b. Multi-Year Compliance Periods

The Framework states: 

It is proposed that compliance periods have a length of three years. This would give facilities more time to achieve GHG emissions reductions before remitting allowances or compliance units to cover all of their GHG emissions vs. an annual compliance period. [77]

Multi-year compliance periods would have both an annual compliance requirement and a final “true up” at the end of each compliance period. For example, for the first and second years of a given compliance period, covered facilities would be required to remit compliance units equal to 30% of their verified GHG emissions, less any GHGs permanently stored, during the preceding calendar year. At the end of each compliance period, covered facilities would be required to remit one emission allowance or eligible compliance unit for every tonne of GHGs they emitted during the entire compliance period, less emission allowances and compliance units remitted in interim years. [78]

Under the proposed multi-year compliance periods, facilities’ compliance with the cap would be assessed in three-year chunks. Facilities would have to report their emissions each year. [79] In the first and second year, they would remit a small proportion of the required compliance units (allowances or purchased credits). The full reconciliation of the books, meaning verifying that a facility has enough allowances and purchased credits to cover what they actually emitted, would take place at the end of the third year.

Presumably, though the Framework does not address this explicitly, there would be no penalties if a facility exceeds their emissions allowance in the first or second year of a three-year compliance period. It appears that ECCC would only take enforcement action [80] if a facility is found to be in non-compliance at the end of the three-year period (i.e., their total actual emissions over three years exceeded their total allowances and purchased credits).

Multi-year compliance periods are a common feature of cap-and–trade systems. They can reduce price volatility for companies trading and purchasing emissions allowances and credits [81] and give facilities more time to achieve GHG emissions reductions. [82] The systems in Québec [83] and California [84], and the Regional Greenhouse Gas Initiative (RGGI) which covers eleven American states [85], have three-year compliance periods with “partial annual surrender obligations” to cover some portion of the emissions in interim years.

Incorporating multi-year compliance periods in the new cap on O&G sector GHG emissions is reasonable, particularly in the first few years as ECCC, companies, and third-party auditors work to implement the new system and the market to trade and purchase emissions allowances and credits is established. The fact that facilities will still have to report their emissions annually is important, because ECCC will know which facilities might be at risk of non-compliance.

However, the devil is in the details, and the details of how multi-year compliance periods will work are scarce as the two paragraphs quoted above are the only information currently available. For example, we don’t know if any verification of facilities’ reported emissions will be done in the interim years (years one and two of a three-year compliance period). If those interim emissions are not on track to meet the facility’s emissions cap over the three-year period, we don’t know if ECCC will have any authority or tools to compel or influence the company before the end of the three-year period. And as mentioned above, we don’t know what the consequences for non-compliance will be. The draft regulations, expected to be released in 2024, will spell out all of these details and we will be watching with great interest.

In the meantime, we can assess the policy based on what we do know. To highlight potential issues, the following tables illustrate three scenarios that could occur given what we currently know about multi-year compliance periods. Three different facilities each have allowances to emit 1.0 Mt of CO2e per year for three years. (All the numbers in the scenarios are completely made up for ease of understanding.) The facilities take different approaches over the three year compliance period and we can see the results.

In Scenario 1 (below), Facility X emits 1.3 Mt and stores (e.g., through CCS) 0.1 Mt each year. In the first and second years, the facility remits compliance units equal to 30% of what they emitted that year, or 0.36 Mt each year.

At the end of the compliance period, the facility’s net emissions are 3.6 Mt, 20% more than their 3.0 Mt allowance. They must remit compliance units for 2.88 Mt (equal to 3.6 Mt minus the 0.62 Mt they previously remitted). The facility is allowed to purchase credits through a combination of carbon offsets and contributions to a decarbonization fund (discussed in detail below) to emit up to 20% more than their allowances, in this case 0.6 Mt. So the facility emits a combination of allowances and purchased credits totalling 3.6 Mt for the three-year period, and is in compliance with the cap system.

