This week Ontario tabled legislation creating a framework for a greenhouse gas ("GHG") cap and trade system and invited public comments on how the system should be designed.

Ontario's proposed legislation, Bill 185, would amend the Environmental Protection Act to clearly enable the government to establish a cap and trade regime for GHGs. The substance of the regime will be found in regulations yet to be drafted. However, these regulations will necessarily impose limits on GHG emissions in Ontario and establish a carbon market for the trading of GHG allowances and credits.

In conjunction with the new bill, Ontario released a discussion paper called "Moving Forward: A Greenhouse Gas Cap-and-Trade System for Ontario" which revises an earlier paper released last December in light of stakeholder comments and developments in the rest of Canada and, particularly, the United States. The discussion paper presents the fundamental issues yet to be resolved. The resolution of those issues will determine the depth and breadth of the economic impact of the system.

The key issues now open for discussion include:

  • What sectors will be given a cap? (The paper indicates that "the sectors covered by Ontario should be comprehensive and include electricity, industrial, transportation, residential, commercial and institutional.")
  • Should the electricity and industrial sectors be phased in first, followed by the others?
  • Should emission allowances be auctioned off or provided for free? (The paper notes, not surprisingly, that industry's preference is to get them for free. It also suggests that in the electricity sector, allowances will mostly be auctioned off, but in "energy-intensive and trade-exposed industries", more would be handed out for free, at least in the early years of the program.)
  • How should the program recognize and reward companies that voluntarily took action to reduce GHG emissions before the program started?
  • What will be the rules for creating and trading "offsets" (i.e. credits for emission reductions undertaken voluntarily by non-capped emitters, which could be sold to capped emitters)? In particular:
    • What types of offset projects will be eligible?
    • Will renewable energy and energy conservation projects qualify, and if so, how should the offset system be co-ordinated with other incentives such as the Feed-In Tariff under the new Green Energy Act, 2009?
    • Should offsets from outside of Ontario be integrated into the program? (The paper suggests that they should be.)
    • What criteria will be imposed for evaluating offsets? How will "additionality" (broadly, the concept that a project should not earn an offset credit if it would have been implemented anyway) be defined?
    • Who will oversee the offset system - a government agency or a public-private partnership?
  • Will capped entities be allowed to contribute to a GHG technology fund as an alternative to reducing their own emissions or purchasing credits from other capped entities or offsets, as proposed under the federal "Turning the Corner" program? (The paper suggests that the answer is no, because the proposed Western Climate Initiative and federal US regimes do not include this technology fund option.)
  • How will the caps be set? In other words, what will be the baseline against which future emissions will be measured?  

The government is inviting public feedback on these questions and the cap and trade program in general by July 26, 2009.

The paper indicates that the cap and trade program will not be operational before 2012. This is later than expected - Ontario and Québec signed a Memorandum of Understanding last May indicating that they would work towards establishing such a program as early as the beginning of 2010. (Québec introduced climate change legislation of its own two weeks ago, as we reported in the inaugural issue of our quarterly bulletin, Climate Change @ Gowlings.)

The paper stresses the need for the Ontario regime to be compatible with other emerging cap and trade systems. In particular, it envisions linkages to the Western Climate Initiative (comprising Ontario, Québec, British Columbia, Manitoba and seven US states), as well as to the US and Canadian federal systems (if in fact those federal systems materialize): "The three programs will, hopefully, coalesce and Ontario will strive to harmonize to the maximum extent possible with the resulting North American system."

The implementation of a cap and trade system will have potentially economy-wide ramifications. We think it will be of particular significance to the energy, natural resource, manufacturing, financial, transportation, and real estate sectors. Gowlings' Climate Change Group is available to individual clients and industry associations to discuss the significance of this development and the submissions that may be made regarding the shape of the coming regulatory regime.

The discussion paper is available on the Environmental Registry.