Ontario's Cap and Trade Program Unveiled

On February 24, 2016, the Ontario government introduced the Climate Change Mitigation and Low-carbon Economy Act, 2016  (the "Act") which sets out a framework for Ontario's cap and trade program and enshrines emission reduction targets for the province.  The following day the government released the Cap and Trade Regulatory Proposal and Revised Guideline for Greenhouse Gas Emissions Reporting regulation (the "Reg") providing further details of the program.

The Cap and Trade Program

As of January 1, 2017, Ontario's allowable GHG emissions to the atmosphere will be limited under a cap and trade program.  As we previously reported, Ontario's program will be linked with the existing Quebec and California carbon market.

Emitters must hold an allowance for every tonne of GHG they release into the atmosphere. The Ministry of Environment and Climate Change ("MOECC") is authorized to create emission allowances each year in the following amounts:

Each year, the MOECC will reserve 5% of the emission allowances created for sale to capped participants.  Under the Act, the MOECC is authorized to also distribute emission allowances free of charge.  The free allowances are meant to be a temporary measure to protect against "carbon leakage" (i.e. the movement of production to jurisdictions that have not implemented carbon policies) while these GHG-intensive industries adjust to the new cap and trade reality.  The government has identified a number of manufacturing activities as eligible for the free allowance allocation, including cement, glass, chemical, copper, nickel, iron, steel, lead, lime, pulp and paper and zinc producers.  Electricity generators, petroleum product suppliers, natural gas distributors and electricity importers are not eligible for the free emission allowances.  The remaining emission allowances will be distributed at auctions to be held four times per year.

In addition to emission allowances, the MOECC may also create offset credits.  Offset credits represent verifiable and permanent emission reductions that occur outside the cap in sectors without a compliance obligation.  Participants in the program would be able to purchase and apply offsets to their reported emissions.  Ontario and Quebec are already working together to create a joint system of carbon offsets.  Quebec currently offers offsets for programs dealing with agricultural manure, disposal of methane at garbage dumps and the destruction of gases that destroy ozone.  Only registered participants will be eligible to purchase, sell, trade or otherwise deal with Ontario emission allowances and offset credits.

Prohibitions and Enforcement

The Act sets out a number of prohibitions, including a prohibition against fraud and market manipulation and a prohibition against holding an emission allowance or credit that is owned, directly or indirectly, by another person.  The Act contains enforcement provisions and penalties including fines ranging from $4,000 to $10 million and imprisonment of up to five years.

Cap and Trade Proceeds

As we recently discussed, the government has already begun to discuss spending the proceeds from Ontario's cap and trade program.  Proceeds will be deposited into a new GHG Reduction Account.  These funds would then be invested into projects that reduce GHG and help save energy, including public transit, clean-tech innovation for industry, electric vehicle incentives and social housing retrofits.

Emission Reduction Targets and Climate Action Plan

The Act sets the following targets for reducing Ontario's overall GHG emissions:

The Act permits these targets to be increased by way of regulation.  There is no corresponding permission for the government to lower these targets.

Under the Act, the government is required to prepare a climate change action plan that sets out actions that will enable Ontario to achieve these emission reduction targets.  The action plan must include: (1) the potential reduction in GHG resulting from the action; (2) an assessment of the cost per tonne of the potential reduction in GHG; and (3) if an action could be funded, in whole or in part, using amounts from the GHG Reduction Account, the estimated amount contemplated.

Effect on Consumers

The government acknowledged that the cap and trade program will result in increased costs to consumers in some areas.  Under cap and trade, the price of gasoline is estimated to increase 4.3 cents a litre.  Households that rely on natural gas are expected to see an increase of $60 per year.  The government is hoping that investments in retrofit programs will result in sufficient energy savings to offset the increased costs.  The government does not anticipate that households will see increases in electricity rates as a result of the cap and trade program given that Ontario's electricity generation is not carbon intensive.

For more discussion on the impacts of the cap and trade, see our previous post Ontario's Cap and Trade: Some Early Impact Estimates.