Canada: A More Detailed Look: Proposed Options For Ontario's Cap-And-Trade Program

As noted in our earlier posting, the Ontario government announced in April 2015 that it would implement a cap and trade program that would eventually be linked with the existing cap and trade systems in Québec and California. Following extensive public consultations over the summer, Ontario has released its Cap and Trade Program Design Options paper, which is open for public comment until December 16, 2015. As part of the current consultation process, the Ontario government is seeking input on various elements of the program design including timing, scope of the program, caps on greenhouse gas emissions, allowance distribution, price stability mechanisms, market design features, compliance requirements, flexibility mechanisms and enforcement. Feedback will inform the development of a regulatory proposal for the cap and trade program, which is expected to be tabled in early 2016. This will be followed by another round of public consultations before the cap and trade regulation is finalized.

Ontario's proposed cap and trade program will be the primary tool to help the province to achieve its 2020 emission reduction target of 15% below 1990 levels. In particular, the program seeks to reduce the amount of the province's greenhouse gas emissions by setting a cap on emissions from regulated facilities and activities. Over time, the cap will be lowered, thus reducing overall greenhouse gas emissions. The key proposals for Ontario's cap and trade program include:

  • Start date: A proposed start date of January 1, 2017 with a first auctioning of emissions in March 2017.
  • Cap: A cap would be set for each year of the program that would limit the amount of allowable greenhouse gas emissions in tonnes of carbon dioxide equivalent. The cap is proposed to be set at forecast 2017 emissions, declining at a rate to help the province achieve its 2020 reduction target and then ultimately to support Ontario's 2030 and 2050 targets.
  • Coverage: Broad sector coverage is proposed that would capture electricity (including imported electricity), industrial and large commercial activities (e.g. manufacturing, base metal processing, steel, pulp and paper, food processing), institutions, transportation fuel (including propane and fuel oil), distribution of natural gas (e.g. heating fuel). Ontario is considering how the program would cover energy-from-waste facilities.
  • Point of Regulation: The following points of regulation are being proposed for these sectors:
    • Industrial and institutional sources with annual GHG emissions equal to or greater than 25,000 tonnes would be covered at the point of emission (i.e., at the facility).
    • Domestic electricity generation would be covered at the fuel distributor level, and electricity imports at the point the electricity enters the province (first jurisdictional deliverer). Some exceptions may be required for facilities that connect directly to international or inter-provincial natural gas pipelines (these emissions would be covered at electricity generator).
    • Transportation fuels (including fuel oil and propane) would be covered at the distribution level where they are first placed into the market – imports and domestics covered at volumes of 200 litres or more and that are delivered to an Ontario consumer.
    • Distribution of natural gas – For distributors of natural gas that, in aggregate, is associated with annual GHG emissions equal to or greater than 25,000 tonnes, the point of regulation would be at the point the gas is transferred from pipeline into the distribution network for local customers.
  • Emissions Coverage: It is proposed that both fixed process and combustion emissions be covered.
  • New and Expanding Facilities: (1) New facilities that begin operations on January 1, 2016 or later and have annual emissions equal to or greater than 25,000 tonnes per year would have a compliance obligation starting in their third year of operation. (2) Existing facilities that are expanding and whose emissions exceed the compliance threshold of 25,000 tonnes per year would have a compliance obligation starting with the first year the threshold is reached.
  • Program Opt-in: It is proposed that facilities that are obliged to report emissions under Ontario Regulation 452/09, Greenhouse Gas Emissions Reporting, be permitted to opt in to the proposed cap and trade program; firms that opt in would not be permitted to opt out.
  • Market Design Features: It is proposed that Ontario would align its program parameters with those in the Québec-California market, including the auction reserve price and strategic reserve price tiers. The 2015 Annual Auction Reserve Price was set at CAD $12.08 and USD $12.10 in Québec and California respectively.
  • Mitigating Carbon Leakage: It is proposed that a portion of allowances would be distributed free of charge to large emitters with a direct compliance obligation in order to address carbon leakage risk and support their transition to the new cap and trade program. Emissions attributable to electricity generation would not be eligible for free allocations, but emissions due to intensive production of a trade exposed good would be eligible. Facility allocations would be determined according to an equation based on the multiplication of an assistance factor, an emissions benchmark for the facility and a cap adjustment factor. The remainder of the allowances would be sold at auction.
  • Flexibility Mechanisms: Purchasers and covered entities would be allowed to bank allowances, without restrictions on the amount of allowances that may be banked or on how long they may be banked (subject to holding limit).
  • Offsets: Ontario intends to allow the use of offsets for compliance in its program, and to take account of protocols for project types currently accepted in Québec and California. It is proposed that Ontario establish an Offset Credit Registry, issue offset credits for emissions reductions and removals from eligible projects within Canada, allow for the aggregation of projects, recognize offset credits issued by Québec and California, and limit use of offsets to up to 8% of the total compliance obligation.
  • Border Carbon Adjustments: Proposed options include border carbon adjustments for electricity and fuels to level the playing field and reduce leakage. Ontario is also considering the applicability of border carbon adjustments for other sectors that could be covered by the proposed cap and trade program.
  • Recognition of Early Reductions: Ontario is considering whether to recognize early reductions either through product-output benchmarking or early reduction allowances.
  • Enforcement and Penalties: Similar to the Québec and California rules, an entity with excess emissions would be subject to a three-to-one compliance penalty where an additional three allowances for each allowance short at true-up is required, plus the allowance originally owed.

Comments on the cap and trade design proposals are being accepted until December 16, 2015 and may be submitted either by mail to Melissa Ollevier, Senior Policy Advisor at the Ministry of the Environment and Climate Change or online.

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