To facilitate the implementation of its cap and trade program, Ontario has introduced framework climate change legislation and a supporting cap and trade regulation. The Climate Change Mitigation and Low Carbon Economy Act (the Act) legislates Ontario’s greenhouse gas (GHG) emissions targets, requires the publication of a climate change action plan, and establishes the framework rules for the cap and trade program, as well as the rules for managing the proceeds from the cap and trade program. Ontario has also introduced a draft regulation setting out the details of the cap and trade program, which will cover industries, institutions, electricity generators, and suppliers and distributors of heating fuels that emit 25,000 tonnes of GHG emissions per year or more, as well as suppliers and distributors of transportation fuels that distribute 200 litres of fuel per year or more. The program would also cover entities that import electricity and fuels in to Ontario. Under the cap and trade program, which will come into force on January 1, 2017, 82% of the province’s total GHG emissions will be covered. To create a robust offset credit program in Ontario, a separate offsets regulation will be drafted under the climate change legislation later in 2016.
Overview of the Climate Change Mitigation and Low Carbon Economy Act
The proposed Act looks to:
- Make Ontario’s greenhouse gas reduction targets legally binding – the following targets have been established: 15% below 1990 levels by 2020, 37% below 1990 levels by 2030 and 80% below 1990 levels by 2050.
- Formally direct all cap and trade auction proceeds to a new Greenhouse Gas Reduction Account that would fund green projects to reduce emissions.
- Ensure transparency by requiring an annual public report on funds flowing in and out of the Greenhouse Gas Reduction Account, including a description of funded initiatives and their alignment with climate change action plans.
- Provide a legal framework for the cap and trade program.
- Provide a framework for reviewing and increasing targets, as well as establishing additional interim targets.
- Allow for transitional allowances to large industrial emitters which would be phased out over a period of time.
- Require the government to prepare and implement a climate change action plan for achieving these targets, with progress reports and a review of the plan at least every five years.
Overview of Draft Cap and Trade Regulation
In connection with the proposed cap and trade program, the Ministry of Environment and Climate Change (MOECC) has posted a regulatory proposal for a cap and trade regulation, which includes an appendix presenting detailed technical information for the distribution of allowances to eligible capped emitters for the first compliance period, details related to early reduction credits, and an overview of complementary amendments for the reporting regulation and incorporated guideline to support implementation of the cap and trade program.
Ontario is planning to set a cap on emissions for each year of the first compliance period that will start in 2017 and last through 2020; the cap would be set based on the emissions that are forecast for each of those four years. The cap would translate into the total number of emissions allowances that would be made available for covered sectors through auctioning and free-of-charge allocation. Under the program, regulated emitters will be required to hold a sufficient number of allowances to cover their annual emissions.
Between 2017 and 2020, the economy-wide cap is expected to decline at a rate of 4.17% each year to meet Ontario’s 2020 emissions reduction target. 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 in recognition of the emission reductions that the sector has already undertaken with the closure of coal-fired power plants.
In order to provide transitional support for emissions intensive and trade exposed industries, Ontario plans to allocate emissions allowances free of charge to a broad range of industries including cement, lime and steel. This is aimed at reducing the risk of “carbon leakage”, or the relocation of local industries to other jurisdictions with less stringent environmental standards or no carbon pricing policy. Ontario will review the allocation of allowances at the end of the first compliance period in 2020. The coverage of electricity and fuel imports in the program seek to provide a level playing field for Ontario’s electricity generation and fuels sectors. The government has also indicated that it will consider additional actions to prevent carbon leakage, including border carbon adjustments.
To facilitate compliance, covered sectors would also have the option of funding emissions reductions in non-covered sectors, such as agriculture, through the purchase of offset credits. The government will establish the criteria for creating offset credits that are real, permanent and quantifiable. Furthermore, emitters that have voluntarily taken early and verifiable action to reduce GHG emissions would be rewarded through one-time early reduction credits. Smaller emitters with annual emissions of between 10,000 and 25,000 tonnes would have the choice of opting into the cap-and-trade program and have access to the free allocation of allowances.
The cap and trade proposal has been posted for a 45 day public review and comments may be submitted to MOECC by April 10, 2016.
Revised GHG Reporting Guideline
MOECC has also issued a revised Guideline for Greenhouse Gas Emissions Reporting. To support the proposed cap and trade program, MOECC is now proposing to revoke the Greenhouse Gas Emissions Reporting Regulation (O.Reg. 452/09) and replace it with a new greenhouse gas reporting regulation and incorporated Guideline under the Act. Proposed changes will include:
- Requirements to report production and other process related information;
- Provisions to allow facilities with emissions between 10,000 and 25,000 tonnes to opt-in;
- Clarifications on measurement requirements and reporting of biomass types; and
- Refinements to the Regulation and Guideline to facilitate implementation of the Cap and Trade Regulation.