Ontario's Cap and Trade Update

Introduction

Ontario has forged ahead with its plans to introduce a Cap and Trade System, with the announcement of the Climate Change Mitigation and Low-carbon Economy Act, 2016 (the "Act") and the associated draft Cap and Trade Regulation (the "Regulation"). 

The Act and Regulation outline the details of Ontario's proposed plan to reduce greenhouse gas ("GHG") emissions.

The Cap and Trade System under the Act and Regulation is consistent with the Cap and Trade program design proposal posted on the Environmental Registry in November 2015.¹

Proposed Cap and Trade System

Facilities will be required to comply with the Cap and Trade System as of January 1, 2017. The first compliance period will run from 2017 to 2020. Emission allowances will be auctioned four times a year. Available emission allowances will decrease annually. 

Large emitters will benefit from the distribution of free allowances to help initially offset the cost of the Cap and Trade System. The number of free allowances available for large emitters will decrease over time.

As previously suggested, the Cap and Trade System will apply to GHG emissions from:

• electricity generation and importation
• natural gas distribution
• petroleum product supply
• regulated industrial and large commercial facilities (e.g. manufacturing, base metal processing, steel, pulp and paper, food processing)² that emit greater than or equal to 25,000 tonnes of carbon dioxide equivalent ("CO₂e") per year.

The Cap and Trade System will align with the systems operating in California and Quebec.

If a facility exceeds its cap and fails to purchase sufficient credits or offsets, the facility will be subject to a three-to-one allowance penalty. The facility will have to submit an additional three allowances for every one allowance over the cap in order to get into compliance. 

Non-compliance can also result in prosecutions, administrative monetary penalties, and/or Ministry of the Environment and Climate Change ("MOECC") Orders.

Greenhouse Gas Reduction Account

All proceeds from the Cap and Trade System will go into a Greenhouse Gas Reduction Account. Funds from this Account will be used to exclusively support projects and initiatives to reduce GHG emissions in Ontario.

The Future of Offsets

Ontario has not yet proposed an offset regulation. A separate offset regulation will be proposed once the Act is passed by the Ontario Legislature. 

We expect that the use of offset credits will be limited to a maximum of 8% of a facility's compliance obligations. The MOECC has previously suggested that offset projects may include:

• mine methane capture and destruction
• landfill gas capture and destruction
• ozone depleting substances capture and destruction.

Next Steps

The MOECC is seeking input from stakeholders and the public on the proposed legislation. The public comment period is open until March 24, 2016 for the Act and April 10, 2016 for the Regulation.

^{1 Our summary of the November 2015 design proposal can be found here.} 

^{2 O Reg 452/09, Table 2.}

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.