On February 24, the Ontario government introduced its Bill 172, the Climate Change Mitigation and Low-carbon Economy Act, 2016, and followed it the next day with the Cap and Trade Regulatory Proposal and Revised Guideline for Greenhouse Gas Emissions Reporting regulation, together establishing the provincial framework and operating details for the provincial greenhouse gas cap and trade program. The bill was open for public comment until March 25, and the draft regulations until April 10.
Key features of the draft legislation and regulations are summarized below, based in large part on postings published by several prominent Ontario law firms.
The Act will require emitters to hold an allowance for every tonne of GHG, measured as carbon dioxide equivalents, CO2e, that they release into the atmosphere in a given year, and authorizes the Ministry of Environment and Climate Change to create emission allowances each year in the following amounts:
| Year | Number of allowances (carbon dioxide equivalent, CO2e) |
| 2017 | 142,332,000 |
| 2018 | 136,444,000 |
| 2019 | 130,556,000 |
| 2020 | 124,668,000 |
Subsequently, each compliance period will last three years.
Targeted reductions from 1990 levels, taken from the commitment established on behalf of the entire country at the most recent Conference of the Parties of the United Nations Convention on Climate Change, are as follows:
| Reduction from 1990 GHG levels | Year end |
| 15% | 2020 |
| 37% | 2030 |
| 80% | 2050 |
Covered emitters, referred to in the Act as mandatory participants, include large industrial sources with emissions of 25,000 tonnes or more of CO2e. These include facilities in the ammonia production, cement production, copper and nickel production, iron and steel production, and glass production sectors, as well as natural gas distributors with attributed emissions of 25,000 tonnes or more of CO2e per year, petroleum product suppliers that supply 200 litres or more in the province per year, and importers of electricity.
The bill also identifies two other types of participants: voluntary participants – facilities choosing to become capped emitters (opt in); and market participants, who can trade in the market but have no compliance obligation.
The heating and transportation fuel sector and industries will face cap declines. However the sector-specific cap for the electricity generation sector will remain unchanged from year to year, which recognizes the significant emissions reduction that the sector has already undertaken with the closure of coal-fired power plants.
Some capped emitters will be eligible to receive early reduction credits, based on actions that they have already taken to reduce the emission of GHGs. A maximum of two million early action credits will be available for distribution and emitters will need to apply for such credits.
At the end of each compliance period, covered emitters would be responsible for retiring emissions credits in an amount equal to their actual emissions during that period. Capped emitters that have released more than their allowance face a 3-for-1 penalty in their next true-up period. Failure to comply with the 3-for-1 rule may have their shortfall converted to a debt, based on the amount of the outstanding obligation and the settlement price from the most recent auction.
Each year, the MOECC will reserve 5% of the emission allowances created for sale to mandatory participants. Under the Act, the MOECC is authorized to also distribute emission allowances free of charge. The free allowances are meant to be a temporary measure to protect against "carbon leakage" (i.e., the movement of production to jurisdictions that have not implemented carbon policies) while these GHG-intensive industries adjust to the new cap and trade reality.
The government has identified a number of manufacturing activities as eligible for the free allowance allocation, including cement, glass, chemical, copper, nickel, iron, steel, lead, lime, pulp and paper and ink producers. Electricity generators, petroleum product suppliers, natural gas distributors and electricity importers are not eligible for the free emission allowances. The remaining emission allowances will be distributed at auctions to be held four times per year.
In addition to emission allowances, the MOECC may also create offset credits. Offset credits represent verifiable and permanent emission reductions that occur outside the cap in sectors without a compliance obligation. Participants in the program would be able to purchase and apply offsets to their reported emissions.
The proceeds from auctions are projected to be approximately $478 million in 2016-17 and $1.8 billion – $1.9 billion annually, starting 2017-18. Under Bill 172, all auction revenue would be paid into a Greenhouse Gas Reduction Account. This fund would be used for GHG reduction initiatives, such as initiatives relating to renewable and alternative energy sources, land use changes, building retrofits and improvements, transportation infrastructure and low-emission technologies. Costs of administering and enforcing the Act and regulations may also be billed to the account, and the Crown can be reimbursed “for expenditures in relation to initiatives that are reasonably likely to reduce, or support the reduction of greenhouse gas.”
APPrO President Dave Butters comments, in a recent blog, that notwithstanding the already hundreds of pages of draft regulations, many questions still remain. For example, even though Ontario's electricity sector will not be directly placed under a declining cap, in recognition of the large reduction it has already made through the closure of coal plants, it will be indirectly affected by allocations applied to natural gas importers, who supply the gas-fired plants.
As Dave Butters concludes, there are still answers to be worked out.
Timeline:
• Final regulation effective July 1
• Offsets, and Administrative Penalties regulations by end of 2016
Implementation:
• Training dates to be posted to Ontario.ca by June
• Registration of capped participants (Aug to Nov) and market participants ongoing
• Possible practice auction (December – TBC) in advance of March 2017 auction
• Allocation of allowances (mid-January, 2017).
Excerpted with permission from the blog sites of Aird & Berlis LLP (EnergyInsider.ca), McCarthy Tetrault LLP, and a presentation from the Ministry of Environment and Climate Change.
These excerpts are not intended to be a comprehensive account of the Act or the Regulations. Affected parties should consult with the Ministry and/or a qualified professional.
For links to complete sources, including the original blogs from which this is taken, visit APPrO's webpage at https://www.appro.org/capandtrade16.