The regulations forming the backbone of Ontario’s greenhouse gas cap and trade system have been carefully designed to make the GHG reductions as economically efficient as possible, a senior government official told attendees at APPrO’s 2015 conference on November 15.
Heather Pearson, Director of the Air Policy Instruments and Design branch of the Ontario Ministry of Environment and Climate Change, described key features of the system in a presentation November 15. Two regulations form the backbone of the cap and trade program: the cap and trade regulation itself, and the Quantification, Reporting and Verification Regulation. These regulations were carefully designed, she said, to make sure GHGs will be reduced in an economically efficient way, to discourage productive activity from leaving the province in search of a regime without a carbon price, to make sure the carbon market would be free from manipulation, and to ensure the market would be stable. Detailed coordination of standards and protocols with the system already in place between Quebec and California, the Western Climate Initiative, will guarantee a market large enough to achieve efficiencies in GHG reduction. The agency contracted to manage the auctions in Quebec and California will also manage the auctions in Ontario, increasing consistency.
The Ontario government has made significant progress on its climate change program and strategy over the past year, she said:
• Ontario’s Climate Change Strategy released in November 2015
• Climate Change Mitigation and Low-carbon Economy Act, 2016 passed in May 2016
• Climate Change Action Plan released in June 2016
• Cap and Trade Program introduced in July 2016.
Ontario’s GHG reduction targets are as follows:
• 15% below 1990 by 2020
• 37% below 1990 by 2030
• 80% below 1990 by 2050.
Ontario has already made its one large reduction, in the closure of all coal-fired power. After that, progress will likely take the form of many smaller reductions, covering all areas of the economy, she said.
Two regulations form the backbone of the cap and trade program: the cap and trade regulation itself, and the Quantification, Reporting And Verification Regulation. The Reporting Regulation sets the level of emissions at which an emitter must report at 10,000 metric tonnes CO2 equivalent per year, down from the original 25,000. However the direct compliance obligation applies only to those emitters over 25,000. Those between 25,000 and 10,000 may opt in, which makes them potentially eligible for free allowances. Free allowances are distributed by the government to prevent what’s known as leakage, situations in which Ontario’s carbon price would encourage production to move to a regime outside the province with no carbon price system in place.
The regulation comes into effect January 1 2017.
Some amendments were added over the summer to some of the methodologies, and more are to come. A key intent was to facilitate linkage with the broader agreement between Quebec and California.
Major consideration in designing the regulations was given to making sure the carbon market would be free of manipulation, so that not too much control could be invested in any one area. Consideration went into ensuring a stable market, with measures like a floor price, and a strategic reserve, where 5% of allowances are held back and can be sold at a higher price in case of high demand.
Offsets can be created outside of entities governed by a cap. They represent real reductions, with their creation governed by strict protocols, and can be traded in the same way as allowances. No fewer than thirteen such protocols are to be developed in various fields, such as landfill gas, in collaboration with Quebec.
The home heating fuel sector is covered, with a compliance obligation, but is not eligible for free allowances.
California and Quebec put the compliance obligation on the electricity generators themselves. Ontario put the obligation on the suppliers of natural gas to the power stations. They will pass on those carbon costs.
Each company is free to determine how to comply. Some will find it best to invest in GHG reductions themselves. Others looking at more expensive abatement technology will find it best to purchase reductions from another company who was able to over-comply. The net result, and the objective of the system, is optimal compliance for the least cost overall.
At the end of the four-year compliance period, designed to match those of Quebec and California, each covered entity will need to surrender enough allowances or offsets to match the emissions they’ve produced during that time period, a process known as “truing up.” If they don’t have enough themselves they must buy what they need from the market. But for every allowance or credit they’re short at that time, they will have to find not just the one credit but an additional three. It makes for a pretty strong incentive to make sure they’re in compliance. However, there’s a lot of flexibility built into that four-year compliance period. And entities can bank surplus allowances into the next compliance period.
Ontario will be using WCI Inc. for the administrative and technical services it provides, including use of the Compliance Instrument Tracking System Service (CITSS), the auction platform and market monitor to help ensure appropriate oversight. Through WCI Inc. the operational system is already up and running and Ontario will take advantage of it.
Ontario has pretty strict requirements for monitoring, recording and verifying emissions reductions. The auction has been designed in such a way, with holding limits and purchase limits, for example, to prevent collusion or abuse of market power. The fact of a centralized trading system common to the three jurisdictions allows for the same level of protection across all three.
Registration in CITSS began in August, with mandatory participants having to complete registration by the end of November. Emission allowances were to be deposited in CITSS holding accounts between January 1 and February 1, 2017. A practice auction is to be held in January 2017, with training seminars December 6 and 8. Ontario’s first cap and trade auction will be held in March 2017.
In response to a question from the audience, Ms Pearson noted that the privacy of proprietary information provided by participating companies will be protected. She also noted that the Climate Change Action Plan will be updated on a rolling basis, on the way toward the 80% reduction target for 2050. A consultant has been engaged to develop the thirteen offset protocols mentioned above. Updated information will be posted by the Ministry.
For more information: Ontario’s Cap and Trade Regulation: https://www.ontario.ca/laws/regulation/r16144
Methodology for the distribution of free allowances.