The Ontario government has signed an agreement with Quebec to
create a joint cap-and-trade system to reduce greenhouse gas (GHG)
emissions. In its announcement, Ontario has indicated that it will
impose a hard ceiling on the amount of GHG emissions that is
allowed to be produced by each sector of the economy. By linking
Ontario's system with Quebec's and tying into the Western
Climate Initiative cap-and-trade system already being operated in
Quebec and California, Ontario will join North America's
largest carbon market.
Cap-and-trade programs limit the amount of GHGs that enter our
atmosphere by setting a limit on emissions. Under this system,
businesses will have a GHG emissions quota or emission credits. If
a company does not use all of the credits by emitting less than its
allotted share, these credits can be sold or traded to other
companies that are at risk of surpassing their emissions quota.
Therefore, according to the government, the cap-and-trade system
will seek to reward innovative companies by incentivizing a
reduction in GHG emissions.
It is useful to note that Quebec implemented its cap-and-trade
system in 2013. The Quebec system requires facilities in the
industrial and electricity sectors, and distributors and importers
of fossil fuels whose annual GHG emissions in Quebec are ≥
25,000 metric tonnes of carbon dioxide equivalent (CO2e) to cover
their total reported (and verified) emissions with an equivalent
number of compliance instruments or "allowances" in
circulation. Compliance units are either allocated freely,
auctioned off or sold by mutual agreement by the government or
consist of offset credits, credits for early reduction of emissions
or emissions allowances issued by California (or any other
jurisdiction that may join in the future). The Quebec and
California carbon markets became fully linked and harmonized on
January 1, 2014. They have been conducting joint auctions for
emissions allowances since November 2014.
During the first few years of the cap-and-trade system, Quebec
took measure to avoid "carbon leakage"—i.e., the
relocation of industry to jurisdictions that do not have a
cap-and-trade system—by granting emitters the maximum
emissions allowances required to comply with the system free of
charge; however, the system provides for a gradual reduction in the
number free allowances granted annually.
By adopting a similar system, Ontario would be able to benefit
from the carbon market experience of Quebec and California, and it
could allow for greater flexibility for emitters and participants
in all three jurisdictions as well as have the potential of
increasing liquidity in the carbon market.
The Ontario system will take many months to develop and
industry-specific targets will need to be established. Ontario will
also need to integrate its system with that of Quebec and
California. It is anticipated that these caps will not be in place
until the fall of 2015 at the earliest. It should be noted that
Ontario has adopted Regulation 452/09, which required the reporting
of GHG emissions by operators in certain sectors.
While there is a view that carbon taxes, such as those
implemented in British Columbia, are a more straightforward
approach to discouraging GHG emissions, the Ontario government is
taking the position that since the cap-and-trade system is
sector-based it is a more flexible means to combat climate change.
According to the Ontario government, the revenue collected through
the cap-and-trade system will be spent on environmentally-friendly
technology and infrastructure.
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