On November 16, 2015, the Ontario Ministry of the Environment
and Climate Change (MOECC) released preliminary plans for its
proposed cap and trade system. The system, if implemented, would
make businesses in key industries responsible for their emissions
starting on January 1, 2017. The document, entitled Cap and
Trade Program Design Options, aims to generate feedback that
will assist the province in drafting cap and trade regulations. The
MOECC is accepting comments until December 15, 2015.
The Proposed Cap and Trade System
The proposed system, if implemented, would impose an emissions
cap on facilities in regulated sectors as of January 1, 2017. The
aim in the first year is to maintain, rather than reduce, overall
emissions. Thus, the initial cap would be set based on forecasted
emissions levels in 2017. Beginning in 2018, the cap would decline
3.7% each year, making emissions standards more stringent over
Entities in regulated sectors that expect to exceed the
emissions cap would be able to purchase emissions allowances
through an auction process. The auctions would be conducted as
single-round, sealed bids; prospective purchasers would submit a
one-time confidential bid, with the sale going to the highest
The first auction is proposed to take place in March 2017.
Subsequent auctions would take place quarterly. To link the Ontario
system to similar cap and trade regimes, the quarterly auctions
would be held jointly with Quebec and California. Provincial
proceeds from allowance auctions will be re-invested to achieve
further emissions reductions.
Once purchased at auction, allowances would be tradeable between
entities. The province has disclosed few details about the
mechanics of the trading system. As an alternative to trading
unused allowances, entities can "bank" them for use in a
future compliance period.
The province recognizes that the cap and
trade system will impose new operating costs on businesses in
Ontario, and that some of those businesses may be tempted to shift
production to jurisdictions with less stringent environmental
policies. In an effort to prevent such "leakage", the
province proposes to distribute a number of allowances to large
emitters free of charge.
The emissions caps are proposed to apply to a wide range of
sectors. Facilities in the following sectors would be subject to
the cap and trade scheme:
electricity, including imported
electricity for consumption in Ontario;
industrial and large commercial
(e.g., manufacturing, base metal processing, steel, pulp and paper,
and food processing);
fuel transportation, including
propane and oil; And
distribution of natural gas (e.g.,
The province also proposes to establish an offset system for
entities that operate outside of the regulated sectors. When such
entities invest in emissions-reducing or emissions-removing
projects, the province will recognize those contributions through
offset credits. The credits can then be sold to regulated entities
to "offset" any emissions in excess of the cap. As in
Quebec and California, offsets would only be allowed to account for
8% of a facility's total compliance obligations.
Enforcement and Penalties
Entities with emissions levels that exceed the cap would be
subject to a three-to-one allowance penalty. In other words, if an
entity does not have sufficient allowances or offsets to cover its
emissions in excess of the cap, it would be forced to forfeit three
allowances for each allowance it is short. Continued non-compliance
could result in suspension of the entity's allowance account,
effectively preventing it from using allowances to meet its
emissions cap in the future.
The province would also have the authority to impose monetary
penalties for non-compliance.
The MOECC is seeking feedback on the cap and trade system
outlined in its proposal. Comments received on or before December
15, 2015 will inform the drafting of regulations that will
implement the system.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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