The Government of Ontario is citing climate change as “one of the greatest challenges mankind has faced.” On Monday, April 13, it announced that it will join Quebec and California in adopting the Western Climate Initiative’s (WCI) Cap and Trade program. This will expand North America’s largest cap and trade market to cover more than 60 million people with an aggregate gross domestic product (GDP) of nearly CA$3.3 trillion. The combined economies of these three jurisdictions are nearly equivalent to Germany’s, the fourth largest in the world. With a market this large, there is little question that the addition of Ontario to the WCI Cap and Trade program will have a significant impact on the momentum of the program and the adoption of cap and trade and carbon pricing as an accepted mechanism to address climate change.

Premier Kathleen Wynne together with Environment and Climate Change Minister Glen Murray flew to Quebec City prior to the Premier’s Summit on Tuesday to sign a letter of intent to link the two markets. Minister Murray then joined David Heurtel, Quebec’s Minister of Sustainable Development, Environment and the Fight against Climate Change, at the Canada Roundtable on the Green Economy, where the ministers discussed the alliance between the two provinces.

In their addresses at the Roundtable, both ministers were adamant that taking no action on climate change would be more costly than the costs associated with the cap and trade programs being implemented and proposed. The consensus at the Roundtable, which was made up of representatives from industry, NGOs, government, the financial sector and academics, was that a price on carbon was necessary to address climate change, along with other policy initiatives that could be, and are being, implemented by governments and industry. The Roundtable also recognized that there is merit in carbon pricing programs designed specifically by each province. The rationale behind this approach is that the provinces are in the best position to consider the unique characteristics of their respective constituents, resource bases and economies. Such an approach is thought to ensure a balanced program that fosters environmental stewardship, economic prosperity and competitiveness at the same time. The Roundtable also concluded that municipalities have a significant role in introducing climate change initiatives, such as the City of Vancouver’s Greenest City 2020 Action Plan.

The Ontario cap and trade program, like that of Quebec, will impose a hard ceiling on the greenhouse gas emissions allowed in each sector of the economy. The cap will be lowered over time, reducing the amount of greenhouse gas emissions permitted. The system is designed to reward innovative companies by allowing them to sell permits they do not use to other emitters who need them to comply. It is not yet known whether emission offsets—verified emission reductions created by non-regulated entities—will form part of the program. Offsets have been used in other jurisdictions to add flexibility for emitters, achieve real emission reductions and reduce the cost of achieving them.

The Ontario Government was not specific in its announcement as to how the proceeds of the program would be used, but indicated that it will reinvest the money raised through cap and trade back into projects that reduce greenhouse gas emissions and help businesses remain competitive. Projects may include helping families consume less energy through more energy-efficient appliances or housing, building more public transit to reduce the number of vehicles on the road, and helping factories and businesses reduce greenhouse gas emissions. The Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), introduced in 2009 to bring in a cap and trade system, sets out what the money from the program can be used for. Funds from auctions are to be deposited into the Greenhouse Gas Reduction Account and used for the purpose of reimbursing the Province for costs incurred in administering the regulations relating to greenhouse gases and in carrying out supporting greenhouse gas reduction initiatives, particularly initiatives that relate to the sectors of the Ontario economy to which the regulations apply. Funds from the account may be used for, but are not limited to: (i) costs of research into, or the development or deployment of, lower greenhouse gas emitting technologies in a regulated sector; (ii) costs of programs to reduce greenhouse gas emissions in a regulated sector ; (iii) costs of infrastructure or equipment to reduce greenhouse gas emissions in a regulated sector; and (iv) if the electricity sector is regulated, costs of any greenhouse gas reduction initiative that would otherwise be borne by electricity consumers. However, it is possible that there may be some amendments to the legislation to accommodate policy changes that have occurred since the legislation was introduced almost six years ago.

The goals of Ontario’s program are cited as:

  • providing certainty for industries;
  • creating jobs and more opportunities for investment in Ontario;
  • reducing harmful changes to the environment, said to be causing extreme weather conditions, floods, droughts, and harming the ability to grow food;
  • preventing increases in the cost of food, insurance and healthcare; and
  • protecting the air, water and health of current and future generations.

It is interesting to note that governments are increasingly citing health concerns caused by air pollution associated with emissions as one of the key reasons for implementing emission reduction programs. This seems to be viewed as a more concrete and compelling objective for emissions regulation. The Obama Administration cited health and projected healthcare savings as a benefit of the EPA’s Clean Power Plan announced last June as did the Government of Canada when it announced its proposed new multi-sector industrial air pollutant emissions regulation program a day later. Both Ontario and Quebec highlight these considerations as part of their programs.

When President Obama was unsuccessful at getting cap and trade passed in the US and Canadian Federal Government cancelled its proposed “Turning the Corner” greenhouse gas emissions reduction program in response, many thought that cap and trade in North America was dead. At Dentons, we took the view that this policy would simply take a different path, built on local, provincial, state and regional initiatives gaining momentum and traction. It appears this is turning out to be the case. With Ontario’s introduction of a cap and trade system, more than 75 percent of Canada’s population will now be covered by some form of carbon pricing. In the US, some of the most populace states are covered by cap and trade, either through the WCI program (California) or the Regional Greenhouse Gas Initiative (RGGI) in the northeast and central Atlantic states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont). These states combined constitute approximately 25 percent of the U.S. population and 28 percent of its GDP. As such, it appears that the momentum in North America is shifting toward putting a price on carbon through various market mechanisms and carbon taxes. That being said, at the Quebec City Summit, the provincial premiers were not able to agree that a price on carbon is the best approach. Saskatchewan Premier Brad Wall advocated technological solutions to making burning coal cleaner, citing that countries much larger than Canada are going to continue burning coal and that Canada comprises less than 2 percent of the world’s emissions. Saskatchewan has invested heavily in the world’s largest commercial coal-fired power plant carbon capture and storage facility at its Boundary Dam Power Plant in hopes of making coal-fired generation less emissions intensive. The economics of that project are still in question. The premiers agreed to continue to adopt and promote initiatives to reduce greenhouse gas emissions and new emission reduction technologies.

Ontario and Quebec are now calling on the Government of Canada to cooperate with the provinces to address climate change. A provincial patchwork of programs and regulation is not viewed by industry as being the most effective or efficient way to regulate emissions, but those in favour of action view it as a positive step in the right direction in the absence of uniform federal regulation.