As a number of provinces enact stringent regulation forcing companies to slash GHG emissions, senior in-house counsel are taking a lead role
CANADA IS AWASH IN ACTION plans to address climate change, and in-house counsel are playing an important role in implementing those plans at the corporate level. After all, it’s not only power utilities, renewable energy producers, clean-tech companies and heavy-industry behemoths that require strategic and legal advice from their law departments to take climate action. Any company that owns a factory, office building or fleet of vehicles — in other words, most large companies — will be affected by the country’s growing emphasis on “greenification.”
Officials of the federal and provincial governments held discussions this summer on a joint strategy for climate action, the lead-up to a planned first ministers’ summit in the fall. Mainly due to Saskatchewan’s opposition, Prime Minister Justin Trudeau didn’t achieve consensus on a pan-Canadian carbon-reduction plan at the first ministers’ conference last March, although the federal government has taken some unilateral steps on the climate-action file. In February, Ottawa unveiled a four-year, $2-billion Low Carbon Economy Trust to fund projects that “materially” reduce greenhouse gas emissions.
Absent a comprehensive national plan, however, a set of provincial initiatives have come to the fore. Québec and Ontario have opted for a system of cap-and-trade, British Columbia has a carbon tax, and Alberta is introducing a mix of both approaches. It is unclear (at the time of writing) whether Ottawa will overlay a carbon-reduction model of its own — perhaps a minimum national carbon price — on top of the provincial schemes.
However, with the actions currently announced or underway, Canada is not on course to meet the commitment it made at the Paris climate-action summit last December. The target is to reduce greenhouse gas emissions by 30 per cent below the 2005 level by 2030; Canada would fall short of that objective by 200 megatonnes — or 38 per cent — with existing measures.
Below we examine the state of play in Alberta, Ontario, BC and Québec — the four provinces that are the heaviest emitters of greenhouse gases in Canada, but that also have staked out leadership positions on climate action. Regardless of how all the moving federal and provincial parts line up, in-house counsel will play a critical role in driving the implementation of climate action at the corporate level.
With 35.6 per cent of Canada’s total GHG emissions, Alberta is the largest emitter among the provinces — this, despite having been the first province to regulate such emissions with the 2003 Climate Change and Emissions Management Act.
The province’s NDP government, under its Climate Leadership Plan released in November 2015, is imposing an economy-wide carbon tax starting in 2017 and a 100-million-tonne cap on GHG emissions from the oil sands (higher than the current output of 70 million tonnes).
Alberta’s plan, under Premier Rachel Notley, calls for a phase-out of coal-fired power plants by 2030, a 10-year goal to nearly halve methane emissions, as well as incentives for renewable energy. Alberta will need to replace about 6,000 MW of coal generation with cleaner energy sources, such as wind and natural gas, to meet the government’s target of 30 per cent renewable energy by 2030.
The carbon tax will be introduced in two steps: $20 per tonne in January 2017 and $30 per tonne in January 2018, which is expected to raise $3 billion annually. The tax will not be broken out at the gasoline pump, says Thomas McInerney, a partner at Bennett Jones LLP in Calgary. “Instead, the carbon tax is to be levied at the wholesale fuel supplier level, and that cost will be ultimately passed down to the consumer.”
Alberta already has a voluntary emissions offset market. One carbon offset represents the reduction of one tonne of carbon dioxide (CO2) or its equivalent in other greenhouse gases. Under the proposed mandatory cap-and-trade system, says McInerney, large industrial emitters — operations that produce 100,000 tonnes of GHGs or more annually — will be issued emission permits based on the GHG emission levels of firms in the top quartile of their sector.
“If you are not in the top quartile, the credits issued to you would be insufficient to be in compliance. You can either physically abate your GHG emissions or buy emission credits from other emitters that have a surplus.
