Ontario Introduces Legislation to Cancel the Cap and Trade Program

On July 25, 2018, the Ontario government introduced Bill 4, referred to as the Cap and Trade Cancellation Act, 2018. The new legislation will implement the Government of Ontario’s commitment to wind down Ontario’s Cap and Trade Program, and follows up on the July 3, 2018 announcement that the government has revoked Ontario Regulation 144/16 – The Cap and Trade Program under the Climate Change Mitigation and Low-carbon Economy Act, 2016 (Climate Change Act).

We have previously discussed the uncertainty around how Ontario’s Cap and Trade program will be wound down, including around whether participants would have a compliance requirement for the period during which Cap and Trade was in effect (January 1, 2017 to July 3, 2018). The Cap and Trade Cancellation Act, 2018 answers some questions, but also raises others.

Key elements and effects of the Cap and Trade Cancellation Act, 2018 include the following:

• The Climate Change Act will be repealed.
• Cap and Trade “eligible instruments” (typically allowances) held by participants on July 3, 2018, as well as those instruments not distributed, will be cancelled.
• There will be no cost or consequence against entities who do not hold sufficient instruments to satisfy their compliance obligation as of July 3, 2018.
• Participants who hold more instruments as of July 3, 2018 than would be necessary to meet that participant’s compliance obligation over the prescribed time period (presumably January 1, 2017 to July 3, 2018) may be entitled to compensation, to be determined in accordance with yet to be published regulations.
• Certain participants will not be entitled to compensation, including market participants (non-emitters who acquired instruments for resale) and natural gas and petroleum distributors (who are expected to have recovered their costs from consumers).
• There are prohibitions against other compensation claims and other causes of action against the Government of Ontario related to cancelled compliance instruments and the repeal of the Climate Change Act.

More details about how the compensation framework will operate will become known after the Cap and Trade Cancellation Act, 2018 is passed, and the related regulations are published. It will be interesting to see whether lawsuits are commenced challenging the legislation and seeking additional compensation against the government.

Although the focus of the Cap and Trade Cancellation Act, 2018 is on the wind-down of the Cap and Trade program, the legislation also includes important provisions related to how Ontario will address GHG emissions and climate change in the future. This is seen in two items. First, the government will be required to “establish targets for the reduction of greenhouse gas emissions in Ontario.” Second, the Minister of Environment, Conservation and Parks will (with Cabinet approval) prepare a “climate change plan.” No specific timing is provided for when these items will be first completed, but it can be expected that this will happen soon, as these initiatives will likely be part of the government’s recently announced legal challenge to the federal carbon backstop price.