Canada: Examining California, Quebec And Ontario's Cap-And-Trade Systems

In this post we will more closely examine the details of Ontario's recently announced draft cap-and-trade system in combination with its counterparts in California and Quebec. You will recall that last year we suggested that Ontario's system would follow closely in the footsteps of the existing cap-and-trade systems found within California and Quebec. The link to the May 2015 piece can be found here.

As a result of Ontario's desire to join the Western Climate Initiative (WCI) and the benefits of a harmonized approach to the salient details of a cap-and-trade system that Ontario would introduce with the programs in Quebec and California, we suggested that any proposed cap-and-trade system must follow the detailed policy architecture of the WCI and accordingly, would mimic to a large extent the content, scope and design of the systems within Quebec and California. We further hypothesized that, based on existing public disclosure, the Ontario government had already effectively committed to joining the WCI and the recently released details of the proposed Ontario system have confirmed our predictions to be accurate. 

Below is a chart which summarizes the main features of California, Quebec's and Ontario's cap-and-trade systems, as they relate to several key criteria. We note that the draft regulations introducing the cap-and-trade details are out for comment presently and are subject to change.

 

California

Quebec

Ontario

Regime

Administered by the California Air Resources Board, which adopted California's Cap and Trade Regulation

Administered by the Minister of Sustainable Development, Environment and the Fight against Climate Change, which adopted the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances

To be administered by the Ministry of the Environment and Climate Change, which plans to adopt the Cap and Trade Regulatory Proposal

Population

38.8 million

8 million

13.6 million

Gross Regional Product

US $1.9 trillion

US $276 billion

US $537 billion

Participating Jurisdictions[1]

Quebec, California and Ontario

Quebec, California and Ontario

Quebec, California and Ontario

Greenhouse Gases Covered

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases. These represent the gases covered by the Kyoto Protocol

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases. These represent the gases covered by the Kyoto Protocol

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases. These represent the gases covered by the Kyoto Protocol

Sectors Covered

Electricity (including imports) and industry in 2013; plus distribution and importation of fuels used for consumption in the transportation and building sectors

Electricity (including imports) and industry in 2013; plus distribution and importation of fuels used for consumption in the transportation and building sectors

Electricity (including imports) and industry; plus distribution and importation of fuels used for consumption in the transportation and building sectors

Emissions Threshold

Emitters of at least 25,000 metric tons CO²e annually

Emitters of at least 25,000 metric tons CO²e annually

Emitters of at least 25,000 metric tons CO²e annually, with an opt in for emitters of between 10,000 and 25,000 metric tons CO²e annually

1990-2012 Emissions in million metric tons of CO² equivalent

1990- 431

2005- 483

2012- 459

1990- 84

2005- 86

2012- 78

1990- 177

2005- 206

2012- 167

Target

1990 levels by 2020

20% below 1990 levels by 2020

15% below 1990 levels by 2020

Emissions Target in million metric tons of CO² equivalent (Target Year)

431 (2020)

67 (2020)

151 (2020)

Maximum Emissions Covered in million metric tons of CO² equivalent

370 (2017)

59 (2017)

142 (2017)

Status

First auction on November 14, 2012; compliance obligations began January 1, 2013

Compliance obligations began January 1, 2013

Compliance obligations begin January 1, 2017

Allocation Method

Mixed – some free allocations for industry, auctions for others. The percentage of free allowances allocated to businesses will decline over time

Mixed – some free allocations for industry, auctions for others. The percentage of free allowances allocated to businesses will decline over time

Mixed – some free allocations for industry, auctions for others. The percentage of free allowances allocated to businesses will decline over time

Price Floor at Auction

$10 per metric ton for both 2012 and 2013 before
rising 5% per year (plus inflation) starting in 2014 

$10 per metric ton starting in 2012 and rising 5% for each year
thereafter (plus inflation)

Approximately $13.72 per metric ton starting in 2017 and rising 5% for each year thereafter (plus inflation)

Affiliations

Helped establish Western Climate Initiative in 2007

Joined Western Climate Initiative in 2008

Proposal to join the Western Climate Initiative

Linkage Status

Linked with Quebec's cap-and-trade system in 2014

Linked with California's cap-and-trade system in 2014

Proposal to link with California's and Quebec's cap-and-trade systems in 2017

Offset Limit

Can account for 8% of a regulated entity's compliance obligation

Can account for 8% of a regulated entity's compliance obligation

Separate offset regulation, which sets out the requirements proponents must meet to be able to create, verify and register offset credits, will be proposed later in 2016

2013 Offset Use Limit (Millions of Offset Credits)

13

2.1

Types of Offset Categories

  • U.S. forest and urban forest project resources;
  • Livestock projects;
  • Ozone depleting substances projects;
  • Urban forest projects
  • Covered manure storage facilities – CH4 destruction;
  • Landfill sites – CH4 destruction;
  • Destruction of ozone depleting substances (ODS) contained in insulating foam
    recovered from appliances

As expected, the similarities between the California, Quebec and Ontario are extensive and the Ontario features largely conform to the standards set by the WCI. In particular, Ontario's price floor for carbon logically parallels the pricing mechanism in both California and Quebec and, relative to population, Ontario's 2020 emissions target is also in line with both jurisdictions. With proposed offset regulations to follow later in 2016, it remains to be seen whether such regulations will continue to reflect the existing systems in Quebec and California. Specifically, the Ontario government has emphasized the importance of creating offset credits that are real, permanent and quantifiable. It is our strong belief that a robust offset program will be critical to Ontario's success in meeting its emission targets and effectively combatting climate change. Irrespective of what is proposed, to the extent that any elements of the Ontario cap-and-trade system are incompatible with the WCI, the provincial government has already stated it will make any amendments necessary to ensure WCI compliance. We will report on the offset regime in Ontario when it is introduced.

Footnotes

1 Ontario's participation is based on the current regulatory proposal and, if enacted, will not be in effect until 2017.

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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