Change is in the Air: Ontario Closer to a Cap-and-Trade System

Feb 21, 2013

On January 21, 2013, Ontario’s Ministry of the Environment (MOE) posted the Greenhouse Gas Emissions Reductions in Ontario: A Discussion Paper (the Discussion Paper) on the Environmental Registry, in conjunction with a consultation period open until April 21, 2013.  This Discussion Paper is the latest indication that the Ontario Government intends to pursue a greenhouse gas (GHG) reduction strategy that involves a cap-and-trade system that may have far-reaching effects on industry in the province.  The Discussion Paper also makes it clear that the interests of stakeholders, including Ontario businesses, will be considered.

Jurisdictional Cooperation

The Discussion Paper outlines the desirability of a GHG reduction strategy that is harmonious with strategies existing in other jurisdictions, noting that market-based GHG reduction initiatives exist in Europe and are in development in Asia.  The Discussion Paper identifies regional initiatives in the U.S. specifically the Regional Greenhouse Gas Initiative in the U.S. Northeast and the Western Climate Initiative in the West (and in Quebec).  In particular, the paper referenced California’s emissions trading program where emissions limits have been in effect since January 1, 2013. 

In Canada, B.C., Alberta and Quebec have implemented various GHG reduction policies, from emissions trading in Alberta to carbon taxes in B.C. and Quebec.  The paper explicitly states that Ontario does not intend to implement a carbon tax.

A key aspect raised by the Discussion Paper is that Ontario intends to seek an equivalency arrangement with the Federal Government so as to render federal regulations inapplicable as long as equivalent Ontario regulations achieve identical (or better) outcomes.  The paper suggests that equivalency would allow for a regulatory framework that is more appropriate for Ontario as opposed to one that might be developed federally without necessarily considering issues of specific interest to Ontario.

Principles and Goals

The Discussion Paper identifies general principles that will guide the eventual GHG reduction program in a way that balances environmental protection and economic growth and incentivizes investment in cleaner technologies.  These principles are:

  • achieving absolute reduction in greenhouse gas emissions in a cost-effective way that considers competitiveness and supports achieving equivalency with the federal government
  • simplicity, consistency, transparency and administrative efficiency
  • striving to treat sectors and facilities equitably
  • taking into account early action by industry leaders
  • using accurate and verified emissions data to support policy development
  • promoting development and deployment of clean technologies
  • considering a broad alignment with other emissions reduction programs of similar rigour that provides opportunity for linking in the future
  • considering integration with other provincial environmental policies

The Discussion Paper makes it clear that the goal is to have a system in place one year before federal regulations are put in place in order to negotiate and finalize an equivalency agreement.

Ontario’s GHG reduction program would cover emissions of gases specified under O. Reg. 452/09 and the Kyoto Protocol.  Industries, including petroleum refining, chemicals, steel, cement, pulp and paper, and fossil fuel-fired electricity generators, would be explicitly identified for the purposes of the program, while emissions stemming from transportation and residential heating fuels would not likely form part of any GHG reduction program.

The Discussion Paper suggests that emissions limits for the electricity sector would be established with the objective of stabilizing emissions, accounting for expected rises due to economic growth and nuclear refurbishment.  With two years of emissions data from the industrial sector (which the MOE began collecting in 2010), the paper proposes an emissions baseline based on forecasts of emissions at the start of the program with a targeted reduction of five per cent over five years. 

The actual process of benchmarking emissions is a significant topic for consideration, with the Discussion Paper identifying production-based benchmarks, energy benchmarks, reductions from historical baselines or a mix of approaches as possibilities.

The Discussion Paper emphasizes that the program will be flexible in the sense that there may be several ways that an emitter can meet GHG emissions reduction targets.  Investing in green technologies and developing low-cost, industry-specific emissions reduction projects (offsets) are suggested options, but the paper identifies a market-based approach (i.e. cap-and-trade) as a preferred approach. 

Discussion

The Discussion Paper makes it clear that the Ontario government and the MOE intend to move forward on a cap-and-trade system (as contemplated by the Regulations), but this implementation will proceed in a cooperative manner with industry.  The imperative for change is likely being driven by the realization that emissions reduction targets cannot be met by the status quo, and the fact that the federal government intends on proceeding with an emissions reduction scheme (although details of any such scheme have not been disclosed). Statements regarding climate change made by President Obama in his most recent Inaugural Speech and State of the Union Address, combined with repeated comments on behalf of the Canadian Government that it intends to adopt a “continental approach” to climate change, may also move the agenda forward.

It is also clear that the Discussion Paper raises more questions than it provides answers.  If Ontario chooses to encourage investment in clean technology, how will this “encouragement” be funded?  Can emissions reduction be accomplished without a carbon tax?  Will the public support a carbon tax?  If the benchmarking process varies by sector, how can fairness be assured between sectors?

More information will no doubt come from the reports generated by this consultation process.  However, one thing is certain: change is in the air.

The MOE’s Policy Proposal Notice on the EBR containing the Discussion Paper and public consultation information can be found here.


Background: Ontario’s Greenhouse Gas Reductions Emissions Strategy

Starting in 2002, nitrogen oxides (NOx) and sulphur dioxide (SO2) emissions limits were imposed on Ontario’s electricity sector.  Ontario Regulation 397/01, as amended, created an emissions regime with allowances and emissions reduction credits (ERCs) that are tradeable in order to meet emissions limits.  

In 2003, the McGuinty government announced its intention to phase out coal-fired power.  Seventeen of 19 coal plants will be shut down by the end of 2013, with the remainder scheduled to be closed before the end of 2014.

In 2007, the Climate Change Action Plan established a target of a six per cent reduction of greenhouse gas emissions from 1990 levels by 2014, a fifteen per cent reduction by 2020 and an eighty per cent reduction by 2050.  However, the Ontario Ministry of the Environment (MOE) estimates that Ontario is on pace to meet only sixty per cent of the 2020 reduction targets.

In 2008, Ontario and Quebec agreed to collaborate on a cap-and-trade system aimed at greenhouse gas reduction.  Also in 2008, Ontario joined the Western Climate Initiative (WCI), then a coalition of states (Arizona, California, Montana, New Mexico, Oregon, Utah and Washington) and provinces (B.C., Manitoba, and Quebec) committed to reducing greenhouse gases by developing emissions trading programs and other regional initiatives. Currently, of the seven American states initially becoming members, only California remains. While all four Canadian provinces remain as members, only Quebec has formally agreed to be bound by the program, as has California.

In 2009, the Environmental Protection Amendment Act (Greenhouse Emissions Trading) amended the Ontario Environmental Protection Act (the EPA) to allow for the creation of emissions trading programs that employed “economic and financial instruments and market-based approaches.”  Also in 2009, Ontario Regulation 452/09 obliged certain large emitters to begin reporting greenhouse gas emissions to the MOE.  The MOE has collected data for 2010 and 2011.