Canada: Full Steam Ahead: Ontario Releases Draft Cap And Trade Regulations And Revised Guideline For GHG Reporting

The Ontario government has released its first regulation – The Cap and Trade Program Regulation (the Draft Regulation) – under the proposed Climate Change Mitigation and Low-Carbon Economy Act, 2016 (the Act, which is discussed in further detail here). The Draft Regulation sets into motion Ontario's plan to reduce its greenhouse gas (GHG) emissions 15% below 1990 levels by 2020, 37% below 1990 levels by 2030, and 80% below 1990 levels by 2050. While some details of the cap-and-trade system remain to be worked out by future regulations, including an offset regulation to be released later in 2016, the Draft Regulation sets out important details such as proposed caps, compliance periods, rules related to registration and participation in the cap-and-trade system, description of capped and uncapped participants in the system, and the allocation of allowances including early action credits and free allowances. A revised Guideline for Greenhouse Gas Emissions Reporting (the Guideline) has also been released by the Ministry of Environment and Climate Change (MOECC) for public review and comment. The Draft Regulation and Guideline is open for comment until April 10, 2016.

Highlights of the Draft Regulation include:

  • A program start date of January 1, 2017 with the first compliance period ending December 31, 2020. Thereafter, each compliance period will last three years (i.e. starting January 1, 2021 until December 31, 2023, and so on).
  • The cap on allowances for 2017 is the "business as usual" projection of 142,332,00 allowances (equal to 142,332,00 carbon dioxide equivalents). Between 2017 and 2020, the cap is expected to decline at an average rate of 4.17% each year to meet Ontario's 2020 emissions reduction target. The heating and transportation fuel sector and industries will face cap declines. However the sector-specific cap for the electricity generation sector will remain unchanged from year to year, which recognizes the significant emissions reduction that the sector has already undertaken with the closure of coal-fired power plants.
  • Covered emitters (mandatory participants) include large industrial emitters with emissions of 25,000 tonnes or more of carbon dioxide equivalent per year (CO2e) (including facilities in the ammonia production, cement production, copper and nickel production, iron and steel production, and glass production sectors), as well as natural gas distributors with attributed emissions of 25,000 tonnes or more of CO2e per year, petroleum product suppliers that supply 200 litres or more in the province per year, and importers of electricity.
  • Some capped emitters will be eligible to receive early reduction crédits, based on actions that they have already take to reduce the emission of GHGs. A maximum of two million early action credits will be available distribution and emitters will need to apply for such credits.

According to the 2016 Ontario Budget, proceeds from the auction of emissions allowances are expected to amount to $478 million in 2016-17 and $1.8-$1.9 billion annually starting in 2017-18. All proceeds will be deposited into a new Greenhouse Gas Reduction Account and dedicated to investments that support GHG emission reductions such as energy efficiency for homes and businesses, public transit, research, innovation and clean technology adaptation.

An overview of the key provisions of the Draft Regulation are set out in the table below. We encourage interested parties, particularly mandatory capped emitters, to provide comments to the government by the April 10, 2016 deadline.

Ontario – Proposed Cap & Trade Program – Overview of Key Features

Issue Details and Commentary

Status of Draft Regulation

  • Regulatory proposal for a cap-and-trade regulation (including an appendix presenting detailed technical information for the distribution of allowances to eligible capped emitters for the first compliance period (2017-2020) and details related to early reduction credits) released by MOECC on February 25, 2016 for a 45-day public review and comment period.
  • Comments accepted between February 25, 2016 and April 10, 2016.
Legal Authority
  • Authorized by proposed Climate Change Mitigation and Low-carbon Economy Act (Bill 172) introduced into the legislature on February 24, 2016. This proposal has been posted for a 30-day public review and comment period. Comments accepted between February 24, 2016 and March 25, 2016.
  • Bill 172 outlines provisions relating to two main areas: (1) emissions reduction targets and action plans, and (2) cap-and-trade program and use of proceeds.
Proposed Start Date and Compliance Periods
  • The cap-and-trade program will take effect as of January 1, 2017 with the first compliance period ending December 31, 2020. Thereafter, compliance periods will last three years (i.e. starting January 1, 2021 until December 31, 2023, and so on).
Regulation Coverage
Threshold of Coverage
  • Sources that emit ≥25,000 tonnes of CO2e/year are subject to the cap-and-trade program.
Voluntary and Market Participants
  • In addition to mandatory participants, the Draft Regulation contains provisions for voluntary participants and market participants.
  • A facility that is obliged to report emissions under the Greenhouse Gas Emissions Reporting Regulation (O.Reg. 452/09) (the Reporting Regulation), with annual emissions of between 10,000 and 25,000 tonnes, may opt-in to the cap-and-trade program as a voluntary participant. This approach allows companies with smaller emissions profiles to participate on the same basis as larger emitters in the same sector, including access to free allocation of allowances.
  • A person who is not an employee of a mandatory or voluntary participant in the cap-and-trade program may apply to register as a market participant.
GHGs Covered The following greenhouse gases are covered by the program:

