Canada: Ontario’s GHG Emissions Cap And Trade System: Program Announced With Details To Follow

In December 2009, the Ontario legislature passed the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), 2009, providing the legislative framework needed for a cap and trade system, and regulations were prepared to fill out these requirements.  The Province had previously stated a desire to cooperate with other Western Climate Initiative (WCI) parties on a regional cap and trade system for greenhouse gas (GHG) emissions.  More than five years later, and now behind its WCI partners California and Quebec in initiating a trading system, Ontario Premier Kathleen Wynne announced her government's intention to move forward on the Ontario program, that the Province will be working with industry and communities on the design of the system, and that Ontario will join Quebec and California in allowing for the trading of credits across all three jurisdictions.

An agreement between Ontario and Quebec covering general principles has confirmed that the system will have sector specific GHG caps which will drop over time, that allowances will be granted or auctioned off by the government, and traded between regulated entities, and that proceeds raised from the program will be used by the Ontario government to fund projects that otherwise reduce GHG emissions.  The plan also provides that certain projects in unregulated sectors can be the source of offset credits, which then can be sold to regulated entities to meet emissions credit requirements.  The effect of the program, and the associated trading system, will effectively put a price on carbon for the purposes of regulated sectors.

Critics of the plan point out that the sale of emissions credits will become a significant source of revenue for the Province, some estimating revenue of $1-2 billion per year, but that there is no intention to make the initiative revenue neutral, as with the institution of the carbon tax in British Columbia.  Instead, the Wynne government has stated their intent to "reinvest the money into projects that reduce GHG pollution and help businesses remain competitive", including projects "helping families consume less energy through more energy-efficient appliances or housing, building more public transit to reduce the number of vehicles on the road, and helping factories and businesses reduce greenhouse gases".  One of the strengths of a cap and trade system is that it is designed to facilitate the implementation of the highest impact changes to existing activities; depending on the use of the revenue, the government can assist businesses and families in taking appropriate action, or it can significantly erode the benefits of the new system.  And, of course, the expectation is that the cost of emissions allowances, and of modifications to meet caps, will be passed on to consumers, increasing costs.

Aside from the generally positive comments of progressive commentators who had been disappointed that Ontario has lagged so far behind other jurisdictions on the issue, other supporters of the scheme have pointed out that the implementation of a cap and trade system can work to level the playing field by internalizing certain external costs of carbon-intensive activities.  For example, those utilizing oil and gas to produce electricity in Ontario will have to pay to emit carbon, which should allow renewable energy to be more competitive in terms of price.

As noted, the program will allow for the creation of carbon offset credits through the completion of certain non-regulated sector projects.  With little information released on the details of Ontario's program, we can look to Quebec and the WCI for indications on how this part of the regime will be set up.  Under the WCI, offset credits must be "additional, permanent, verifiable and real", meaning that (i) the reductions would not have occurred in the normal course of business under current regulations and practices, (ii) the reductions are sustainable and irreversible, and in respect of sequestration, that the sequestration is certain in terms of its long-term viability, (iii) the reductions will be verified as against a set standard by an ISO 14065-accredited verification body, and (iv) the reductions have resulted from voluntary action, are quantifiable and do not lead to leakage elsewhere (e.g. through lower cost production in a non-regulated jurisdiction).  Quebec and California have put a conservative limit on the use of offset credits; only 8% of the emissions credits of a regulated sector participant can come from offset credits, while the WCI framework allows for this percentage to be as high as 49%.  To ensure that offset credits meaningfully contribute to the effort at reducing GHG emissions, California has imposed "buyer liability", where the purchaser of the offset credit is responsible if there is a problem.  As an alternative, Quebec guarantees the validity of offset credits and has created an "integrity account" to hold a percentage of credits that can be used by the Quebec government to address problems with purchased offsets.  A levy of 3% of all offset credits created in Quebec will be held by the government in this account, with the possibility of a greater rate for carbon sequestration projects.  Finally, Quebec's offset creation provisions currently apply only to three specific types of initiatives: CH₄ (methane) destruction at covered manure facilities, CH₄ destruction at landfill sites, and the destruction of certain ozone depleting substances found in insulating foam and those removed from refrigeration appliances recovered in Canada.

If the Ontario program is similarly restrictive on the creation of offset credits, it will be a missed opportunity for the Province and especially for certain sectors.  The ability to show a revenue stream or cost reduction from the implementation of certain changes in non-regulated sectors could incentivize Ontario residents to move forward with GHG reducing projects without the need for the government to initiate specific programs, and the market can assist in selecting which projects are worth completing, based on the cost of offset credits on the trading floor.  For example, depending on the cost of an offset credit, this program could finally be the push that the solar thermal and geothermal industries need to deploy their technologies more widely in buildings and homes across the Province.

As always, the devil will be in the details.  What sectors will be subject to a cap and when?  How quickly will caps drop?  Who will pay for their emissions allowances, and who will have them granted to them by the government?  How will emissions allowance prices be developed and restricted?  What types of projects will be eligible for the creation of offset credits?

After five years of inactivity on the file, there is a lot to be done by October, 2015, when Environment and Climate Change Minister Glen Murray has stated the final details will be released.  With a federal election this year, as well as the start of Presidential campaigning in the US, the landscape on GHG trading could change significantly before Ontario auctions off its first emissions allowances.  All that said, Premier Wynne appears determined to catch up on this file, and so business and families should assume that within the next several years, a live GHG cap and trade system will be a reality in Ontario.

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