On April 13, 2015, Premier Kathleen Wynne announced that Ontario will enter into a cap-and-trade agreement with Québec in an effort to curb greenhouse gas (GHG) emissions in Ontario. Premier Wynne’s announcement marks the beginning of a consultation process that will span several months and will shape the details of the cap-and trade system. While the mechanics of the system have yet to be determined, some broad highlights have been announced.

First, the cap-and-trade system will set a “hard ceiling” on GHG emissions in each sector of the economy. Businesses that require more than their allotted quota will be required to purchase additional permits from the market; businesses who have excess emission permits will be able to sell them. Second, Ontario will be joining the cap-and-trade system under the Western Climate Initiative, the largest carbon market in North America, which includes Québec and California. As such, Ontario intends to work closely with both to align its GHG market with theirs. Third, the government will reinvest the proceeds from the cap-and-trade system “in a transparent way” back into projects that will further reduce GHG emissions and help business remain competitive.

Premier Wynne stated it would “irresponsible” to speculate on what the cost of the cap-and-trade system would be, particularly since the system has not yet been designed. A recent government backgrounder on cap-and-trade mentions several reports which put the price of a cap-and-trade system at approximately 2 to 3.5 cents per litre on the cost of gasoline. The government backgrounder also notes that British Columbia saw a 17% decrease in fossil fuel use five years after implementing a carbon price (achieved through a tax on each tonne of carbon emitted), and that the province’s economy had outperformed other provincial economies subsequent to establishing the price.

Québec launched its cap-and-trade system in January 2013 and linked it to California’s market the following year. In Québec’s cap-and-trade system, the government issues permits to companies that emit 25,000 tons or more of carbon dioxide. The permits specify how much carbon the company is allowed to emit. If a company wants to exceed the permitted limit, they must buy additional permits at auction. In Québec and California’s last joint auction, a permit to burn one ton of carbon dioxide cost approximately CAD $15 on average. As of February 2015, Québec had auctioned off $190 million worth of emission credits.

Once Ontario introduces its cap-and-trade system, more than 75% of Canadians will live in provinces that have some form of carbon pricing. Further, climate scientists have said that by joining Québec and California’s carbon market, Ontario has made it easier for other provinces to follow suit.

At present, the Ontario Environmental Protection Act allows for the establishment of “market-based approaches, including without being limited to emissions trading” by way of regulation. 

Discussion

The announcement of April 13, 2015 is an important next step for the Government of Ontario in the development of its GHG emissions reduction strategy (see our previous Osler Update of February 21, 2013 for additional background).  However, the details of how the cap-and-trade system, and in particular the sector-by-sector approach, will work remain murky. The Ontario Government has stressed that it will assist certain sectors such that they will not be put at a competitive disadvantage by the cap-and-trade system (for example, in Québec, free emissions credits have been provided to certain industries).  One of the biggest challenges will be to ensure that the allocation of permits between sectors and within sectors is fair and does not cause undue hardship. For example: (a) how will early responders be treated; (b) will the economic impacts be evenly distributed?  It may be more expensive for some sectors and businesses to reduce emissions.  This is an issue that will likely be closely scrutinized by the business community unless the ultimate costs are inconsequential.

The increased costs faced by businesses will likely be passed on to the ultimate consumer.  Nonetheless, the Ontario Government has made it clear that carbon pricing is coming to Ontario and has given notice that businesses must adapt to this new reality.  Like any government-created market, there may be opportunities for businesses to profit from the system, particularly those who actively reduce their GHG emissions and can become net sellers of their carbon credits.  It is expected that law firms will be busy assisting industry in making submissions during Ontario’s consultation process and helping industry adapt to the new cap-and-trade regime when it is unveiled.  While businesses anxiously await the details of Ontario’s cap-and-trade system, they must also begin preparing for the “new normal” of carbon pricing in Ontario.