  • carbon dioxide;
  • methane;
  • nitrous oxide;
  • hydrofluorocarbons;
  • perfluorocarbons;
  • sulphur hexafluoride;
  • nitrogen trifluoride;

and such other contaminants as may be prescribed as a greenhouse gas by the regulations.

Sectors Covered
  • All activities set out in Table 2 of the Reporting Regulation that are engaged in at a single facility (i.e. the large industrial emitters).
  • Electricity importation.
  • Natural gas distribution.
  • Petroleum product supply.

The cap-and-trade program will cover approximately 82% of the Ontario's total GHG emissions.

Point of Regulation
  • Industrial and institutional sources with annual GHG emissions ≥25,000 tonnes: at the point of emission (i.e. at the facility).
  • Domestic electricity generation: at the fuel distributor level.
  • Electricity imports: at the point the electricity enters the province (first jurisdictional deliverer).
  • Transportation fuels (including fuel oil and propane): 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 ≥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.

Allowance Allocation

Distribution Method
  • Emitters covered under the program must hold an allowance for every tonne of greenhouse gas emissions released.
  • As the cap declines each year, emitters would need to hold a sufficient number of allowances to cover their annual emissions. To comply, emitters could reduce their emissions or purchase allowances in the carbon market.
  • Allowances will be distributed through auctions and free-of-charge allocation to industry.
  • Emissions attributable to electricity generation would not be eligible for free allocation of allowances, but emissions due to intensive production of a trade exposed good will be eligible.
  • Free allocation amount will decline over time. The timing for the decline will be determined before the end of the first compliance period as part of a program review. The proportion of free allowances will decline as other jurisdictions adopt carbon policies, Ontario entities transition to the carbon price, and border carbon adjustments are introduced.
  • The rest of the allowances (i.e. those not distributed free-of-charge) will be sold at auction.
Allocation Methodology
  • Facility allocations will be determined primarily by three factors and calculated based on the equations set out in the Draft Regulation. The three factors include the following:
    • Assistance Factor (up to 100%); certain emissions intensive and trade exposed industries will receive a higher assistance factor.
    • Base amount for facility, determined according to product-output benchmarks (based on allowances per unit of output), energy use (based on allowances per GJ of energy used) or historical emissions.
    • Cap Adjustment Factor (reflects annual reduction in the cap)
  • Examples of sectors or facilities eligible for allocation based on product-output benchmarks: iron and steel making; petroleum refining; grey cement manufacturing; hydrogen manufacturing; beer manufacturing.
  • Examples of sectors or facilities eligible for allocation based on energy use: eligibility requirements under this category are based on exclusions set out the Appendix to the Draft Regulation – facilities that use energy in certain processes, operations or activities are not eligible for this type of allocation.
  • Examples of sectors or facilities eligible for allocation based on historical emissions: white cement manufacturing; glass manufacturing; ammonia manufacturing; nitric acid manufacturing; carbon black manufacturing; ethylene manufacturing; lubricant manufacturing; styrene manufacturing; magnesium production; high calcium lime production; dolomite lime production; mining, base metal smelting, refining; brick making; and mineral wool insulation manufacturing.
  • Direct allocations will also be made to certain participants (as set out in the Appendix to the Draft Regulation), including: Carmeuse Lime Canada; Terra International (Canada) Inc.; University of Toronto; University of Western Ontario; University of Guelph; York University; London Health Sciences Centre; Hamilton Health Sciences Corporation; Queen's University; Emerald Energy From Waste Inc; and Clean Harbors Canada Inc.
  • Quarterly auctions – initially separate; joint auctions once the program is officially linked to Quebec and California.
  • Sealed bid, single round, lots sizes of 1000 allowances, uniform price.
  • First auction: March 2017 stand-alone auction (to be aligned with Quebec and California's schedule where auctions are currently held every quarter).
  • Participants must provide financial guarantee covering full value of any bid.

A summary of the results of the February 2016 Quebec-California auction is available online.

Price Stability Mechanisms Auction Reserve Price

  • Ontario will align its reserve price with the price in the joint Quebec-California market for 2017. The 2016 reserve price in Québec and California was CAD $12.82 and US $12.73 respectively.

