Environmental compliance challenges for fuel suppliers in the U.S. and Canada

Tax compliance has never been simple for fuel suppliers. Now, environmental compliance requirements are making it even more complex. One of the primary reasons for this is a lack of uniformity for environmental reporting requirements.

Before President Trump announced the United States would be withdrawing from the Paris Climate Agreement, the U.S. had pledged to reduce greenhouse gas (GHG) emissions to 25–28 percent of 2005 levels by 2025. Yet even before the president surprised the world with his announcement, the accord didn’t bind the U.S. to any specific emissions-reducing targets or regulations.

That’s not the case at the state level. California and Washington created their own plans to reduce carbon emissions, with penalties for non-compliance, and several other states are working on similar policies. In general, one of two approaches is adopted: a carbon tax, or a cap-and-trade system.

A carbon tax puts a price on carbon dioxide emissions but allows the market to determine how much they must be reduced.  

A cap-and-trade system establishes a marketplace for the amount of GHG emissions. Typically, this approach reduces the amount of allowance over time, which causes the market to set the price of credits going forward. The “cap” puts a limit on the amount of GHG emissions a company can produce. The “trade” provides some flexibility, enabling companies to buy and sell allowances: If Company A exceeds its allowance and Company B has an excess of allowances, Company B can sell or trade its unclaimed allowances to Company A.

California

California has developed a cap-and-trade system and set ambitious goals for itself. The California Global Warming Solutions Act of 2006 (AB 32) aims to reduce GHG emissions to 1990 levels by 2020, and to 80 percent below 1990 levels by 2050.

Without diving into too many details, the act requires reporting for gasoline, diesel, and finished liquefied petroleum gas (LPG) products sold for use in California. This applies to LPG produced in a California refinery and sold to California customers, as well as LPG imported in the state. It also applies to exports of LPG produced in California, be they out of state or out of country.

While fuel taxes must be remitted to the California Department of Tax and Fee Administration, GHG emissions must be reported to the California Air Resources Board (CARB). California also requires independent verification of GHG emissions data reports. Only CARB-accredited verification bodies are authorized to provide verification services to reporting entities.

Washington

Washington’s Clean Air Rule (2008) also strives to reduce GHG emissions over time: to 1990 levels by 2020, 25 percent below 1990 levels by 2035, and 50 percent below 1990 levels by 2050. It requires transportation fuel suppliers in the state to report their GHG emissions to the Washington Department of Licensing (DOL) and the Department of Ecology.

But in March 2018, a superior court found parts of the Clean Air Rule to be invalid; Washington is currently barred from implementing regulations that cap and reduce carbon emissions. The state has filed an appeal with the Washington State Supreme Court.

Meanwhile, Washington Governor Jay Inslee is pushing to institute change on multiple fronts. One proposal is to impose a “pollution fee” on large emitters based on the carbon content of fossil fuels sold or used in the state, and electricity generated in or imported for use in the state. Under Initiative Measure 1631, which will be put before voters in November, the fee would start at $15 per metric ton of carbon content on January 1, 2020, and would increase by $2 per metric ton in subsequent years.

Other state efforts

Other states are working together to try to curb emissions. The Carbon Costs Coalition states — Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New York, Oregon, Rhode Island, Vermont, and Washington — have agreed to reduce carbon emissions, develop market-based solutions to climate change, ensure equity in policy proposals, create a resilient economy, and improve public health.

The Regional Greenhouse Gas Initiative (RGGI) is a cooperative effort between Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. Participating states have agreed to a cap on GHG emissions, which becomes more stringent over time. 

Despite having a shared goal, lawmakers in each state are working to pass legislation “tailored to local needs.” Though still works in progress, the drafts reveal different tactics and thresholds. For example, New York proposes taxing carbon at $35 per ton, increasing annually by $15 until it reaches $185 per ton; and Maryland is considering a $15 per ton carbon tax, increasing by $5 per ton annually until $45 (in 2025), where it would remain.

Several other states are working independently to develop GHG-reducing policies. These include Hawaii, Minnesota, and Utah. Fees, taxes, and thresholds considered in each vary.

Environmental compliance in Canada

The situation is similar in Canada. Still a party to the Paris Agreement, Canada has committed to reducing Canada’s total GHG emissions to 17 percent of 2005 levels by 2020. Provinces have been given until the end of 2018 to come up with a plan for pricing carbon.

Certain criteria must be met. For example, jurisdictions should provide regular, transparent, and verifiable reports on the outcomes and impacts of their policies. In addition, the carbon pricing system must become more stringent over time:

• Explicit price-based systems should start the carbon price at a minimum of $10 per ton in 2018 and rise by $10 per ton annually, to $50 per ton in 2022
• Cap-and-trade systems should have a 2030 emissions reduction target equal to or greater than Canada’s 30 percent reduction target, and have emission caps that become more stringent over time

Provinces have already or are in the process of establishing their policies. As of April 1, 2018, British Columbia imposes a carbon tax of $35 per ton of carbon dioxide (CO2) equivalent emissions, a rate that will increase by $5 per ton until reaching $50 per ton in 2021. Currently, the rate translates to 7.78 cents per liter of gasoline, 8.95 cents per liter of diesel, and 6.65 cents per cubic meter of natural gas.

In Quebec, which came up with a plan to cap emissions in 2013, businesses that emit 25,000 metric tons or more of CO2 equivalent annually are subject to a cap-and-trade system. This began as a tax on the industrial and electricity sectors, and now applies to fossil fuel distributors as well.

Some other provinces are still developing their plans. Manitoba is working on an output-based pricing system. Yukon is studying a carbon tax. On the other hand, days after Doug Ford became the Premier of Ontario on June 29, 2018, his government pulled out of the world’s second-largest carbon market — a bi-national cap-and-trade program with California and Quebec in 2017 — and started winding down cap and trade in Ontario.

Moving forward

Greenhouse gas emissions reporting requirements are subject to change: Old plans are challenged or amended, and many new plans are on the horizon.

In fact, despite President Trump’s anti-Paris Accord rhetoric, a federal carbon tax is even under consideration on Capitol Hill. The Market Choice Act (H.R. 6463), introduced by Florida Representative Carlos Curbelo, would “set the United States on a path to reduce carbon emissions and not only fulfill, but exceed the commitments set out under the Paris agreement.”

Keeping informed is a must for businesses in this space. To facilitate GHG emissions reporting, businesses should identify data and process gaps, and develop a commercial and operational reporting strategy.

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