The Ontario government (Government) has taken significant steps in its fight against climate change by introducing two significant pieces of climate change legislation:

  1. ​The Climate Change Mitigation and Low Carbon Economy Act (Act) on February 24, 2016 
  2. The Cap and Trade Program Regulations (Regulations) on February 25, 2016

BACKGROUND 

On April 15, 2015, the Government signed an agreement with Quebec to create a joint cap-and-trade system to reduce greenhouse gas (GHG) emissions. For further background on the proposed cap-and-trade scheme, please see our April 2015 Blakes Bulletin: Ontario to Adopt Cap-and-Trade System, Joining Quebec and California Carbon Market and our November 2015 Blakes Bulletin: Ontario Government Consulting on Proposed Design of the New Cap-and-Trade Program

THE ACT

Climate Change Targets

The Act provides the legislative basis for the cap-and-trade program and establishes in legislation the following (previously announced) targets for the reduction of GHG emissions below 1990 levels: 15 per cent by 2020, 37 per cent by 2030 and 80 per cent by 2050. The cap-and-trade program will be the primary tool for Ontario seeking to achieve its 2020 target. 

Climate Change Action Plan

The Government will be required to prepare and implement a climate change action plan for achieving these targets. The plan will be required to include the types of initiatives that may be funded from the cap-and-trade auction proceeds. Progress reports and a review of the plan will be required at least every five years. 

THE CAP-AND-TRADE PROGRAM

A cap-and-trade program creates an incentive to cut GHG emissions. It creates a price on carbon emissions by limiting the amount of GHG emissions created by the economy (this is the cap). It will create limited tradeable emission allowances for specific periods and require participants to hold allowances equal to their emissions. Emitters must hold an allowance for every tonne of GHG emissions that they release into the atmosphere. It will allow those entities covered by the cap to trade in a flexible and cost-effective way (this is the trade). The cap will decline each year and emitters will need to hold a sufficient number of allowances to cover their annual emissions. To comply, the emitters can either lower their carbon footprint or purchase allowances in the carbon market. The Ministry of Finance’s Investing in the Low Carbon Economy briefing includes useful diagrams on the system.

Cap- and-Trade Auction proceeds

All cap and trade auction proceeds are to be deposited in a new Greenhouse Gas Reduction Account. This account will fund green projects to reduce emissions and be the subject of an annual report detailing the funds flowing in and out of the account. Annual revenues are estimated by the Government to be approximately C$1.9-million. The Government has already created a C$325-million Green Investment Fund that will commit to projects that will fight climate change, grow the economy and create jobs. 

Rules

The detailed provisions of the cap-and-trade program are outlined in both the Act and the Regulations. The following are notable provisions: 

  1. ​Transitional Allowances: The Government will distribute allowances through both auctioning and free-of-charge allocations to industry. In the first compliance period (January 2017 – December 2020) many of the allowances required by large GHG emitters in Ontario will be distributed free of charge. The Government states that this is a temporary measure to allow for transition to the new regime and to seek to stop production of a facility shifting to a jurisdiction with a less stringent carbon pricing policy. 
  2. Trading: Only registered participants in the cap-and-trade program can purchase, sell or trade or deal in Ontario emission allowances and credits. 
  3. Offences: The Act details the penalties for failure to comply with the Act or Regulations, which range from fines of C$25,000 up to C$10-million and up to five-year imprisonment for individuals. 
  4. Quebec and California: Linking agreements are planned with Quebec and California and once these are in place amendments will be made to the Regulation to recognize allowances and credits from California and Quebec; adjust holding and purchasing limits to account for the size of the linked markets; and address currency adjustments related to the auction.
  5. Timing: Both pieces of legislation will be the subject to consultation and certain details may change. The Act passed its first reading on February 24, 2016 and will be open for public comment until March 25, 2016. The Regulations are open for public comment until April 10, 2016. The cap-and-trade program is scheduled to come in force on January 1, 2017. 
  6. Offset credits regulations: Carbon offsets are credits for GHG reductions that can be purchased and used to compensate for GHG emissions. A separate regulation will be introduced by the Government detailing the requirements that proponents must meet to be able to create, verify and register offset credits for use in the cap-and-trade program. 

GHG EMISSIONS REPORTING

The Ministry of the Environment and Climate Change is proposing to revoke the Greenhouse Gas Emissions Reporting Regulation and replace it with a new GHG reporting regulation and the incorporated guideline under the Act. New measures include: 

  1. ​Requirements to report production and other process related information
  2. Provision to allow facilities with emissions between 10,000 and 25,000 tonnes to opt-in
  3. Clarification on measurement requirements and reporting of biomass types 
  4. Refinements to the Regulations and the GHG Emissions Reporting Guidelines to facilitate the implementation of the Regulations