On July 25, 2018, the newly elected Ontario Government tabled Bill 4, the Cap and Trade Cancellation Act, 2018 to repeal the Climate Change Mitigation and Low Carbon Economy Act, 2016, cancelling Ontario's cap and trade program.

Ontario's Cap and Trade Program

The cap-and-trade program came into effect January 1, 2017, and was aimed at reducing GHG emissions to 15 percent below 1990 levels by 2020, 37 percent by 2030 and 80 percent by 2050. The program set "caps" on greenhouse gas emissions for companies in certain industries, including manufacturing, electricity and fuel distribution. Companies that emit below the cap could generate credits and then sell those credits to other companies that exceed the limits.

In September 2017, Ontario, Quebec and California signed the Agreement on the Harmonization and Integration of Cap-and-Trade Programs for Reducing Greenhouse Gas Emissions. This agreement, which came into effect on January 1, 2018, linked the three carbon markets to harmonize regulations and allowed for the mutual recognition and trading of allowances.

Key Aspects of Bill 4

Bill 4, if enacted, would operate to:

  • cancel cap and trade instruments, including those allowances obtained for free by the government;
  • provide limited compensation to select participants who purchased allowances in excess of allowances required as of July 3, 2018;
  • limit causes of action against the Crown arising out of the cancellation of the cap and trade program; and
  • require the Government of Ontario to create a new climate change plan that includes establishing targets for reducing the amount of GHGs emitted in the province.

Under Bill 4, the final compliance date for emissions is July 3, 2018. All allowances obtained for free from the government will be cancelled; companies can only use purchased allowances to meet their obligations. However, any participant unable to cover their emissions as of July 3, 2018, would be forgiven, meaning that there are no consequences for those companies that failed to obtain enough allowances to offset their emissions.

The formula for how compensation will be provided is unclear; details as to the methodology behind compensation will be laid out in a regulation expected to be introduced in the winter of 2019. Notably, compensation will only be provided to companies that bought allowances for compliance beyond July 3, 2018, to satisfy their obligations under the current term (i.e., until December 2020), and only for those that are unable to pass the costs through to their customers.

Many participants will be ineligible to participate in the compensation scheme, including voluntary participants who purchased allowances on a speculative basis, as well as participants registered:

  • as market participants (as defined in the Climate Change Mitigation and Low Carbon Economy Act, 2016);
  • with respect to electricity importation into Ontario for consumption in Ontario;
  • with respect to the distribution of natural gas in Ontario;
  • with respect to the operation of equipment related to the transmission, storage and transportation of natural gas;
  • with respect to the supply of petroleum products for consumption in Ontario; and
  • with respect to the operation of equipment for a transmission system within the meaning of subsection 2 (1) of the Electricity Act, 1998 and that has been issued an order under subsection 78 (1) of the Ontario Energy Board Act, 1998.

This, combined with Bill 4's attempts to limit causes of action against the Ontario government, will leave many companies that participated in the cap and trade program without potential recourse, bar court challenge to the validity of such limitations.

The regulations in force under the Climate Change Mitigation and Low-Carbon Economy Act, 2016, including the Greenhouse Gas Emissions Quantification, Reporting and Verification Regulation (O. Reg. 143/16), will also be repealed. Reporting requirements will be transitioned to a new regulation to be introduced under the Environmental Protection Act. Participants are now required to submit their greenhouse gas emissions report from January 1 to July 3, 2018, by October 1, 2018, with the accredited third party verification due by December 1, 2018.

Broader Implications of the Elimination of Ontario's Carbon Program

Bill 4's compensation limits and the end of Ontario's participation in the Quebec and California carbon market will have far reaching implications on the future of the cap and trade market in North America. The Bill, if passed, will result in winners and losers among Ontario's cap and trade participants. Participants with insufficient allowances in their account to cover their emissions as of July 3, 2018, will have no further emission reduction obligations; yet, participants that purchased additional allowances and are not covered by the limited compensation regime will be left with worthless allowances, with nothing in the way of compensation for them.

While details regarding how compensation will work are few, the limited information released by the Ontario government makes it clear that participants who were slow to participate in Ontario's cap and trade program will emerge largely unscathed, while early adopters who participated in the program with a long term compliance strategy will be the hardest hit by such cancellation.