiveness and trade issues and give companies time to invest in efficiency and adopt newer technology. Through the discussion document adjacent to these FAQs, the province is looking for input on the most appropriate method for distributing allowances.
What is an offset and how will they be used in the cap and trade program?
In cap and trade programs, some activities and sectors are not subject to the cap. These can include agriculture and forestry sectors. GHG emissions that are reduced from the non-capped sectors can be claimed and sold as a “carbon offset” credit. Nova Scotia’s cap and trade program could allow capped emitters to purchase these offsets to meet their obligations as long as the offset is “additional”, “real”, “verifiable” and “permanent”. The province proposes using only Nova Scotia–generated offset credits for compliance in its program.
When will Nova Scotia launch the cap and trade program?
Nova Scotia’s cap and trade program is expected to begin in 2018, in line with federal requirements. Following consultation with stakeholders, the legislation and regulations will be developed to meet the federal timeline.
What is the difference between a carbon tax and a cap and trade program?
Both a carbon tax and a cap and trade program are designed to reduce GHG emissions by attaching a price or cost to emissions, thereby providing an incentive to reduce emissions.
A carbon tax is a direct tax on fossil fuels (e.g. coal, oil or natural gas). It may lead to emissions reductions, but it is not always clear what level of tax will trigger the desired reduction. Some emitters will just pay the tax and pass the costs on to consumers which may not reduce their emission levels.
In a cap and trade program, a cap (or limit) is set on the GHG emissions permitted in the province by issuing allowances to companies. If a company wants to emit more than allowed, it can buy allowances (or offset credits) from other companies, that have allowances available. This ensures that the province’s cap on the total amount of GHGs is not exceeded. Over time, as the cap decreases, allowances become scarcer and there is additional incentive for companies to find cost-effective ways to cut GHG emissions. Nova Scotia chose to implement a cap and trade program because it allows government to protect the pocketbooks of Nova Scotians and builds on actions already in place that have proven to be effective in reducing GHGs. Government is not imposing a carbon tax as it would be a more expensive alternative for Nova Scotians.