On May 27, 2009, Ontario introduced legislation to aid in implementation of a provincial greenhouse gas (GHG) cap and trade system, and released another discussion paper about the design of such a system. Following similar legislative initiatives in the provinces of British Columbia and Québec, the proposed amendments would enable the province to pass discretionary regulations for the establishment and administration of a cap and trade system. Although deemed a step in the right direction by many, neither the legislation nor the discussion paper includes any substantive commitments about the probable structure of the proposed system.

The Ontario Government

The intention to implement a cap and trade system is not new to the province of Ontario. In June 2008, the province signed a Memorandum of Understanding (MOU) supporting a provincial-territorial cap and trade initiative with Québec. The agreement called for collaboration on the development of a trading system and indicated both provinces’ desire to reach implementation “as early as January 1, 2010.” Prior to the MOU, Ontario had set a provincial target to reduce absolute (as opposed to intensity-based) GHG emissions to 6 percent below 1990 levels by 2014 and 15 percent below such levels by 2020.

Ontario demonstrated its further commitment to a cap and trade system by joining the Western Climate Initiative (WCI) in July 2008. Partners to that agreement include British Columbia, Manitoba, Québec and several American states. The WCI was created to evaluate and implement a cooperative regional market-based cap and trade system. WCI members have committed to lowering their emission rates to 15 percent below 2005 levels by 2020.

Bill 185: Environmental Protection Amendment Act

The Ontario government introduced Bill 185, the Environmental Protection Amendment Act on May 27, 2009. The Bill, which has received First Reading, would amend the Environmental Protection Act through the addition of broad provisions enabling the passage of regulations to establish and regulate a GHG cap and trade program, and to establish rules relating to the scope, trading, distribution and administration of such program. The proposed amendments do not provide the details or structure for the proposed system.

The amendments were released in conjunction with a discussion paper, providing for a 60-day comment on the Ontario Environmental Registry, titled “Moving Forward: A Greenhouse Gas Cap-and-Trade System for Ontario.” The discussion paper suggests alternative approaches for crucial elements of the system and requests comments on the alternatives for establishing caps and baselines, scope, thresholds and phasing in, allowance distribution (allocation/auction), incentives for early action, offsets, reporting and transition. It indicates the Province’s strong preference to move forward in conjunction with regional, North American and international initiatives to promote a harmonized system.

The discussion paper specifies 2012 as the implementation date for the Provincial cap-and trade system, which is two years later than the 2010 date proposed under the Ontario-Québec MOU. This aligns the proposed Ontario cap and trade system with the WCI, which has a target start date of 2012.

The Ontario Ministry of Environment has indicated that discussion has occurred with the nine industrial sectors likely to be regulated under the Ontario cap and trade system: base metal, cement, chemical, electricity, lime, natural gas, petroleum, pulp and paper, and steel. The Province asserts that these sectors represented about 40% of Ontario’s total estimated emissions in 2007. Supporting the appropriateness of the legislation, the Ministry asserts that the cap and trade system will “create a demand for low-carbon technologies, driving innovation, economic growth, and new job creation.” By passing the enabling amendments, Ontario intends to position itself to protect provincial interests in negotiations with both the federal government and other jurisdictions in any future development of a North American cap-and-trade system.

The Proposed American Clean Energy and Security Act of 2009

Ontario’s decision to defer implementation of the proposed legislation to 2012 may have been influenced by current developments in the United States. The proposed American Clean Energy and Security Act of 2009 (a.k.a. the Waxman-Markey Bill) was released as a discussion draft on March 31, 2009. The Waxman-Markey Bill included a proposed cap and trade system that would freely distribute 85 percent of its initial carbon permits, leaving 15 percent to be auctioned. Careful to avoid any interpretation as a “tax” in the current economic downturn, this bill seeks to protect electricity distributors by allotting them the largest share of free permits. This approach is intended to protect consumers, sheltering them from energy rate spikes through the free distribution of emission permits to their local distributors in the formative years of the system.

The Waxman-Markey Bill has been approved (33-25) by the U.S. House Energy and Commerce Committee but still has significant steps to complete before becoming law. It remains subject to review by at least eight other House committees and consideration by members of the U.S. House of Representatives and Senate. If this bill is ultimately adopted, there will almost certainly be significant changes made at each step of the process. The Waxman-Markey Bill does appear to indicate a strong American drive to be at the forefront of the formation of a cap and trade system, and any harmonized system that may emerge.

Commentary

Both the WCI and the proposed Waxman-Markey Bill address the primary greenhouse gases which are specified under the Kyoto Protocol and addressed by the proposed amendments under Ontario’s Bill 185. This will allow for consistency across the emerging systems should harmonization occur. However, the WCI and Waxman-Markey approaches do differ (including with regard to timing and point of regulation) and such differences will have to be resolved if the systems are to be compatible. To provide uniformity with emerging systems, the Ontario government has indicated that it will likely ultimately include a broad spectrum of sectors within the provincial system, including electricity, industrial, transportation, residential, commercial and institutional sectors. The Ontario government’s proposed amendments are intended to provide the province with a platform and a seat at the table in any future negotiations with provincial, federal, international and non-governmental stakeholders in the development of a harmonized cap and trade system. The Ontario government has indicated that frustration with Ottawa’s and Washington’s previous failure to make significant progress on the Climate Change issue has driven it to take the reins in setting up a provincial cap and trade system.

The timing of this legislation may provide the provincial government some advantage when collaborating with other stakeholders. Ontario hopes for a common system with other jurisdictions that will maximize trade opportunities, ensure a level playing field for industry and avoid punitive cross-border tariffs. The effectiveness of any Ontario or Canadian cap and trade system will hinge on harmonization across borders which would permit a broad-based market for GHG credits. With the U.S. system being the “elephant” in the room, the reality is likely to be that whatever GHG system is adopted in the U.S. will dictate the substance of the Ontario and Canadian systems, whether or not it is fully consistent with the system design that would otherwise be adopted by the Ontario and Federal Governments. It remains to be seen whether the proposed Waxman-Markey Bill is necessary (or will be successful in providing the tipping point) to begin the process toward a North American (or even global) harmonized GHG cap and trade system.