The Ontario Government has begun consultations leading to the implementation of a greenhouse gas cap-and-trade system, which may be in place as early as 2010.

Ontario had previously stated its intention to develop a greenhouse gas cap-and-trade scheme. On June 2, 2008, Ontario and Quebec signed a Memorandum of Understanding to establish a joint cap-and-trade system, inviting other provinces and territories to collaborate, to be implemented as early as January 1, 2010.

Additionally, Ontario is a partner in the Western Climate Initiative (the “WCI”), and has committed to be part of the regional WCI cap-and-trade system which is slated to come into effect in 2012. The Ontario Government has expressed the desire to get out in front of the WCI system in the hopes of providing Ontario entities with a competitive advantage in the new regional, and potentially North American-wide regime.

The consultative process began with the release of a document entitled Discussion Paper: A Greenhouse Gas Cap-and-Trade System for Ontario (the “Discussion Paper”). It outlines the intentions and various proposed details for the regime and invites interested parties to comment. The main aspects of the Discussion Paper are outlined below.

Targets

Ontario proposes using the cap-and-trade system as a main tool to bring emissions in line with its greenhouse gas (’GHG”) reduction goals, which are:

• 6% below 1990 levels by 2014 (a reduction of 61 megatonnes relative to business-as-usual)


• 15% below 1990 levels by 2020 (a reduction of 99 megatonnes relative to business-as-usual)


• 80% below 1990 levels by 2050

Linkages

The Discussion Paper recognizes the need for Ontario’s system to efficiently and effectively link with other cap-and-trade systems around the world; in particular, it needs to be able to work with the WCI system. The need to be flexible and use internationally accepted base years and offset criteria is crucial. As the Discussion Paper states at page 16:

By starting earlier, Ontario would provide our industries with greater experience in all aspects of emission trading, including familiarity with the market approach and full range of compliance options. This would prepare Ontario’s industries for future Cap-and-Trade programs, such as WCI or Cap-and-Trade systems that are implemented. The Discussion Paper acknowledges that in order to ensure the early-start has the desired effect, any system must ensure linkages are possible and easily made.

GHGs Covered

Ontario proposes to use the full set of six GHGs included under the Kyoto Protocol. These are: Carbon dioxide; Methane; Nitrous Oxide, Hydrofluorocarbons; Perfluorocarbons; and Sulphur Hexafluoride.

Cap Setting and Thresholds

The cap will be set considering Ontario’s Climate Change Action Plan targets, requirements for federal equivalency, and the need to be as stringent as other existing or emerging international trading systems for linking purposes.

Ontario has proposed that caps will initially be placed on any facility or corporate entity that has GHG emissions over 100,000 tonnes of carbon dioxide equivalent (CO₂e). In 2012, the threshold will be lowered from 100,000 to 25,000 to be consistent with the WCI, which has indicated it will begin with a threshold of 25,000 tonnes CO₂e.

Sectors that would be caught by the initial threshold include electricity generation, iron and steel manufacturing, cement, petroleum refining, pulp and paper, lime, base metal smelting, and chemicals. The Discussion Paper acknowledges that additional sectors may be phased into the cap-and-trade system over time starting in the 2012 period.

It is proposed that caps would be reduced on a linear basis or stepped down at predetermined intervals. Electricity generation would be regulated at the corporate or facility level. Electricity imports would be regulated at the point-of-sale to the Ontario grid. Industrial sources would be regulated at the point of greenhouse gas emission.

The Discussion Paper clearly states the intention to create a system that can be the most effective while minimizing administrative costs and complexity. The Government is seeking comments that address these intentions.

Allocation of Allowances

The Discussion Paper acknowledges the ongoing debate as to whether allowances should be distributed gratis (i.e. free of charge) or through an auction process. The WCI proposes a minimum of 10% auctioned allowances initially, rising to 25% by 2020 (potentially rising to 100%) being auctioned.

The Ontario Discussion Paper proposes a combined approach to be used, employing both gratis and auctioning distribution initially, with the transition towards higher levels of auctioning in the future. However, it does make not recommendations or proposals for the appropriate allocation mix, stating that decisions must be made regarding the gratis/auction split while ensuring the overall design is administratively simple, transparent and cost effective.

Offsets

Offsets are created through emissions reductions undertaken by unregulated entities (those not subject to a cap). Ontario has proposed the inclusion of offsets into the cap-and-trade system, acknowledging they allow cost-effective compliance and create incentives for non-regulated entities to make emission reductions and develop emission-reducing practices and technologies.

Ontario has expressed the desire to place a limit on the amount of compliance that can come from offsets. The WCI Partners have recommended limiting the use of offsets to no more than 49% of the total emission reductions from 2012-2020 in order to ensure that most of the emissions reductions occur in the capped sectors.

The Discussion Paper flags the need to consult on the use of offsets from other systems, such as the Clean Development Mechanism, and the use of existing protocols for offset creation (e.g. protocols from Alberta or the CDM). It appears that offsets will form an important part of any cap-and-trade system in Ontario, however the details remain uncertain.

Credit for Early Action

The Discussion Paper emphasizes the importance of providing credit for early action and proposes that Ontario comply initially with the plan for Early Reduction Allowances under the WCI. Under the WCI, recognition will be given for early actions between January 1, 2008 and January 1, 2012. The Discussion Paper recognizes that each WCI Partner jurisdiction has the discretion to recognize early actions other than those eligible for the Early Reduction Allowances within their respective allowance budgets.

Ontario has asked for comments on the recognition of early actions before January 1, 2008 and has indicated that it will need to consider action taken by Ontario industry beyond the 15 Mt limit currently discussed in the federal framework.

Banking

Ontario is considering the availability of banking of allowances for use in future compliance periods to give more flexibility to regulated emitters. However, there will be no consideration of borrowing from future compliance periods. The details of the banking provisions are under discussion.

Compliance and Reporting

The Discussion Paper acknowledges that reporting is a critical aspect of any successful greenhouse gas management strategy. Ontario has indicated that all regulated emitters, including emitters that apply for offsets, would be required to report emissions. Under the WCI there will be mandatory reporting for all entities and facilities with emissions equal to or greater than 10,000 tonnes/year of CO₂e, beginning in January 2010. Ontario is currently considering whether reported emissions will be subject to government audit, or will be required to have independent third party verification.

Multi-year compliance periods allow for greater flexibility and are preferred in the Discussion Paper. The WCI Partner jurisdictions have recommended three year compliance periods to commence in 2012. Ontario intends to harmonize the compliance periods with the WCI, therefore, the first compliance period will be a short one, from 2010-2011. Future compliance periods will be based on the 3-year, WCI compliance periods.

Comments on the discussion paper can be made by email to Heather Pearson of the Air Policy Instruments and Program Design Branch, Ministry of Environment via heather.e.pearson@ontario.ca. More information, including a link to the Discussion Paper and presentations from the December 10th launch of consultations, is available here.

This article was prepared by Laura Zizzo of Gowlings, and was first published in the February 3,2009 edition of Mondaq. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Source: Mondaq