“If you don’t want to have to purchase credits every year to meet your compliance obligations,” says McInerney, “you’re going to have to physically abate your emissions. You may have to realize efficiencies by implementing different operating procedures, perhaps incorporating some clean tech. In-house counsel are usually the tip of the spear in developing those strategies.”
Calgary-based BluEarth Renewables Inc. is a private, independent renewable-power producer, focused on the acquisition or development of wind, hydro and solar projects. Its portfolio currently includes 11 operating projects generating about 170 MW of power in Alberta, BC and Ontario. Shaun Wrubell, Director of Legal at BluEarth, and the company’s first in-house counsel, says most of its solar facilities have been acquisitions rather than start-ups. “We work closely with the business-development team — everything from getting in at the front end and structuring the deal, to overseeing the legal due diligence and helping structure and negotiate the transaction documentation.”
There’s also a role to play for Legal at start-ups. “We provide support for the acquisition of the necessary land rights, helping out with the licensing, permits and approvals required for actual electricity generation and grid connection. We also play a role in negotiation with local stakeholders, such as government agencies, private landholders and Aboriginal groups. We would also structure shareholder governance agreements with any partners involved.”
Legal also does enterprise risk management. Diversifying the company’s projects, by region and by sector, helps mitigate business risk. Ironically, the Calgary-based company did not, until recently, have assets in Alberta because of the province’s deregulated power market.
Last January, however, its first Alberta project came online: Bull Creek, a 29 MW wind farm. “We have direct sales agreements with several school boards,” says Wrubell. “We submit power to the grid and the boards are obligated to take a certain amount of that.” The power generated can offset 80,000 tonnes of greenhouse gas emissions annually. BluEarth also has two solar projects in Alberta that are in the permitting stages.
Asked about the climate change initiatives of the Alberta and Ontario governments, Wrubell says, “We’re encouraged by the policies and we think they’re promising, but we’ve yet to see the full details of either province’s program.”
Ontario generates 23.9 per cent of Canada’s total GHG emissions — second only to Alberta. The Green Energy Act of 2009 began the province’s transition to clean energy with incentives for wind, solar and biomass projects, and for green construction.
Ontario closed its last coal-fired generating plant in 2014. As recently as 2003, coal provided 25 per cent of the province’s energy. Despite the coal phase-out and a 21-per-cent decrease in GHG emissions by industry since 1990, the province’s overall carbon footprint is relatively unchanged. The main culprit has been a 24-per-cent increase in emissions from the transportation sector since 1990.
Sarah Powell, a partner at Davies Ward Phillips & Vineberg LLP in Toronto, says the rail, air and even road sub-sectors have decreased their energy intensity, yet the sector’s overall emissions have climbed, largely due to economic and population growth. “It’s a significant challenge. Much of the focus has been on the industrial sector, but when we think of who has to pull up their socks, it’s you and me.”
Ontario’s Climate Change Action Plan, issued in June 2016, calls for the province to spend $7 billion over four years in an attempt to reduce GHG emissions 15 per cent below 1990 levels by 2020, and 80 per cent by 2050. The plan promises incentives for retrofitting buildings and rebates of up to $14,000 for the purchase of electric cars.
Ontario is to adopt a cap-and-trade system, with a carbon market integrated with those of Québec and California (under the so-called Western Climate Initiative). The government is putting a price on carbon of $18 a tonne and capping emission allowances at roughly 142 tonnes per year in 2017, when the system launches. (Facilities that emit more than 25,000 tonnes of CO2 equivalent (CO2 eq.) have had to report their emissions annually since 2010.)
It’s not only heavy emitters or renewable power producers that can take climate action. In 2012, Toronto-based consumer-products manufacturer Unilever Canada began to run all of its manufacturing plants and offices in Ontario on green electricity from Bullfrog Power, becoming the single largest commercial buyer of renewable energy in Canada. “I think it was the fortuitous result of an enthusiastic strategy,” says John Coyne, VP of Legal and External Affairs and General Counsel.
