The Government of Ontario has launched consultations towards the design of a greenhouse gas emissions trading system (the “System”) set to commence on 1 January 2010. Pursuant to an MOU signed with Quebec in June 2008, Ontario intends to develop the system with its neighbouring province. Emissions trading will not be new to Ontario; it developed Canada’s first emissions trading scheme almost a decade ago to combat acid rain and smog.

The design principles for the System include the need for absolute (rather than intensitybased) targets, equitable treatment between capped sectors, and an emphasis on compatibility with other systems. Potential design elements are outlined in a discussion paper published in December.1

Linking with WCI

Ontario is a member of the Western Climate Initiative (the “WCI”).2 As such, the System is being designed to be consistent with the WCI design. As the WCI’s first compliance period begins on 1 January 2012, Ontario is aiming to get a head start to gain experience and competitiveness. Linking with other systems, like the Regional Greenhouse Gas Initiative and the Midwestern Greenhouse Gas Reduction Accord, is also contemplated.

Emissions Caps

The cap will be set at a level consistent with the targets set in Ontario’s Climate Change Action Plan.3 Ontario’s GHG emissions are to be reduced by 6% below 1990 levels by 2014, 15% below 1990 levels by 2020, and 80% below 1990 levels by 2050. Other factors to be considered in setting the cap will be “the need to be as stringent as emerging U.S. or European trading systems.” The System may use an emitter’s three-year emissions average in setting individual caps. Caps would then be reduced either in a steady annual progression or on a step-wise basis. All six greenhouse gases subject to the Kyoto Protocol would be included in the System.

Scope and Point of Regulation

Scope

By sector, the Ontario’s largest sources of GHG emissions are transportation (33%), industry (25%) and electricity (16%). For the 2010-2011 compliance period facilities emitting more than 100K tonnes CO2e in the following industries would be included: fossil fuel-fired electricity generation; base metal smelting and refining; cement; chemical; iron and steel; lime; petroleum refining; and pulp and paper. Once the first compliance period of the WCI commences, additional sectors would be included and the emissions threshold would drop to 25,000 metric tons.

Point of Regulation

Emissions from industrial facilities would be capped at the facility-level. Generators in Ontario may be capped at the plant or corporate level. Consistent with the WCI, imported electricity would be regulated at the point of the “first jurisdictional deliverer.”

Electricity Sector

In the System’s first year, facilities would be capped “at, or close to” its current amount of emissions. If the contemplated 2005-2007 three-year average is used to determine “current” emissions, facilities that have seen emissions steadily increase may thus find themselves long on allowances. Imported electricity may be assigned a “default” GHG emissions rate. Ontario Power Generation has recently announced it intends to reduce its GHG emissions from coal-fired production by 27% in 2009.4

Distribution of Allowances

At the outset, the System will distribute allowances through a mixture of free allocations and auctions. Which facilities and industries should receive free allowances and which should have to pay will surely be a hot topic of discussion during consultations. The government will retain some allowances for new entrants. Initially more allowances would be allocated rather than auctioned so that the government can provide a significant number of credits for early action. The allocation and auctioning mix would be adjusted for linking purposes so that emitters are on a level playing field with those in the same industry in other jurisdictions.

Offsets

The System will grant credit to projects that offset emissions. Offsets will need to be “real, surplus, verifiable, permanent, and enforceable.” The government will facilitate the creation of offset protocols and has already established a working group for that purpose. The WCI has identified the following as offset project priorities: agriculture, forestry, and waste management. The WCI restricts emitters to using offsets for under half of their compliance obligations. Ontario is contemplating more stringent restrictions. In formulating offset protocols, Ontario anticipates adapting existing protocols likes those of the Clean Development Mechanism. As the System will only cap a limited number of sectors at the outset, presumably not all uncapped sector activities will be offset-eligible.

Credit for Early Action

Ontario intends to take full advantage of the Credit for Early Action Program included in the proposed federal framework. Several emissions reductions, such as plant slowdowns or shutdowns, would not be eligible for credit. Early action credits under the WCI are available to emissions reductions made in the four years prior to the commencement of the first compliance period.

Banking and Borrowing of Allowances

The government expects to allow the banking of allowances subject only to restrictions flowing from participation in linked systems. Borrowing allowances from future compliance periods will not be permitted.

Compliance and Reporting

The System’s first compliance period will run from 2010 to 2011 so that future compliance periods can align with those of the WCI. Facilities in WCI jurisdictions with at least 10,000 metric tons of annual emissions must report their 2010 emissions in 2011. Ontario is conscious of the need to harmonize reporting requirements with those of other programs to minimize the burden on reporters. The government has vowed to work with fellow members of the Climate Registry to this end. The government has yet to decide whether auditing will be done by the government or by third parties.

Conclusion

By limiting the System’s scope to a small number of sectors and by applying a heighty threshold of 100,000 metric tons of emissions, the government is clearly aiming to use the 2010-2011 period as a trial run for Ontario’s participation in the WCI. With the first period set to begin on 1 January 2010, the government will need to move quickly to finalize the System’s design. Comments on the proposed System can be made to Heather Pearson, of the Air Policy Instruments and Program Design Branch, at heather.e.pearson@ontario. ca. The comment period closes on 3 March 2009.