As we recently discussed here, on April 13, 2015, Ontario Premier Kathleen Wynne formally announced plans to create a cap-and-trade system for greenhouse gas emissions in Ontario, to be linked with the systems already in place in Quebec and California. This is not the first time Ontario’s government has announced intentions to implement cap-and-trade in the province; prior efforts have lacked the political will and determination to bring cap-and-trade to fruition. In this blog post, we highlight some of the major recent cap-and-trade developments in Ontario and the U.S. to help put the re-launching of the province’s cap-and-trade efforts in context.
The Acid Rain Program (ARP), established under Title IV of the 1990 Clean Air Act (CAA) Amendments, was the first federal U.S. law to adopt an emission trading system on a large scale and was a precursor to a similar regime that was established in Ontario shortly thereafter. The ARP was a market-based initiative taken by the United States Environmental Protection Agency (EPA) beginning in 1995 to reduce atmospheric levels of sulfur dioxide (SOx) and nitrogen oxide (NOx), the primary precursors of acid rain, from the power sector. The program set a permanent cap on the total amount of SOx that may be emitted by electric power plants in the country, with allowances being bought and sold in secondary markets. Reductions in NOx emissions were also required and were mainly achieved through retrofits to coal-fired plants. The program was largely hailed as a success, significantly reducing SOx and NOx emissions in the U.S. In Ontario, the first air emissions trading program was introduced in 2001. The program includes the Emissions Trading Code, which was intended to supplement Ontario Regulation 397/01, which governs emissions trading under the Ontario Environmental Protection Act. The program introduced the use of a market-based system for reducing emissions of NOx and SOx in the province.
Unlike the system introduced in 2001 that was limited to SOx and NOx emissions, the Government of Ontario has been contemplating the introduction of a wide-ranging cap-and-trade system for greenhouse gas emissions since at least 2008, when it joined the Western Climate Initiative (WCI). The WCI consists of a voluntary coalition of US states and Canadian provinces that have developed guidelines to facilitate mutual cooperation in order to reduce greenhouse gas emissions. One of the WCI’s main goals is to work together with member jurisdictions to “identify, evaluate, and implement emissions trading policies to tackle climate change at a regional level.” In fact, California and Quebec’s cap-and-trade systems that came into force in 2013 are based largely on design recommendations made by the WCI. Under the WCI, member jurisdictions are not compelled to establish a cap-and-trade system, rather, the WCI’s non-binding nature allows jurisdictions to maintain their autonomy in combatting climate change. California and Quebec are currently the only two WCI members that utilize an integrated cap-and-trade system.
Also in 2008, Ontario further moved towards the establishment of a cap-and-trade regime when Ontario Premier Dalton McGuinty and Quebec Premier Jean Charest signed a Memorandum of Understanding (MOU) with respect to a provincial and territorial cap-and-trade initiative. The MOU set out the two provinces’ plans to create an interprovincial cap-and-trade system for the trading of emissions credits, which was expected to be implemented by as early as 2010. Interestingly, the MOU invited other provinces and territories to sign on and “work collaboratively on the cap and trade initiative”, and contemplated forming linkages with other North American and international trading schemes. California and Quebec’s cap-and-trade systems were formally linked in 2014, with its first joint auction of greenhouse gas allowances taking place in December 2014, and its second in March, 2015.
Shortly after joining the WCI and entering into the MOU, the Government of Ontario demonstrated its further commitment to a cap-and-trade system by introducing enabling legislation in 2009. Bill 185, or the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), amended the Environmental Protection Act through the addition of provisions that provided the government with broad authority to implement emissions trading systems and establish rules relating to the scope, trading, distribution and administration of such a system. Like the WCI and MOU, Bill 185 explicitly contemplated integration with other cap-and-trade systems, noting that such linkages could provide emissions reductions at a lower cost, while improving the pace of innovation and allowing for larger trading volumes and liquidity.