Bullfrog’s generators inject renewable electricity onto the regional electricity grid to match the amount of power Unilever’s facilities use. The company has reduced its annual CO2 equivalent emissions by 7,500 tonnes. Says Coyne: “A lot of the work was done by me individually, to identify the opportunity, source the supplier, negotiate the deal, persuade my management colleagues that this was the right way forward and proceed with the transaction. We were exclusively involved in preparing the details of the contract.”
He emphasizes, however, that what matters “is reduction of our carbon footprint not just in terms of energy consumption, but in the totality of the business.” That calculation may include recycling the waste generated in Unilever’s factories instead of contributing to the carbon dioxide being emitted from landfills.
Ontario Power Generation (OPG) produces 60 per cent of the province’s power. Thanks to its phase-out of coal-fired plants, its power is 99.7 per cent free of smog and GHG emissions. “We reduced our GHG emissions from a peak of 39 million in 2009 to 0.5 million tonnes in 2015,” says Senior Counsel John Beauchamp. “We were the first and only jurisdiction in North America to stop using coal.”
As Ontario Power Generation converted some of its coal-fired generation to biomass-fuelled generation, its law division negotiated new “energy supply agreements” with the Independent Electricity System Operator, the government authority that oversees day-to-day operation of Ontario’s electrical system.
The law division is also involved in OPG’s recent efforts to diversify its portfolio and increase renewable generation, often in partnerships with indigenous communities. In March, for example, OPG was awarded a contract to develop a 44 MW solar energy farm at its Nanticoke site, in partnership with SunEdison Canadian Construction LP and Six Nations Development Corp.
“There was a ton of legal work involved in putting together that bid, in particular coming up with the partnership structure in advance of the bid,” says Beauchamp.
Québec is the only large province to have significantly reduced its GHG emissions below 1990 levels. “Québec is a leader in climate initiatives in Canada,” says Pierre-Olivier Charlebois, a partner at Fasken Martineau DuMoulin LLP in Montréal. The province’s target is to be 25 per cent below its 1990 emissions level by 2020 and 35 per cent below by 2030. Québec implemented a cap-and-trade system in 2013, applicable to operations that emit 25,000 tonnes of CO2 eq. or more annually and to fossil fuel distributors.
At the end of each compliance period, all regulated emitters must have enough emission allowances to cover their total reported (and audited) greenhouse gas emissions for that period. They can obtain allowances at government auctions, by buying them from other market participants or by buying offset credits. Québec linked its carbon market with California’s in November 2014.
“For many years, there was a voluntary carbon market in Québec, but not many companies were participating,” says Charlebois. “Now, with the big emitters regulated, over 100 companies participate in the carbon market.”
The government estimates that its cap-and-trade system will raise $2.8 billion by 2020, which will go into Québec’s Green Fund to finance environmental projects. Québec already derives almost all of its electricity (97 per cent) from renewable energy sources. While hydro power is its biggest strength, the province has also invested heavily in wind power.
Montréal-based pulp and paper company Resolute Forest Products (formerly AbitibiBowater) has made progress on climate action. “Resolute committed to reducing absolute GHG emissions by 65 per cent compared to 2000 levels by 2015,” says Alice Minville, Senior Legal Counsel. “We chose the year 2000 as a baseline in order to take into account the significant investments we made over the past 15 years to reduce our GHG emissions. We have since surpassed our target, reducing total GHG emissions by 67.5 per cent — a full two years ahead of schedule.”
Resolute achieved much of this greenhouse gas reduction by adopting cleaner energy to power its processing operations. A major step was conversion of its Saint-Félicien mill in 2014 from heavy oil to biomass and natural gas. Resolute has also installed a turbo generator at three of its Québec mills. “We now produce electricity from our steam turbine on our biomass boiler and sell it to Hydro Québec,” says Minville. Her legal group supported the energy group on the various bids to win the power-generation contract.
