Yesterday, the provincial government released its 2016 Ontario Budget and with it came the details of their much anticipated cap-and-trade plan. The plan, which will be governed by the Climate Change Mitigation and Low Carbon Economy Act, will be linked to existing cap-and-trade systems in Quebec and California under the Western Climate Initiative. The provincial government anticipates that the cap-and-trade plan will cover a broad range of industries, which, in aggregate, account for nearly 82 per cent of the province’s total emissions. The plan is expected to generate proceeds in excess of $1.8 billion through the sale of carbon allowances and is intended to do most of the heavy lifting necessary to enable Ontario meet its greenhouse gas reduction target of 37% below 1990 levels by 2030.

Details of the cap-and-trade plan can be parceled into three primary sections: the plan itself; the cost of the plan; and investment of the proceeds.

The Plan

Under the plan, the province will set a cap on emissions beginning in 2017. The cap equates to the total number of carbon allowances that will be sold by the government, with one allowance being equal to one tonne of greenhouse gas emissions. Emitters are expected to purchase sufficient credits to cover their emissions in a given year. In an effort to prevent carbon leakage, the plan allows for free credit allocation to competitively sensitive industries until the end of the first compliance review period in 2020. The plan also allows for emitters to take advantage of additional compliance measures, including offset credits gained through emissions reduction in excluded sectors, such as agriculture, and a one-time allocation credit award for first movers.

The plan includes a framework for reviewing and increasing targets and also stipulates that the government is required to prepare and implement a climate change action plan for achieving these targets, with progress reports and a review of the plan every five years.

The Cost

The expected costs, reflected in the chart below, will be born primarily by consumers through increased gasoline and heating costs.

Click here to view the table.      

A major criticism has been that the cap-and-trade plan forces consumers, rather than large emitters, to pay increased costs, while doing little to actually reduce emissions. However, the provincial government insists that the funds generated by the plan will be designated towards investments that will, among other things, increase energy efficiency, with the effect of lowing total costs over the medium to long term.

Investment of the Proceeds

The proceeds generated by the plan will be invested in “green” initiatives, which are aimed at reducing emissions and generating sustainable economic growth. The government has suggested that such initiatives include:

  • investment in renewables;  
  • infrastructure to support zero-emission transportation methods;  
  • investment in public transit; and  
  • funding for research and development into low-carbon technologies.

In an effort to improve transparency and public perception, the plan contains disclosure obligations regarding how the funds generated through the cap-and-trade program are spent and how such spending aligns with the provincial government’s dynamic climate change goals.

In conjunction with the announcement, the provincial government has also published the Cap and Trade Regulatory Proposal and the Revised Guideline for Greenhouse Gas Emissions Reporting, which set out the framework of the cap-and-trade system and contain detailed provisions governing credit allocation, implementation guidelines, market and compliance rules, reporting obligations for emitters and enforcement measures. Accordingly, we are reviewing these regulations and will provide a more detailed analysis in the days that follow.