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Nova Scotia announces ETS cap, coverage and allocation details

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On 14 November 2018, Nova Scotia released its Regulatory Framework containing the final design of its cap-and-trade program, which will start on 1 January 2019. The Framework includes specific information on the system’s scope, annual emissions cap, allocation and revenue usage.

  • Scope: The program will regulate the industrial and electricity sectors. It will cover facilities generating 50,000 tCO2e/year or more, petroleum product suppliers selling 200 liters or more of fuel into the Nova Scotia market, natural gas distributors producing 10,000 tCO2e/year or more, and electricity importers responsible for more than 10,000 tCO2e/year. There are no provisions for voluntary participation. In total, the program will cover 21 companies that are responsible for 80% of Nova Scotia’s greenhouse gas (GHG) emissions.
  • Cap: Caps are set annually with a four-year compliance period (2019–2022), as follows:
    • 2019: 13.68 Mt (compared to 13.77 Mt projected business-as-usual (BAU) emissions)
    • 2020: 12.72 Mt (BAU: 12.89 Mt)
    • 2021: 12.26 Mt (BAU: 12.45 Mt)
    • 2022: 12.14 Mt (BAU: 12.37 Mt)
  • Free Allocation: Most of the allowances will be distributed for free, although precise figures are yet to be disclosed.
    • Industrial facilities will receive allowances based on production intensity benchmarks based on data from the period 2014-2016. The Regulatory Framework provides information on the calculation of the benchmarks, including assistance factors and production adjustments. Three quarters of allowances will be distributed to entities at the beginning of the year and the remaining quarter will be provided in the following year after the submission of a verified emissions report.
    • Nova Scotia Power Inc., the main electricity distributor in Nova Scotia, will be allocated allowances based on a reduction from BAU projections. Around 6.3 million allowances will be freely allocated to Nova Scotia Power Inc. in 2019, declining to just over 5 million in 2022.
    • Fuel suppliers (petroleum product suppliers, natural gas distributors, and electricity importers) will receive 80% of free allocation based on verified GHG reports for previous year’s emissions.
  • Auctioning: The province will hold auctions two to four times per calendar year, starting in 2020. The minimum price in 2020 will be CAD 20 (USD 15.23), increasing by five percent plus inflation per year. Bidders will be subject to purchasing limits that restrict how many allowances each participant can buy at any one auction. Purchasing limits are intended to mitigate the risk that one participant can manipulate the market by causing shortages and price spikes. For the 2019–2022 compliance period, purchasing limits will apply to all auctions as follows:
    • Fuel suppliers: 15% of the previous year’s verified GHG emissions per auction and 25% for the calendar year;
    • Industrial facilities: three percent of their previous year’s verified GHG emissions per auction and five percent for the calendar year;
    • Nova Scotia Power Inc.: five percent of the allowances available for sale at each auction.
  • Trading: Mandatory participants may trade allowances with one another either through documented over-the-counter sales or through consignment auctions. Allowances offered for sale through consignment are included in the government auctions and sold first, followed by emission allowances offered for sale by the province.
  • Price regulation: Prices for automotive gasoline and diesel are regulated in Nova Scotia. For these fuels, the province made a regulatory change to include the compliance cost of the cap-and-trade program when determining the wholesale selling price of the fuels. See the Regulatory Framework (p. 22) for more information.
  • Offsets: Nova Scotia’s cap-and-trade legislation includes the possibility for an offset system. Further consultations will be undertaken in 2019 to develop this option.
  • Monitoring and compliance: Participants who do not surrender enough allowances at the end of the compliance period will pay an amount determined by the lowest bid price accepted for allowances at the most recent auction times the amount of outstanding obligations at the time of the determination. Administrative penalties for violations of other cap-and-trade regulations will be determined in further regulations.
  • Revenue Usage: A “Green Fund” will be set up in 2019 to receive and disburse auctioning revenues. The Green Fund will support measures that mitigate GHG emissions, promote adaptation, encourage innovative technology, and reduce negative economic and social effects of mitigation action.
  • Reserve: In 2019, the government will place three percent of allowances available under the yearly caps into a reserve. Allowances from the reserve will be used to (1) accommodate new participants in the cap-and-trade program, (2) adjust to variability in year-to-year commitments to free allowances, and (3) offer for sale at set prices to participants at pre-determined times throughout the year. Up to four reserve sales can occur in a calendar year starting in 2020. The minimum price for those sales would be CAD 50 (USD 38.05) rising by five percent plus inflation annually. The reserve price is intentionally higher than the auction floor price and the predicted market price, and is designed to act as a cost-containment measure.
The province’s cap-and-trade program is in compliance with Canada’s federal carbon pricing requirements outlined in the Pan-Canadian Framework on Clean Growth and Climate Change. According to Nova Scotia’s estimates, the program will have a small impact on consumer prices in Nova Scotia, estimating a one cent increase in gasoline prices and a one percent increase in electricity rates compared to an 11 cent and eight percent increase respectively under the federal program.
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