Scenario 2 (below) illustrates how a facility could save up their allowances and then ramp up production creating very high emissions in the last year of the compliance period. A facility might want to do this if they think the price of their product (oil, gas, LNG) will be higher in future years.

In the first and second years, Facility Y only emits 0.1 Mt each year. Each year they remit compliance units equal to 30% of that amount, or 0.03 Mt. In the third year, the facility emits 2.8 Mt.

At the end of the compliance period, the facility’s net emissions are 3.0 Mt, exactly in line with their total allowance. They must remit compliance units for 2.94 Mt (equal to 3.0 Mt minus the 0.06 Mt they previously remitted). The facility is in compliance with the cap system. However, this scenario in which a large amount of CO2e is emitted all at once in the final year is not very good for the planet (since we have to reduce GHG emissions as quickly as possible), or for Canada meeting its GHG emissions reduction targets which decline over time. 

Scenario 3 (below) shows what it might look like if a facility does not comply with the cap. 

In the first and second years, Facility Z’s emissions are much higher than their annual allowance at 1.5 Mt and 1.8 Mt respectively. They report these emissions so the government knows this facility is not on track to meet their total emissions allowance at the end of the compliance period. The facility is required to remit compliance units equal to 30% of their emissions, or 0.45 Mt in the first year and 0.54 Mt in the second year. In the third year, the facility again exceeds their allowance, emitting 1.6 Mt.

At the end of the compliance period, the facility’s net emissions are 4.9 Mt, 63% over their total allowance. They must remit compliance units for 3.91 Mt (equal to 4.9 Mt minus the 0.99 Mt they previously remitted). The facility is NOT in compliance with the cap system.

The main concern boils down to this: when it comes to reducing GHG emissions, speed matters. 

In 2022, the United Nations Intergovernmental Panel on Climate Change (UNIPCC) said that in order to limit warming to 1.5°C or 2°C, “rapid and deep GHG emissions reductions” are required. [87] In 2023, the UNIPCC said, “There is a rapidly closing window of opportunity to secure a liveable and sustainable future for all,” and noted that, “the level of greenhouse gas emission reductions this decade largely determine whether warming can be limited to 1.5°C or 2°C.” [88]

As explained in detail earlier in this document, the level of the proposed cap on O&G sector emissions already is not ambitious enough. We cannot afford any flexibilities or loopholes that could jeopardize the sector’s ability to realize even the modest reductions required. Giving O&G companies “more time to achieve GHG emissions reductions” is hard to defend when the industry has had five years’ notice that the cap was coming. [89] It’s impossible to defend when we know that continuing emissions will have dire consequences for us all.

It will therefore be crucial that when the forthcoming regulations set out how multi-year compliance periods work, they include some way to hold facilities accountable during the interim years. It’s good that facilities will have to report their emissions each year, but the government must be able to take action immediately if the emissions are not on track with the facility’s allowances. And to be a strong enough deterrent the penalties for non-compliance must be severe, not just the “cost of doing business”. 

In future years the emissions cap for the sector will get stricter and stricter, increasing the need for timely monitoring, verification, and enforcement action if needed. 

For all of these reasons, multi-year compliance periods should be phased out as soon as possible, and certainly by 2030. Post-2030, O&G facilities should be subject to annual compliance periods.

Recommendations:

Tell the federal government (using references to the papers we cite here, as you may wish):

• Reconciling a facility’s actual emissions with their allowances and credits every three years is reasonable when the cap is first introduced. 

• In implementing multi-year compliance periods, the government must have sufficient authority to ensure emissions targets are met. The requirement to report emissions annually must be retained, and the government should be able to hold facilities accountable if their emissions reductions are off-track.

• To ensure the increasingly strict emissions cap in future years can be met, multi-year compliance periods should be phased out by 2030 and be replaced by annual compliance periods.