Ontario Government Introduces Bill Repealing Cap and Trade

The Ontario Government introduced Bill 4: Cap and Trade Cancellation Act, 2018 (Act) on July 25. When it becomes law, the Act will repeal Ontario's cap and trade legislation and "retire" or "cancel" the emissions allowances and offset credits held by Ontario participants, including those purchased at auction. The Act is expected to become law in the coming weeks, though it may undergo changes as it proceeds through the legislative process. Although the Act provides the framework for the wind down of cap and trade, certain specifics, such as the amount of compensation available to eligible participants for cancelled cap and trade instruments, will be prescribed by regulations which have not yet been published.

What You Need To Know

• The Act repeals the Climate Change Mitigation and Low-carbon Economy Act, 2016 (2016 Act) enacted by the previous government, and retires or cancels cap and trade instruments issued under the 2016 Act or purchased on the Ontario-Québec-California carbon market.
• The Act includes a scheme that will compensate some holders of cap and trade instruments for some of their cancelled instruments. In effect, compensation will only be available for a small percentage of purchased allowances. Further specifics will be set out in regulations which have not yet been published.
• The following participants registered under the 2016 Act cannot claim compensation for cancelled cap and trade instruments: market participants; electricity importers; natural gas distributors; participants who operate equipment related to the transmission, storage and transportation of natural gas; petroleum products suppliers; and operators of electricity transmission systems.
• The Act bars any claims for damages against Ontario for, among other things, the "retirement and cancellation of any cap and trade instrument in accordance with [the] Act." This prevents the holders of any retired or cancelled cap and trade instruments from bringing claims for damages against Ontario in Ontario courts for the lost value of their cap and trade instruments.
• There may be remedies available under international trade agreements for some holders of cancelled cap and trade instruments.
• The Act requires Ontario to establish greenhouse gas emissions reductions targets and to prepare a climate change plan. Further details are expected this fall, presumably with a view to developing a provincial plan to align with the province's arguments in challenging the federal backstop carbon price that will take effect on January 1, 2019 in provinces without equivalent pricing schemes.

Political Context

The introduction of the Act builds on Premier Ford's campaign promise to wind down Ontario's cap and trade program, which started when his government withdrew Ontario from the Ontario-Québec-California carbon market by revoking the cap and trade regulations and suspending all trading on July 3, 2018.

Retirement or Cancellation of Instruments

The following types of cap and trade instruments that could be traded on the Ontario-Québec-California carbon market before July 3, 2018,¹—and which may be held in cap and trade accounts in Ontario—will be retired or cancelled when the Act comes into force: Ontario emission allowances and credits; Québec greenhouse gas emission units, reserve emission units, offset credits and early reduction credits; and California greenhouse gas emissions allowances and Air Resources Board offset credits.

The retirement and cancellation of cap and trade instruments will proceed in three steps.

• First, the Minister will attribute a certain level of greenhouse gas emissions to participants by regulation (section 2(1) of the Act). If "the Minister proposes to determine the amount of greenhouse gas emissions to be attributed to a participant," that participant will be given notice of the proposal and an opportunity to be heard (section. 2(3) of the Act). Based on information from the Ministry of the Environment, Conservation and Parks (MOECP) to program participants, emissions will be attributed based on interim emissions reports covering the period until July 3, 2018 when the cap and trade regulations were revoked.
• Second, cap and trade instruments held by that participant up to the amount of attributed emissions will be retired (section 6(2) of the Act). No compensation will be paid for retired cap and trade instruments. Participants with instrument holdings short of their attributed emissions will essentially be deemed to have been in compliance, with no further obligation.
• Third, all cap and trade instruments held by participants, other than those that were retired, will be cancelled (section 7 of the Act).

Regulations attributing greenhouse gas emissions to eligible participants have not yet been published. MOECP issued a new emissions verification and reporting regulation on July 26, in part to facilitate the cap and trade wind down proposed in the Act.

Compensation Scheme for Instruments

The compensation scheme is set out in section 8 of the Act. As indicated, only certain participants will be eligible for compensation under the Act. The following participants will not be eligible for compensation: market participants; electricity importers; natural gas distributors; participants who operate equipment related to the transmission, storage and transportation of natural gas; petroleum products suppliers; and operators of electricity transmission systems.

Compensation will only be payable for some cancelled cap and trade instruments. The maximum number of cap and trade instruments in respect of which compensation will be payable shall be calculated as follows:

• the number of cancelled instruments under section 7 of the Act minus;
• the number of instruments that were distributed free of charge to the participant under the 2016 Act minus;
• the number of cap and trade instruments held by the participant that are classified or assigned with a vintage year of 2021.

The amount of compensation payable for each instrument following the application of this formula will be prescribed by regulations. Although those regulations have not yet been published, it appears clear that the holders of cap and trade instruments will not be compensated for all cap and trade instruments in their accounts at the time of cancellation. Overall, compensation will only be available for a small percentage of instruments held by Ontario participants.

Limits to Possible Compensation

No other compensation is available under the Act. Section 9 prohibits "any compensation or damages in respect of the value of cap and trade instruments retired or cancelled under" the Act, or any compensation for (a) "any other loss, including loss of revenues or loss of profits, related, directly or indirectly, to the enactment" of the Act, (b) "the making or revocation of any regulation" under the Act, (c) the repeal of the 2016 Act, or (d) the revocation of any regulation under the 2016 Act.

The Act also bars any claim in Ontario courts for a remedy in "contract, restitution, tort, misfeasance, bad faith, trust or fiduciary obligation, and any remedy under any statute" related to (a) the enactment of the Act or the repeal of the 2016 Act, (b) the making of regulations under the Act, (c) anything done under the Act or its regulations, including decisions about a participant's eligibility for compensation, (d) the retirement or cancellation of cap and trade instruments, or (e) any "act or omission" related to the wind down of cap and trade.

Although the Act bars claims in Ontario courts, there may be legal remedies available to some holders of retired or cancelled cap and trade instruments, such as under the North American Free Trade Agreement.

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¹ Ontario Regulation 386/18, Prohibition Against the Purchase, Sale and Other Dealings with Emission Allowances and Credits (July 3, 2018)