Emissions Reduction Trading and NOx and SO2 Emission Limits for the Electricity Sector: O. Reg. 397/01
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Introduction
Almost 30 per cent of electricity produced in Ontario is presently created by burning coal or oil, which contributes significantly to Ontario’s air quality problems. The electricity sector was responsible for almost 15 per cent of Ontario’s nitrogen oxides (NOx) emissions and 24 per cent of sulphur dioxide (SO2) emissions in 1999. In October 2001, MOEE finalized a regulation (O. Reg. 397/01) that sets new sector-wide caps on airborne emissions of NOx and SO2 from the electricity sector. The reductions will occur in two steps: the first at the end of 2001, followed by a larger reduction in 2007. MOEE states that the reductions required by 2007 will cut this sector’s emissions of NOx by 53 per cent and SO2 by 25 per cent from 2000 levels.
The new regulation also sets out rules for a system of emissions reduction trading, giving power plants the option either to cut their own emissions directly or to buy emission reduction credits (ERCs) to help meet their new emission limits. The power plants can trade allowances among themselves, but they can also buy ERCs from other uncapped industries or organizations that have demonstrated emission reductions. ERCs are intended to encourage emission reduction projects that might otherwise not be economical. They can also spur technological innovations, which may then be more widely adopted. Emissions trading systems are often considered best suited for pollutants that have region-wide environmental effects (like NOx and SO2), since it is argued that “the environment doesn’t care” exactly which smokestacks are emit- ting less of these pollutants, as long as overall emissions are reduced in the region. This is one of the first regulated emissions reduction trading system in Ontario and, in fact, in Canada, designed to help industry meet legally mandated reduction targets.
A previous pilot-scale program, Pilot Emissions Reduction Trading (PERT), was established in 1996 and was used by Ontario Hydro (now by its successor company, Ontario Power Generation) to meet voluntary NOx reduction targets in 2000 and 2001. MOEE also made several closely related announcements in October 2001 that helped to flesh out the ministry’s next steps on controlling industrial sources of air pollution.
First, the ministry proposed imposing NOx and SO2 emission limits on other industry sectors, such as iron and steel, petroleum refineries, chemicals and non-iron metal smelters. Second, MOEE proposed moving up the province-wide targets for reduc- tions of NOx and SO2 emissions from the year 2015 to the year 2010. Third, MOEE finalized the regulation requiring the Lakeview Generating Station in Mississauga to convert from burning coal to natural gas. (See Emission Limits: The Lakeview Thermal Generating Station and pages 71–75 of the Supplement.)
The emissions reduction trading scheme is complicated by the fact that Ontario’s electricity sector is also currently being restructured from a near monopoly to an industry with more players and more competition. By the year 2008, all electricity generators emitting NOx will be competing for emission allowances based on their electricity production, rather than on their historical emissions of NOx and SO2. MOEE expects that this feature will encourage cleaner electricity production. One important variable in future emissions from electrical generation in Ontario is the extent of nuclear generation capacity expected to come on-line in the next few years from refurbished nuclear units. If nuclear power is priced lower than coal-fired generation, it may displace coal-fired plants in the market place, reducing fossil fuel output. If this scenario materializes, actual emissions may fall, although not as a result of Regulation 397/01.
MOEE states that the new caps and trading system will reduce NOx and SO2 emissions from the electricity sector, and will provide incentives to other sectors to reduce emissions. The new regulation should also provide more regulatory certainty for this industry through to the year 2010. The regulation also has many critics, however, who have a range of concerns about new regulatory burdens, unfair treatment of Ontario Power Generator’s competitors, and environmental weaknesses.
Trading with Uncapped Sectors
In effect, the trading system will allow the electricity sector to reduce its own gross emissions by far less than the above-stated targets. Through buying credits, OPG is permitted to exceed its NOx cap by up to 33 per cent and its SO2 cap by up to 10 per cent. MOEE has decided to allow capped power plants to purchase these credits from uncapped industry sectors. These uncapped sectors may be increasing their overall emissions (e.g., through increased production) while at the same time selling credits for site-specific emission reductions. Since the emissions of uncapped sectors can continue to grow, the net effect is that overall emissions are free to rise.
In summer 2001, both Environment Canada and the U.S. Environmental Protection Agency stated that the ministry’s design does not protect the environment and is not compatible with the Canada/U.S. Ozone Annex (see below).
