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Nova Scotia transitions to new carbon pricing system

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On 1 January 2023, Nova Scotia introduced an output-based pricing system (OBPS) for its power and industry sectors, as a replacement for the current cap-and-trade system, which will end after the compliance deadline in December 2023.

As the federal approval for Nova Scotia’s cap-and-trade system was set to expire at the end of 2022, the Nova Scotia government decided to propose an OBPS rather than extending the system. The OBPS is designed to meet the federal minimum carbon pricing benchmark of CAD 65 (USD 50) in 2023 as set in the  ‘Update to the Pan-Canadian Approach to Carbon Pollution Pricing 2023-2030. The federal cabinet approved Nova Scotia’s proposal, and the new system took effect in January 2023.

The Nova Scotia OBPS, as laid out in the amendments to the Nova Scotia Environment Act, sets facility-level performance standards for electricity generators and large industrial emitters, with mandatory participation for facilities emitting ≥50,000 tCO2e/year. The system applies to the province’s largest emitters, such as Nova Scotia Power and Lafarge cement. Other facilities, with emissions below the threshold, have the option to either join the system or face a federal fuel charge from July 2023.

The Nova Scotia government grants ‘performance credits’ (expressed in tonnes of carbon dioxide equivalent) to regulated facilities that surpass their emissions standards. These surplus credits can be either sold to other facilities or banked for later use. Facilities exceeding their emissions standards must submit a corresponding number of credits. These can be purchased from the government or other facilities that have surplus credits for sale. The price of the credits will follow the federal government’s backstop carbon price, which is CAD 65 (USD 50) in 2023, and will increase by CAD 15 (USD 11.54) annually until it reaches CAD 170 (USD 130.77) per tonne in 2030.

The OBPS replaces Nova Scotia’s cap-and-trade system that was introduced in 2019 to meet Canada’s federal carbon pricing benchmarks. The first auction was held in June 2020. Despite operating as planned and meeting federal obligations, the system faced criticism due to its lack of liquidity and limited market size. Only 26 mandatory participants were covered, with opt-in emitters and speculators prohibited from participating in the carbon market.

At first glance, the OBPS appears similar to the system it is replacing. The key difference is that the cap-and-trade system sets an overall cap on emissions each year, whereas the OBPS allows emissions to increase over time if production increases. However, the Nova Scotia Department of Environment points out that the OBPS standards will become more stringent over time. The overall goal of the OBPS is to encourage emitters to switch to clean energy sources and make their operations more energy efficient and climate friendly.

Although Nova Scotia has officially moved to the OBPS, the province’s cap-and-trade system will officially end after the scheduled compliance deadline in December 2023. The transition includes two more auctions scheduled for June and August 2023 for facilities to purchase allowance for their verified 2022 emissions, and a reserve sale in November 2023 for entities to fulfill their remaining compliance obligations before the cap-and-trade system’s true-up deadline for 2019-2022 emissions.

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