On May 18, 2016, the Ontario government (Government) passed the Climate Change Mitigation and Low-carbon Economy Act, 2016 (Act). The Government says that the Act’s objective is to make the province accountable for transparently investing proceeds from the cap-and-trade program into actions that reduce greenhouse gas (GHG) pollution, create jobs and help people and businesses shift to a low-carbon economy.

On May 19, 2016, the Government finalized two new regulations under the Act: The Cap and Trade Program Regulations (Cap-and-Trade Regulations), which will take effect on July 1, 2016, and The Quantification, Reporting and Verification of Greenhouse Gas Emissions Regulations (Emissions Regulations), which will take effect on January 1, 2017. The Emissions Regulations provide the methodology by which participants will quantify and verify their emissions.

CAP AND TRADE REGULATIONS

The finalization of the Cap-and-Trade Regulations is a significant step in the process that began in April 2015, when the Government signed an agreement with Quebec to create a joint cap-and-trade system to reduce GHG emissions. For further background on the development of the cap-and-trade system, please see our November 2015 Blakes Bulletin: Ontario Government Consulting on Proposed Design of the New Cap-and-Trade Program and our February 2016 Blakes Bulletin: Ontario Announces Climate Change Mitigation and Low Carbon Economy Act and the Cap-and-Trade Program Regulations. The Cap-and-Trade Regulations set out the mechanism for carbon emissions trading.

Under the Cap-and-Trade Regulations, a facility can only emit as much carbon as it has allowances for. One allowance is equal to one ton of carbon dioxide. The first compliance period will be from January 1, 2017, (when the cap-and-trade system begins) until December 31, 2020. The total number of allowances for all facilities (i.e. the cap) is provided in the Cap-and-Trade Regulations for the years 2017–2020 and will steadily decline each year.

Allowances

A certain number of allowances will be reserved each year for free distribution to participants (as per section 55 of the Cap-and-Trade Regulations).

Eligible participants must apply for free allowances in respect of the activities engaged in at each facility (as per sections 86 and 88(1)) and the number allocated will be determined according to the Methodology for the Distribution of Ontario Emission Allowances Free of Charge.

Allowances that are not freely distributed will be auctioned. The first auction is scheduled for March 2017. If the amount of carbon dioxide (CO2) emitted by a facility exceeds its free allowances, it must purchase additional allowances at the auction. Similarly, facilities that emit less than their permitted allowances may sell their unused free allowances at the auction (as per sections 58–84).

Changes from the Draft Regulations

These regulations were finalized after months of public consultation, which resulted in certain amendments to the draft, including the following:

  • Facilities that generate electricity and steam via cogeneration for use on-site will receive allowances free of charge for emissions attributable to the electricity generation and the steam generation. The purpose is to remove disincentives for cogeneration and simplify implementation
  • For some industries and facilities, the allocation of free allowances will be based on historical or product-output benchmarks, rather than simply energy-use benchmarks
  • In terms of the use of biomass, a factor was added to the allowance allocation formula that would lower the cap adjustment factor in proportion to any facility’s biomass use, so that facilities using more biomass would see a more moderate rate of decline. With regard to biomass reporting, biomass continues to be treated as carbon neutral however the Emissions Regulations and guideline do not currently include the changes that were proposed on measurement requirements and reporting of biomass
  • The regulations are likely to be amended after they come into force to include provisions that address indirect steam emissions, early reduction credits, offset credits and facility shutdowns.

Cap-and-Trade Proceeds Usage

The Government says that the cap-and-trade system will generate between C$1.8-billion and C$1.9-billion per year to invest in programs that reduce GHG pollution, help save families money and reward innovative companies by creating more opportunities for investment in Ontario. For example, on May 26, 2016, the Government announced that it will invest up to C$100-million in cap-and-trade proceeds over four years to support the introduction of renewable natural gas. Methane that is released from sources such as landfills, municipal green bin collection, agricultural residues, livestock manure, food and beverage manufacturing waste, sewage treatment plants and forestry waste can be recovered, cleaned and directly substituted for conventional natural gas. The Government does highlight that natural gas will continue to play a critical role in Ontario’s energy supply mix for transportation and heating buildings.

ONTARIO ENERGY BOARD (OEB) DISCUSSION PAPER

The OEB published a Staff Discussion Paper on a Cap-and-Trade Regulatory Framework for the natural gas utilities on May 25, 2016. The paper sets out the OEB staff’s initial thoughts on the key elements, issues and options for the development of a cap-and-trade regulatory framework for the natural gas utilities. The paper includes a useful glossary of cap-and-trade terminology.