The legal department works closely with the company’s government-relations group and corporate environmental group on advocacy to governments. “We’re big enough to have the ear of government,” says Minville, “but we’re also very knowledgeable about, for example, what’s going on in California and Québec [in cap-and-trade]. It was really helpful in advocating for what we thought would be a good cap-and-trade system for Ontario.”
She says: “It’s really a question of working at the beginning to understand what the proposed regulations are — to see what the opportunities are. If necessary, you want to be first in line to make the required changes to your process and to your equipment. But it’s easier to work on what your energy inputs are than to invest massive amounts in new anti-pollution equipment.”
In 2008, Canada’s westernmost province became the first jurisdiction in North America to implement a carbon tax. At $30 per tonne of CO2 equivalent, the tax applies to gasoline, diesel, natural gas, heating fuel, propane and coal. However, the province’s greenhouse gas emissions, after initially declining, have been rising again; BC is not on track to meet its target of reducing emissions to 33 per cent below 2007 levels by 2020.
Alex MacWilliam, a partner at Dentons Canada LLP in Calgary, says: “There’s been a change in British Columbia in purchasing patterns with respect to fuel that’s been greater than we’ve seen in provinces that don’t have carbon taxes. But the fact that emissions haven’t fallen you can attribute to the overall growth in the economy.” That the carbon tax is frozen until 2018 could also be a factor.
The Climate Action Secretariat, appointed to advise Premier Christy Clark’s government on its forthcoming Climate Leadership Plan, has recommended that the tax be increased annually by $10 a tonne starting in 2018. It has also urged the government to proceed with a cap-and-trade system. Heavy emitters (defined as facilities emitting 10,000 tonnes or more annually) already have to report to the government, while those above 25,000 tonnes have to have their emission reports verified by a third party.
Telus Garden in downtown Vancouver is a pioneer in the “greenification” of urban real estate. The million-square-foot development includes the 22-storey Telus head office building, the first Vancouver office tower built to Leadership in Energy and Environmental Design (LEED) Platinum specs, as well as a LEED Gold 47-storey condo tower with 424 green homes and retail space.
The development is one of the first in Vancouver to incorporate a district energy system, which recycles part of the heat coming from serverse in the massive Telus data centre into the office and residential towers. It provides about 80 per cent of the heating and cooling for the two towers, reducing CO2 emissions by one million kilograms annually. On the rooftop, 300 solar panels generate 65,000 kilowatt hours of electricity per year, reducing the building’s need for power from the grid.
The property developer, a joint venture between Telus and Westbank Projects, issued $225 million in “green bonds” in order to retire short-term construction financing for the office tower, which opened last September. It was the first time in North America that green mortgage bonds were used for real estate financing. (In contrast to traditional bonds, which do not provide visibility on how the proceeds are to be used, green bonds require transparency: investors know the funds will be used to create environmental benefits.)
The Telus legal department was intimately involved in the original thinking about Telus Garden right through to its completion, says Michel Belec, Senior VP of Legal Services. “There were some interesting challenges, not just in negotiating with Westbank how we would work together, but the scope and size of the project generated fascinating issues from a legal perspective — financing, environmental, customs and excise matters, even some free trade issues as we looked at securing suppliers from various jurisdictions.
“We helped structure the joint venture. There were a number of partnerships created and a number of financing arrangements. We also were involved in settling all the construction agreements, and advised on the internal governance process for the joint venture and for Telus as well. Throughout the project there were key decisions that had to be made, so we created a framework for that. We were implicated in a significant volume of work.”
In-house counsel at other organizations will be implicated, too, as the country gears up for the transition to a low-carbon future. It is an imperative that presents opportunities for clean-tech innovators as well as challenges for traditional industrial emitters. Governments and companies both face a balancing act: to recognize their continued reliance on fossil fuels in the short term while setting in motion the de-carbonization of the Canadian economy necessary in the medium to long term. As uncertainty swirls around the pace of this transformation, in-house counsel will have a strategic as well as transactional role in how the process unfolds.