MOEE has countered that Ontario’s fossil fuel power sector cannot support an effective trading market on its own right now, since it consists of just six plants, all owned by the same corporation. A fluid market in ERCs, and the fexibility this provides to capped emitters, can develop only among a group of players that have a wide range of capacities to reduce their emissions. In contrast, it is expected that the U.S. system will allow more than 200 coal-fired stations, as well as several industrial facilities, to trade allowances.
Ontario and Canada’s Obligations under the Ozone Annex
Under the Canada-U.S. Ozone Annex signed in December 2000, the fossil fuel power sector in southern Ontario will be required to cut nitrogen oxide emissions (measured as NO2) to 39,000 tonnes by the year 2007. Environment Canada has stated that MOEE’s cap would be able to meet the Ozone Annex, as long as MOEE did not allow trades between capped and uncapped sectors.
Weak SO2 Cap
Because the cap is very lenient, a number of commenters raised concerns that Regulation 397/01 will not result in any real reductions in SO2 emissions, at least until 2007. Until the year 2007, the regulation sets an overall SO2 cap of 157.5 kilotonnes per year. This is more SO2 than OPG’s six fossil fuel power plants have actually been emitting in most recent years.
Emissions of other Toxic Pollutants from Power Plants
Ontario’s fossil fuel power plants produce significant air emissions of mercury, lead and a range of other contaminants. For example, in 1999 this sector emitted 22 per cent of Ontario’s total mercury emissions. Ontario Regulation 397/01 will not reduce these emissions, since its focus is strictly on NOx and SO2. Environmentalists have argued that OPG should instead invest in converting more of its coal-fired power plants to natural gas, since this would not only dramatically cut emissions of NOx and SO2, but would also eliminate emissions of mercury, lead and a number of carcinogens. So far, only the Lakeview Generating Station must cease burning coal by April 2005.
Finalizing this regulation has been an important step for MOEE and the outcome of much painstaking negotiation. MOEE staff also carried out very high-quality public consultation on this regulation, described in more detail on page 20. The two central concepts embodied in the regulation — sector-specific emission caps and an emissions trading scheme to help ease compliance costs — are both supported in principle by many industry and environmental organizations. But the many complex details are hotly debated. Some informed observers take the view that a badly designed trading system may be worse than no system at all, because it will give the illusion of progress and reduce the urgency to take other measures to cut air emissions. Others have concluded that Ontario needs to “lock in” the policy gains it has made so far, and that this regulation is a reasonable, though imperfect, first step. MOEE itself seems to have taken this latter view, and has indicated that it is willing to adjust its trading program over time — for example, to harmonize it with the U.S. trading program.
Stakeholder comments certainly had an effect on the outcome of this consultation, since the final regulation included several key changes from earlier versions. (More detail is provided on pages 76–85 of the Supplement.) Commenters have highlighted some significant weaknesses in this regulation, particularly the weak SO2 cap and the fact that emissions of other contaminants such as mercury remain unaddressed. A critical feature of O. Reg 397/01 is that it permits the electricity sector to purchase ERCs from uncapped sectors. In the short term, any real reductions in emission loadings will depend on the quality of the ERCs approved, which will in turn depend on how carefully MOEE oversees this approval function.
To its credit, MOEE has signaled its intention to cap other industrial sectors, and this will do much to strengthen the integrity of the trading system. However, these other sectors have only just begun to monitor and report their NOx and SO2 emissions under Ontario Regulation 127/01 (see Monitoring and Reporting of Emissions of Airborne Contaminants). Until now, MOEE has not had reliable emission inventories for either NOx or SO2. It is not clear how soon (or whether) MOEE will be able to assemble accurate emission inventories from the newly required emission reports, or by what process sector-specific caps will be allocated. Early indications are that negotiations on capping emissions of Ontario’s other industries will be complicated and protracted. However, it is clear that MOEE is developing this regulatory framework for the medium and long term, and that immediate air quality improvements should not be expected.
| Recommendation 11:
The ECO recommends that the Ministry of Environment and Energy strengthen its emissions reduction trading system by quickly expanding NOx and SO2 emission caps to other industrial sectors. |
| This is an article from the 2001/02 Annual Report to the Legislature from the Environmental Commissioner of Ontario. |
Citing This Article
Environmental Commissioner of Ontario. 2002. "Emissions Reduction Trading and NOx and SO2 Emission Limits for the Electricity Sector." Developing Sustainability, ECO Annual Report, 2001-02. Toronto, ON : Environmental Commissioner of Ontario. 84-87.
