Ontario Updates Stakeholders on Cap-and-Trade Program Design

Get our latest update on Ontario's cap-and-trade system here.

The Ontario Ministry of the Environment and Climate Change (MOECC) has provided a Report Back to Stakeholders discussing the design options being considered for the province’s anticipated cap-and-trade program for greenhouse gas (GHG) emissions. This update follows the MOECC’s consultation in late 2015 on a discussion paper titled Cap-and-trade Program Design Options (for more detail, see our bulletin here).

What You Need To Know

• The MOECC is moving forward with its draft cap-and-trade regulations, which could be released as early as late February 2016.
• Key highlights in the Report Back to Stakeholders include:

• general support for design features which would facilitate future linkage between the Ontario program and the existing systems in California and Québec;
• a question on whether to delay the proposed January 1, 2017 start of the first compliance period until 2018, at least for certain industry sectors; and
• a proposal for how free allowances will be allocated to various industry sectors. Allowances are emissions credits that can be traded between program participants and ultimately used by emitters covered by the cap-and-trade program to meet their compliance obligation.

Overview of Report Back to Stakeholders

The MOECC is designing its cap-and-trade program concurrently with its development of a 2016 Climate Change Strategy and Action Plan. This plan will specify measures, in addition to the cap-and-trade program, that the province intends to carry out over the next five years to reduce Ontario’s GHG emissions. It may also establish how the province will use the proceeds from the cap-and-trade program (which will be obtained through the province’s sale of emissions allowances).

A primary component of the province’s mitigation efforts will be the anticipated cap-and-trade regulations. A draft of these regulations may be released as early as late February. Based on stakeholder feedback to date, there is considerable support to include design features that would facilitate linkage between the Ontario program and the joint California and Québec cap-and-trade programs, allowing for emissions allowances and offsets to be used for compliance in any of the linked jurisdictions. For example, Ontario’s program is likely to adopt rules relating to the auctioning of allowances, price stability and offset credits that closely align with the California and Québec rules.

The MOECC has publicly stated its intention to implement the cap-and-trade system beginning on January 1, 2017. However, many stakeholders have voiced support for delaying the start date of the first compliance period to 2018 or later, in part to allow additional time to develop the regulatory framework and to help covered emitters transition into the new regime. It remains an open question as to whether the MOECC will delay the start of the first compliance period for some industry sectors.

One of the most important new developments in the Report to Stakeholders is the MOECC’s proposal on how it will allocate free emission allowances to certain industry and institutional sectors. Under the proposal, the allocation of free allowances at the facility level will be determined as the product of three factors: (i) an assistance factor (with certain emissions-intensive and trade-exposed industries receiving a higher assistance factor, and therefore a higher percentage of free allowances); (ii) a base emissions amount (determined based on a facility’s benchmark production, energy use or historical emissions); and (iii) a cap adjustment factor (which reflects an annual reduction in the province’s overall emissions cap). The first two factors are of particular importance. Based on initial stakeholder feedback, the MOECC is proposing an assistance factor of 100% for all of the sectors that will receive free allowances in the first compliance period. It is also proposing to calculate the base emissions amount at the facility level using one of three approaches depending on the facility sector (as outlined in the table below):

Allowance Allocation Method	Examples of Sectors Subject to Allocation Method Under Current Proposal
Product-Output Benchmarks (based on allowances per unit of output)	Iron and steel; petroleum refining; grey cement; white cement; lime; glass; fertilizer; and hydrogen.
Energy-Used Benchmarks (based on allowances per GJ of energy used)	Vehicle manufacturing; food manufacturing; institutions; chemical; ethanol, pulp and paper; and mining.
Historical Emissions	Base metal smelting; brick-making; carbon black; ethylene; magnesium production; mineral wool insulation; lubricants manufacturing; and styrene.

By way of example, given the proposal to use a 100% assistance factor, a facility in the iron and steel sector would receive free allowances covering 100% of the emissions associated with its benchmark product output, less a percentage reduction in any given year based on the corresponding reduction in the province’s overall emissions cap.

The Report to Stakeholders revealed other cap-and-trade design options as well. For example, the MOECC continues to propose regulating emissions of large emitters at the facility level—with the exception of certain natural gas-fired electricity generators which the MOECC is considering to regulate upstream at the fuel distributor level. The MOECC is also considering the rate at which the overall cap will be adjusted downward in support of Ontario’s 2020 emissions reduction target. Post-2020 cap reductions will likely be determined after the cap-and-trade regulations have been issued.