Canada: Ontario Cap-And-Trade Program Design Options Released

The Ontario Ministry of the Environment and Climate Change (MOECC) has released a discussion paper titled Cap-and-Trade Program Design Options, providing the public with its first detailed look at the design options being considered for the province's anticipated greenhouse gas (GHG) emissions cap-and-trade system.

What You Need To Know

  • The MOECC is accepting comments on the discussion paper until December 16, and will be incorporating that feedback into draft cap-and-trade regulations that are expected to be released in early 2016.
  • Several key issues must be resolved before then, such as determining:
    • who will be responsible for certain GHG emissions, particularly in the energy sector where a cap can be imposed on the end-users of fossil fuels (such as natural-gas fired generators) or upstream on the importers and distributors of those fuels;
    • to what extent certain industries, particularly high-emitting and trade-exposed industries, should be allocated free emissions allowances or required to purchase those allowances at an auction; and
    • whether and how to impose a tariff on imported fossil fuels and carbon-intensive electricity to level the playing field for domestic fuel producers and electricity generators that will face a price on carbon.

Each of these key issues is discussed further below.

Ontario Cap-and-Trade Overview

The MOECC is developing Ontario's cap-and-trade system under the Western Climate Initiative (WCI), a regional framework under which both California and Québec have already implemented their own cap-and-trade systems.  These systems linked last year, allowing California and Québec emissions credits to be used in either jurisdiction and creating the largest carbon market on the continent. Currently, the MOECC is targeting January 1, 2017 as the start date to implement its own system, with possible linkage to the California and Québec systems as early as January 1, 2018.

Ontario's cap-and-trade system is expected to cover the GHG emissions associated with the following sectors: (i) large industrial and institutional emitters, (ii) transportation fuel distributors and (iii) natural gas distributors. Based on recently reported emissions data, over 140 facilities in Ontario would be covered using the currently proposed thresholds (see below). The MOECC anticipates capping emissions in the covered sectors at projected levels for 2017, and then reducing the cap by about 3.7% per year thereafter until 2020. New facilities that meet the threshold for coverage but that do not begin operations until January 1, 2016 or after would have compliance obligations starting in their third year of operation.

Among the various design elements that the MOECC is considering, three are especially critical to determining how the cap-and-trade system will affect industrial activity in the province:

  • Point of Regulation Ontario is proposing to use the following thresholds in regulating emissions associated with the covered sectors:
    (i) industrial and institutional emitters with annual GHG emissions of 25,000 tonnes or more would be regulated at the point of emission (i.e., at the facility);
    (ii) domestically produced and imported transportation fuels at volumes of 200 litres or more would be regulated at the point the fuel is first distributed in or imported into Ontario for delivery to a customer; and
    (iii) natural gas distributors, where 25,000 tonnes or more of annual GHG emissions are attributable to the end-use of that gas, would be regulated at the point the gas is transferred from a pipeline into the distribution network for local customers. 
    In the electricity sector, the MOECC is currently deciding whether to cover the emissions from natural gas-fired generators directly (by capping emissions from those facilities) or to regulate those emissions upstream (by covering them at the fuel distributor level). Currently, the MOECC is only proposing to regulate gas-fired generators directly where they are connected to international or inter-provincial natural gas pipelines.
  • Allocation of Free Allowances Allocating emissions allowances free of charge is one way to reduce the risk of carbon leakage (i.e., production moving to jurisdictions without similar carbon policies to avoid higher operating costs). The MOECC is proposing to determine which entities will receive free allowances using a method developed by the California Air Resources Board, which ranks leakage risk by sector according to the emission intensity and trade exposure (EITE) of the sector. In general, high EITE sectors are likely to receive more emissions allowances for free over time.

    For the first compliance period (likely 2017 to 2020), the MOECC is considering awarding free allowances to covered emitters in the industrial and institutional sectors equivalent to 100% of their compliance obligation (with covered emitters still required to purchase allowances to cover any emissions that exceed this cap). The proportion of allowances allocated free of charge would be reassessed prior to the second compliance period (likely 2021-2023) and is expected to decline over time. Specific allocation methodologies for each sector are under development, in part to determine the baseline emissions in each of the covered sectors.
  • Border Carbon Adjustments As another measure for minimizing carbon leakage and leveling the playing field for domestic producers, the MOECC is considering whether to impose border carbon adjustments for imported electricity and fuel. The MOECC and the Ministry of Economic Development, Employment and Infrastructure are also considering the applicability of border carbon adjustments to other industry sectors, particularly those that are exposed to competition in jurisdictions that may not impose a carbon price. Border carbon adjustments have been the subject of considerable legal scrutiny, in part given their potential implications under domestic Constitutional law as well as international trade agreements.

In addition to these issues, the MOECC's discussion paper outlines many other design options, including registration requirements, market rules, price stability mechanisms, allowance banking, use of offset credits, recognition of early voluntary reductions, compliance requirements, and enforcement and penalties.

Comments on the discussion paper can be submitted to the MOECC online through the Environmental Registry by December 16, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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