On April 13, 2015, Premier Kathleen Wynne announced that Ontario would implement a cap and trade system aimed at reducing greenhouse gas emissions in the province. Ontario has committed to imposing a hard cap on pollution for each sector of the economy.

A cap and trade system, in general, places a limit on the amount of greenhouse gas emissions that may be produced in a specified time frame. As time progresses, this limit is reduced as per previously established guidelines. Businesses must hold enough emission allowances in order to equal their actual greenhouse gas emissions. If a business does not hold enough allowances for the given time period, they may purchase allowances to meet the requirement. Conversely, if a business holds an excess of allowances, they may save them or sell them to other businesses.

Ontario has been a partner of the Western Climate Initiative since July 2008 along with California, Quebec, Manitoba and British Columbia. One of the goals of this non-profit organization was to create a common approach towards reducing greenhouse gas emissions in North America. Both California and Quebec have implemented cap and trade legislation, while British Columbia has chosen to adopt a carbon tax. In 2014, Quebec and California linked their cap and trade systems together in order to bolster the size of the market for emission allowances.

Ontario is planning to link its market to the joint Quebec-California cap and trade system and will attempt to work with both jurisdictions in order to accomplish this goal. Although details about the newly announced Ontario system remain unclear, it is likely that it will be similar to the systems in California and Quebec.

In California, businesses which produce more than 25,000 tons of carbon dioxide each year must obtain permits from the state. These emission allowances are distributed through a mix of free allocations and quarterly auctions. The amount of free allowances varies by industry and decreases as time passes. In 2015, the total hard cap on greenhouse gas emissions is 395 million metric tons of carbon dioxide and this will be reduced to 334 million metric tons by the year 2020. Since 2012, California has held one auction per quarter during which businesses have been able to purchase emission allowances above and beyond their allocation. At the most recent auction in February 2015, allowances were sold at $12.21 per ton. As of September 2014, California had sold roughly $2.27 billion worth of allowances.

In Quebec, similar to California, businesses which emit more than 25,000 metric tons of carbon dioxide per year are subject to the cap and trade system. The Quebec government has committed to reducing greenhouse gas emissions by 2020 to a level that is 20% below the 1990 level. The Quebec government was aware that due to the small size of the province’s economy, a carbon market exclusively in Quebec would not be liquid enough to be efficient. Quebec thus chose to link their system to the system in California. This linkage came into effect on January 1, 2014. Allowances from either system may be used by a business in either jurisdiction in order to comply with regulatory obligations.

Stay tuned as further details and a schedule of implementation for the new Ontario system become available over the next few months.