Canada Launches New Fund From Carbon Pollution Pricing

March 14, 2022

Written By Claire Lingley, Tom McInerney, Sharon Singh and Sarah Gilbert

On February 14, 2022, the federal government announced the launch of the Output-Based Pricing System Proceeds Fund (the OBPS Proceeds Fund), which will aggregate the proceeds received by virtue of the federal Output-Based Pricing System (the OBPS). The OBPS Proceeds Fund aims to support industrial initiatives that reduce greenhouse gas (GHG) emissions and deploy clean technology and green energy by re-investing the proceeds of the federal OBPS back into the jurisdictions from which they originate, into projects that reduce carbon pollution. 

Background of the OBPS

The OBPS constitutes one of two elements of the federal regulatory carbon pricing system established under Canada's Greenhouse Gas Pollution Pricing Act (the GGPPA), the other being the federal fuel charge. The GGPPA acts as a federal backstop whereby the OBPS, the federal fuel charge, or both, will apply to jurisdictions that have failed to implement a carbon pricing scheme at least as stringent as that prescribed by the GGPPA.  Jurisdictions are also free to opt in to either or both the OBPS and the federal fuel charge. 

When the GGPPA came into force in 2019, the OBPS applied to Ontario, Manitoba, New Brunswick, and partially in Saskatchewan. Prince Edward Island, Yukon, and Nunavut opted into the OBPS. As of January 1, 2021 the federal OBPS no longer applies in New Brunswick, nor does it apply to Ontario as of January 1, 2022.

The OBPS is applicable to larger industrial facilities that emit 50,000 tonnes or more of CO2e annually, as well as facilities that have opted into the OBPS, collectively referred to as "Covered Facilities." Under the OBPS, Covered Facilities are required to meet federally set emission reduction requirements, based on facilities' production from specified industrial activities. If Covered Facilities exceed the set emissions limit, they are required to compensate by paying an excessive emissions charge, submitting compliance units (surplus credits, recognized credits, and federal offset credits), or a combination of the foregoing. The proceeds earned through this system ultimately fund the OBPS Proceeds Fund.  

A more detailed overview of the OBPS can be found in our previous insight, Federal Government Releases Draft Greenhouse Gas Offset System Regulations.

OBPS Proceeds Fund

In implementing the OBPS, the Government of Canada committed to return all direct proceeds from the OBPS to the jurisdiction where they were collected. Jurisdictions that have voluntarily adopted the OBPS can opt for a direct transfer of collected funds. Proceeds collected in jurisdictions for which the OBPS is mandated to apply (Mandated OBPS Jurisdictions) will be returned through the two program streams of the OBPS Proceeds Fund:

1. The Future Electricity Fund (FEF); and
2. The Decarbonization Incentive Program (DIP)

The Future Electricity Fund

The FEF is funded by proceeds collected from electricity generating Covered Facilities in Mandated OBPS Jurisdictions.  This funding stream aims to advance Canada's GHG emission reduction targets by supporting the production and delivery of clean electricity, as well as its efficient use. Proceeds from electricity generating Covered Facilities (i.e., utilities) will be returned through funding agreements with governments of current, and previous, Mandated OBPS Jurisdictions. The details of these funding arrangements, i.e., whether funding will be provided directly to specific projects or left in the hands of the provinces to manage, have not yet been announced.

Based on proceeds from Mandated OBPS Jurisdictions in 2019, the estimated funding available through the FEF is: $0.3 million in Manitoba, $5.9 million in New Brunswick, $17.0 million in Ontario, and $56.3 million in Saskatchewan.

The Decarbonization Incentive Program

The DIP is a merit-based program aimed at the long-term decarbonization of Canada's industrial sectors. Funded by proceeds collected by the federal OBPS in Mandated OBPS Jurisdictions (other than proceeds from electricity generating Covered Facilities channelled into the FEF), the DIP supports single or multi-year projects focused on accelerating the deployment of low carbon technologies within current, and previous, Mandated OBPS Jurisdictions.

On February 14, DIP applications started being accepted on a continuous basis for a minimum of two months, or until available funding within respective Mandated OBPS Jurisdictions have been allocated. Applicants must be legal entities incorporated or registered in Canada and operate or have a controlling ownership stake in an eligible OBPS Covered Facility, located in one of the Mandated OBPS Jurisdictions.  

Eligible Activities under the DIP

To be considered for funding under the program, the project must occur at an eligible facility and result in GHG emissions reductions.  Eligible facilities are Covered Facilities (not including those that generate electricity as their primary activity) that are located within current or former Mandated OBPS Jurisdictions. 

Eligible GHG emissions reductions must be:

• material in the year 2030 and measurable over the lifetime of the project:
• GHG reductions are material if the results are tangible, measurable, achievable, and contribute meaningfully towards Canada's GHG reduction targets;
• affecting sources of GHG emissions either within the facility’s direct control and/or from acquired sources of energy such as electricity or purchased heat/steam; and
• incremental to GHG emissions reductions obtained by other required actions, such as regulatory requirements or business-as-usual maintenance and repairs.

Examples of eligible projects include:

• carbon capture storage & utilization;
• stationary and mobile equipment retrofits for energy efficiency;
• building envelope upgrades (insulation, windows, doors);
• heat Recovery;
• stationary and mobile equipment retrofits for fuel switching;
• clean electricity and low-carbon fuel production for own use;
• cogeneration or combined heat & power production;
• district energy and/or heating;
• organics diversion; and
• industrial process changes and product use changes (e.g., refrigerants)

Research, development & demonstration, standalone education or capacity building activities, feasibility and prospective studies, and projects with the primary aim of incenting behavioural change are not eligible for funding as they do not meet the requirement of material GHG reductions. 

Based on proceeds from Mandated OBPS Jurisdictions in 2019, the estimated funding available for eligible applicants under the DIP is: $5.3 million in Manitoba, $0.9 million in New Brunswick, $68.3 million in Ontario, and $6.9 million in Saskatchewan.

Next Steps

The OBPS Proceeds Fund provides a valuable opportunity for funding across Mandated OBPS Jurisdictions. While the exact details of how the FEF will be distributed have not been released, industries should consider their eligibility under the DIP and look to capitalize on available funding.

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