What is Canada's Output-Based Pricing System (OBPS)?

Introduction to Canada's Carbon Pricing Framework

Canada's consumer carbon tax has long been at the heart of heated debate, and according to Mark Carney, it's now clear that this approach isn't working. 

"The Consumer Carbon Tax isn’t working—it’s become too divisive," 

says Carney, scrapping the tax in favor of incentives that reward Canadians directly for making greener choices, such as investing in electric vehicles, energy-efficient appliances, and better home insulation.

‍

But removing the consumer carbon tax raises a critical question: how will Canada ensure emissions continue to decline rapidly enough to meet its climate commitments?

‍

Enter the Output-Based Pricing System (OBPS). Originally designed to regulate industrial emissions by putting a price on carbon from large emitters, the OBPS could soon take on a central role in Canada's climate strategy.

‍

The Role of the Output-Based Pricing System (OBPS)

Designed as a targeted mechanism, the OBPS provides carbon price certainty to large industrial emitters—such as steel, cement, and chemical manufacturers—who compete in global markets. 

‍

By applying an emissions price only above a certain benchmark, the OBPS ensures competitiveness while encouraging emission reductions where they're most impactful. With Mark Carney proposing to shift away from consumer carbon pricing, the OBPS’s role becomes even more critical in driving Canada’s industrial transition toward a cleaner economy.

‍

Objectives of the Federal OBPS

The OBPS stands as a pivotal structure with several core objectives:

• Reduce Industrial Emissions: Encourage large emitters to lower greenhouse gas emissions through clear price signals and incentives for adopting cleaner technologies.
• Maintain Industry Competitiveness: Protect Canadian industries from international disadvantage by setting emission benchmarks rather than applying blanket charges.
• Prevent Carbon Leakage: Ensure emissions aren’t simply shifted elsewhere by creating fair and transparent carbon pricing measures.
• Drive Innovation: Promote investment in low-carbon technologies and innovation within heavy-emitting sectors, positioning Canada as a global leader in clean industry.

‍

Understanding the Fundamentals of the OBPS

How Canada’s Output-Based Pricing System (OBPS) works

Canada’s OBPS works by establishing emission-intensity benchmarks—based on sector averages—for each covered industrial activity. Facilities emitting below these benchmarks earn surplus credits, while those exceeding the standards must either pay for their excess emissions or purchase credits from others. 

‍

This market-based mechanism promotes efficient emissions reduction, rewarding companies that innovate or invest in cleaner technologies. Under Carney’s proposals, tightening these benchmarks and increasing market transparency could further strengthen incentives, accelerating industrial decarbonization across Canada.

‍

Illustrative examples of OBS for key sectors

To provide a clearer understanding of how output-based standards (OBS) are applied in practice, it is helpful to look at some specific examples across different industrial sectors. The OBS values are expressed in terms of tonnes of CO2 equivalent (tCO2e) per unit of output, with the unit of output varying depending on the specific activity. 

‍

The following table presents example OBS values for a selection of industrial sectors:

Illustrative Output-Based Standards (OBS) for Selected Sectors (as of December 2023)

‍

These examples demonstrate the diversity of industrial activities covered under the OBPS and the range of emissions intensities associated with them. The specific OBS value for a facility is crucial as it, along with the facility's production level, determines its annual emissions limit. 

‍

Facilities that can achieve lower emissions per unit of output than the OBS are positioned to earn surplus credits, while those with higher emissions intensity will face a compliance obligation. The significant variation in OBS values across sectors reflects the inherent differences in the emissions profiles of various industrial processes.

‍

Greenhouse Gases Covered by the OBPS

The OBPS encompasses a range of greenhouse gases:

• Primary GHGs: Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O).
• Industrial GHGs: Sulfur hexafluoride (SF6), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs).

‍

With global warming potential (GWP) values in use, the system accurately assesses these gases' varying climate impacts, aligning with the latest climate science insights.

‍

Jurisdictional Scope

In regions without compliant systems, the federal OBPS applies, encompassing Manitoba, Nunavut, PEI, and Yukon. Complex regulatory landscapes are formed as provinces like British Columbia and New Brunswick develop tailored systems, and businesses operating nationwide must navigate these.

‍

Eligibility Criteria for Participation

Mandatory registration

Facilities in emissions-intensive and trade-exposed (EITE) sectors or those involved in electricity generation emitting over 50,000 tonnes of CO2e annually are required to register.

‍

Voluntary participation

For facilities emitting between 10,000 and 50,000 tonnes annually, voluntary participation in high-risk sectors for carbon leakage offers benefits:

• Carbon Pricing Experience: Prepares organizations for upcoming regulatory changes.
• Surplus Credits Revenue: Potential financial gains from exceeding emissions targets.

‍

Summary

For senior directors and corporate leaders in sustainability, risk, and compliance, understanding the OBPS is fundamental to crafting effective carbon strategies. At Arbor, we can help measure your company’s carbon emissions. Our carbon accounting platform empowers organizations to decarbonize every scope of your company, aligning environmental stewardship with economic success. Visit www.arbor.eco to explore how we can support your journey toward sustainability.