Strategic Reserve

  • 5% of total allowances from the cap each year will be set aside by the province in a strategic reserve and made available to Ontario emitters at fixed prices to manage price impacts in the event there is high demand for allowances.
  • Ontario plans to align its price tiers with the price in the joint Quebec-California market for 2017. For Quebec and California, these price tiers were set at $40, $45 and $50 per allowance in 2013, escalating annually at 5% plus inflation and converted to Canadian currency.
  • Only covered entities can purchases allowances from reserve and allowances can only be used for compliance.
Early Reduction Crédits
  • Early Reduction Credits will only be awarded for reductions of eligible emissions during the reduction period between January 1, 2012 and December 31, 2015.
  • Eligibility criteria and calculation methods are set out in the Appendix to the Draft Regulation.
Market Rules
  • A holding limit will apply to any registered entity, which will depend on supply of allowances in the market.
  • A purchase limit prevents covered entities from purchasing more than 25% of allowances sold at auction; for non-covered entities the limit is 4%.

Market Flexibility

  • 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).
  • Borrowing of allowances from future compliance periods will not be allowed (with possible exception for complying with penalty rule).
  • 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 Quebec and California. The draft regulation for offsets will be released later in 2016.
  • Ontario plans to:
    • establish an Offset Credit Registry;
    • issue offset credits for emissions reductions and removals from eligible projects within Canada;
    • allow for the aggregation of projects (bundling of identical projects for reporting purposes);
    • recognize offset credits issued by California and Quebec, in anticipation of linking to Ontario's program; and
    • limit use of offsets to up to 8% of the total compliance obligation.
Compliance Period
  • Initial four year compliance period to allow harmonization in a linked program with Quebec and California's compliance periods. Subsequent compliance periods will be three years.

Emissions Reporting and Verification

  • Capped participants must report annually under the Reporting Regulation (as required since 2010).
  • All participants must register with MOECC to participate in allowance trading market.
  • Third party verification is required for sources emitting ≥25,000 tonnes per year, or exceeds another verification threshold listed in the Reporting Regulation.

Compliance and Enforcement

Compliance Period Obligation
  • Following a compliance period, all entities with a compliance obligation must surrender a number of compliance units (e.g. allowances, offset credits) equal to their emissions during the period. This process is commonly referred to as a true-up.
  • Acceptable compliance units for true-up include emission allowances, strategic reserve allowances, early reduction credits and offset credits issued by Ontario.
  • For entities with a compliance obligation, the requisite number of compliance units from each entity's compliance account will be placed into a retirement account and retired.
  • Any entity participating in the cap-and-trade market (including voluntary participants) may choose to voluntarily retire allowances or offset credits to benefit the environment.
  • An entity will be permitted to use offset credits for up to 8% of its total compliance obligation for each compliance period.
Penalty for Non-Compliance
  • An entity with excess emissions will 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 (meaning that four allowances must be surrendered for every tonne not covered in time).
  • Enforcement measures for the cap-and-trade program are aligned with those measures set out in the Quebec and California cap-and-trade programs.
  • Potential fines for non-compliance with the Act or related regulations range from minimum fines set at $5,000 and $25,000 to maximums as high as $4 million and $6M million for individuals and corporations, respectively, on first convictions. The Act also allows for the issuance of administrative monetary penalties, which are similar to the environmental penalties that can be issued under the Ontario Environmental Protection Act and the Ontario Water Resources Act.


Western Climate Initiative
  • Ontario intends to link its proposed cap-and-trade program with the existing programs in Quebec and California, which will likely occur in 2018.
  • Ontario will propose any necessary amendments to the regulations to facilitate linking of the Ontario program with the programs of Quebec and California once linking agreements are in place (Quebec and California are currently parties to a linking agreement for their joint program). These amendments would include:
    • recognition of allowances and credits from Quebec and California;
    • adjustment of the holding limits and purchase limits to account for the size of the linked markets; and
    • currency adjustments related to the auction.
  • Manitoba has indicated that it plans to join the linked program as well.

As noted above, a revised Guideline for GHG reporting was also released with the Draft Regulation. To support the proposed cap-and-trade program, the MOECC is proposing to revoke the current Reporting Regulation and replace it with a new GHG reporting regulation and incorporated Guideline under the Act. Proposed changes will include:

  • requirements to report production and other process related information;
  • provisions to allow facilities with emissions between 10,000 and 25,000 tonne to opt-in to the cap-and-trade program;
  • clarifications on measurement requirements and reporting of biomass types; and
  • refinements to facilitate implementation of the Draft Regulation.

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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