Overview

On May 27, 2009 the Government of Ontario introduced Bill 185, the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), 2009 (“Bill 185”), a set of amendments to the Environmental Protection Act that, if passed, will enable a government authority to implement a provincial cap and trade system for greenhouse gas (GHG) emissions. The Ontario Government is also seeking comments on a discussion paper entitled “Moving Forward: A Greenhouse Gas Cap-and-Trade System for Ontario” (“Moving Forward”) that explores possible options for the structure and design of the proposed system.

An Integrated Cap and Trade System

Within the larger context of the 2007 Ontario Climate Change Action Plan, which set GHG emissions reductions goals for the province, Bill 185 builds on Ontario’s previous commitments to develop a cap and trade system that is integrated with other North American jurisdictions. In June 2008, Ontario and Quebec entered into a Memorandum of Understanding which stated an intent to create a cap and trade system. The following month, Ontario joined the Western Climate Initiative (“WCI”), a regional partnership which endorses cap and trade and includes seven U.S. states, Quebec, British Columbia, and Manitoba. Bill 185 is the next step in the progress towards a cap and trade regime in Ontario.

Key Features of the Bill

  • Included GHGs: The proposed legislation will apply to all 6 GHGs (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride).
  • Interaction with Other Jurisdictions: The regulatory authority’s power to make regulations includes the power to link Ontario’s cap and trade system with other jurisdictions and to govern the use and trading of foreign allowances within the province.
  • Auctions: The government will be able to auction or sell allowances and offsets.
  • Delegation: The government will be able to delegate its authority to regulate the provincial cap and trade system.

“Moving Forward”: Designing Ontario’s GHG Emissions Trading System

In Moving Forward, the Government of Ontario outlines policy issues and options to implement the future cap and trade system. Informed by consultation with stakeholders, a key theme of Moving Forward is the government’s desire to harmonize the Ontario system with other emerging systems, particularly in North America. The discussion paper focuses on transitional assistance in the short term and investment in green technology in the long term. Specific options being considered are discussed below.

Caps and Baselines

Moving Forward indicates that the Ontario Government is still in the process of deciding between the following two options with respect to caps and baselines:

  • Use forecasted emissions levels to 2012, with a reduction target of 15% economy-wide by 2020; or
  • Use 2005 as the baseline, with reduction targets of 3% by 2012, 17% by 2020 for industry and fuels, 42% by 2030 and 80% by 2050.

It has also not yet been determined whether the baseline should be the 3-year average emissions between 2005-2007 or the 5-year average emissions between 2003-2007.

Scope and Thresholds

Stakeholders in Ontario have generally indicated the need for a cap and trade system to be as broad as possible in its coverage and to have consistent thresholds across regulated sectors.

Although the government foresees coverage of the electricity, industrial, transportation, residential, commercial and institutional sectors, it is entertaining two potential timelines for inclusion:

  • initial inclusion of electricity generation and imports, large industrial and commercial combustion sources and industrial process emissions, followed by inclusion at a later date of residential, commercial and industrial fuel combustion and transportation fuel combustion; or
  • initial inclusion of all electricity generation, natural gas liquid, petroleum and coal-based liquid fuel producers/importers emitting more than 25kt/yr, followed by industrial sources emitting more than 25 kt/yr, in turn followed by natural gas distribution.

Cap Setting and Allocation

Allowance allocation and means of auctioning are issues which have generated a wide variety of views from stakeholders. Industry stakeholders had indicated their preference to receive gratis (free) allowances. Other stakeholders focused on the need for higher levels of auctioning for the electricity sectors.

In Moving Forward, the approach which is currently emerging is an allocation model that uses higher levels of auctioning for distributing allowances to electricity generators, with higher levels of gratis allowances and lower levels of auctioning proposed for energy-intensive and trade-exposed industries. This approach would ultimately be phased out when full auctioning could be implemented more broadly over the longer term. Allocations to other sectors will require further clarification.

The province has also indicated the use of a sector-wide benchmark to determine allocations so as to offer a competitive advantage to facilities that took early action to reduce emissions before the system’s implementation. This approach marks a departure from the EU-ETS approach which is based on reductions from historical emissions or reductions from forecasted levels.

A host of issues regarding allocation principles and the formation of an auction system remain outstanding, including: whether the electricity sector should be subject to full auctioning from the outset of a cap and trade system; whether there should be floors or ceilings and/or reserve prices for auctions and offsets; to what purposes auction revenues should be put; what to do with unsold allowances; and how to develop benchmarks for gratis allowances.

Credit for Early Action

The Ontario Government supports providing incentives and rewarding emissions reductions that occur prior to the system’s start date. However, further comment is required with respect to how to provide such rewards and incentives. The Ontario Government has considered issuing early reduction allowances or credits that could be used like other allowances as well as auctioning allowances and offsets. The government has also considered using industry benchmarks to determine gratis allocations so those who have already reduced emissions below the benchmarks will be able to make unused allowances available for sale. Stakeholders have called for simple and clear criteria to assist proponents.

Offsets

Many stakeholders have expressed a strong interest for Ontario to establish an offsets program, and industry has indicated that offsets should be available as a compliance alternative. A technical experts group was established to advise Ontario on rules for a potential offsets system in response to the strong stakeholder interest in offsets. However, it remains to be seen whether the proposed offset system will be overseen by the government directly, by a government agency or by a public-private partnership. In addition, it is not yet clear what types of projects will be eligible to obtain offsets, whether and how Ontario should recognize offsets from other jurisdictions, and how to best assess a project’s additionality and permanence, among many other issues.

Reporting

Stakeholders have expressed an interest in an effective and efficient reporting system which is also capable of being linked with other systems, such as any reporting system required by the Federal Government. Many industries indicated a preference for an audit approach to verify data rather than third party verification. Smaller companies emphasized the need that administrative requirements be manageable. Concerns were also raised with respect to the protection of confidential information.

Moving Forward states that it is Ontario’s intention to harmonize its reporting process with the Federal Government and the U.S. to avoid duplicate regulatory requirements. However, the details of how to achieve an efficient yet effective reporting system have not yet been developed.

The Ontario Government is considering WCI’s three-year verification cycle (full verification in the first year and less intense verification in the next two) and the use of voluntary (i.e. non-verified) reporting requirements for emissions between 10 kt/yr and 25 kt/yr. In addition, the province is considering how electronic reporting infrastructure might be integrated with other provincial reporting requirements.

Industry Transition

It is widely understood that the transition to a cap and trade system will require new green technologies. At this time, the government has not decided which of the specific emissions reduction technologies to focus on. Stakeholders have identified technology deployment, research and innovation and accelerated investment, among other things, as key to a transition to a cap and trade system. The province is seeking feedback on who should coordinate the technology and transition – existing government programs, a new government-led body, or the private sector – and where the funding should come from – existing government support programs, auction revenues, or a new technology fund.

What’s Next

Bill 185 and Moving Forward are currently subject to public comment which closes on July 26, 2009. However, given that summer is rapidly approaching, Bill 185 may not receive second reading before Fall 2009. Although significant progress towards a cap and trade system has been made with the introduction of Bill 185 and the posting of Moving Forward, a great deal of work remains to be done. This is especially the case since the Government of Ontario is seeking to implement the proposed cap and trade system by 2012 in order to coincide with the expected start date for the U.S. cap and trade system.