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Ontario Releases Options for Cap-and-Trade System Targets and Baselines: Still to be Determined
June, 2009
By Adam Chamberlain, Christina Vechsler and Raquel Kaplan Goldberg
On May 27, 2009 the Government of Ontario introduced Bill 185, a set of amendments to the Environmental Protection Act that, if passed, will enable a government authority to implement a provincial cap-and-trade system for greenhouse gas (GHG) emissions. The Ontario government is also seeking comments on a discussion paper entitled Moving Forward: A Greenhouse Gas Cap-and-Trade System for Ontario that explores possible options for the structure and design of the proposed system.
Within the larger context of the 2007 Ontario Climate Change Action Plan that set GHG emissions reductions goals for the province, Bill 185 builds on Ontario’s previous commitments to develop a cap-and-trade system that is integrated with other North American jurisdictions. In June 2008, Ontario and Quebec entered into a Memorandum of Understanding, which stated intent to create a cap-and-trade system. The following month, Ontario joined the Western Climate Initiative (WCI), a regional partnership that endorses cap-and-trade and includes seven U.S. states, Quebec, British Columbia and Manitoba.
Bill 185 is the next step in the progress towards a cap-and-trade regime in Ontario. Key features of the Bill cover:
- Included GHGs. The proposed legislation will apply to all six GHGs (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride).
- Interaction with other jurisdictions. The regulatory authority’s power to make regulations includes the power to link Ontario’s cap-and-trade system with other jurisdictions and to govern the use and trading of foreign allowances within the province.
- Auctions. The government will be able to auction or sell allowances and offsets.
- Delegation. The government will be able to delegate its authority to regulate the provincial cap-and-trade system.
In Moving Forward, the Ontario government outlines policy issues and options to implement the future cap-and-trade system. Informed by consultation with stakeholders, a key theme of Moving Forward is the government’s desire to harmonize the Ontario system with other emerging systems, particularly in North America. The discussion paper focuses on transitional assistance in the short term and investment in green technology in the long term.
TARGET ALTERNATIVES
Moving Forward indicates that the Ontario government is still in the process of deciding between the two options for caps and baselines. It could be based on forecasted emissions levels to 2012 with a reduction target of 15% economy-wide by 2020, or it could use 2005 as the baseline with reduction targets of 3% by 2012, 17% by 2020 for industry and fuels, 42% by 2030, and 80% by 2050. It is still to be determined whether the baseline should be the three-year average emissions from 2005-2007 or the five-year average emissions from 2003-2007.
Stakeholders in Ontario have generally indicated the need for a cap-and-trade system to be as broad as possible in its coverage and to have consistent thresholds across regulated sectors. The government foresees coverage of the electricity, industrial, transportation, residential, commercial and institutional sectors, but it is entertaining two potential timelines for inclusion:
- initial inclusion of electricity generation and imports, large industrial and commercial combustion sources and industrial process emissions, followed by inclusion at a later date of residential, commercial and industrial fuel combustion and transportation fuel combustion; or
- initial inclusion of all electricity generation, natural gas liquid, petroleum and coal-based liquid fuel producers/importers emitting more than 25 kilotonnes per year (kt/yr), followed by industrial sources emitting more than 25 kt/yr, in turn followed by natural gas distribution.
CAP SETTING AND ALLOCATION
Stakeholders have traditionally expressed a wide variety of views about allowance allocation and means of auctioning. Industry stakeholders had indicated their preference to receive gratis (free) allowances, while other stakeholders focused on the need for higher levels of auctioning for the electricity sectors.
In Moving Forward, the currently emerging approach is an allocation model that uses higher levels of auctioning for distributing allowances to electricity generators with higher levels of gratis allowances and lower levels of auctioning proposed for energy-intensive and trade-exposed industries. This approach would ultimately be phased out when full auctioning could be implemented more broadly over the longer term. Allocations to other sectors will require further clarification.
The Province has also indicated the use of a sector-wide benchmark to determine allocations to provide a competitive advantage to facilities that took early action to reduce emissions before the system’s implementation. This approach is a departure from the EU-ETS approach which is based on reductions from historical emissions or reductions from forecasted levels.
A host of issues regarding allocation principles and the formation of an auction system remain outstanding. These include: whether the electricity sector should be subject to full auctioning from the outset of a cap-and-trade system; whether there should be floors or ceilings and/or reserve prices for auctions and offsets; to what purposes auction revenues should be put; what to do with unsold allowances; and how to develop benchmarks for gratis allowances.
CREDITS AND OFFSETS
The Ontario government supports providing incentives and rewarding emissions reductions that occur prior to the system’s start date, but has asked for further comment on how to provide such rewards and incentives. It has considered issuing early reduction allowances or credits that could be used like other allowances, as well as auctioning allowances and offsets.
The government has also considered using industry benchmarks to determine gratis allocations so emitters who have already reduced emissions below the benchmarks will be able to make unused allowances available for sale. Stakeholders have called for simple and clear criteria to assist proponents.
Many stakeholders have expressed a strong interest for Ontario to establish an offsets program, and industry has indicated that offsets should be available as a compliance alternative. A technical experts group was established to advise Ontario on rules for a potential offsets system in response to the strong stakeholder interest in offsets.
However, it remains to be seen whether the proposed offset system will be overseen by the government directly, by a government agency or by a public-private partnership. Nor is it yet clear what types of projects will be eligible to obtain offsets, whether and how Ontario should recognize offsets from other jurisdictions, and how to best assess a project’s additionality and permanence, among many other issues.
REPORTING
Stakeholders have expressed an interest in an effective and efficient reporting system which could be linked with other systems, such as any reporting system required by the Federal government. Many industries indicated a preference for an audit approach to verify data rather than third party verification.
Smaller companies emphasized the need that administrative requirements be manageable. Concerns about protection of confidential information were also raised.
Moving Forward states that it is Ontario’s intention to harmonize its reporting process with the Federal government and the U.S. to avoid duplicate regulatory requirements. However, the details of how to achieve an efficient yet effective reporting system have not yet been developed.
The Ontario government is considering WCI’s three-year verification cycle – full verification in the first year and less intense verification in the next two – and the use of voluntary (i.e. non-verified) reporting requirements for emissions between 10 kt/yr and 25 kt/yr. The Province is also considering how electronic reporting infrastructure might be integrated with other provincial reporting requirements.
INDUSTRY TRANSITION
It is widely recognized that the transition to a cap-and-trade system will require new green technologies. At this time, the government has not decided which of the specific emissions reduction technologies to focus on.
Stakeholders have identified technology deployment, research and innovation and accelerated investment, among other things, as key to a transition to a cap-and-trade system. The Province is seeking feedback on who should coordinate the technology and transition – existing government programs, a new government-led body, or the private sector – and where the funding should come from – existing government support programs, auction revenues, or a new technology fund.
Bill 185 and Moving Forward will be subject to public comment until July 26, 2009. Since the legislature is now in summer recess, Bill 185 will not receive second reading before Fall 2009.
Although significant progress towards a cap-and-trade system has been made with the introduction of Bill 185 and the posting of Moving Forward, a great deal of work remains to be done. This is especially the case since the Ontario government is seeking to implement the proposed cap-and-trade system by 2012 in order to coincide with the expected start date for the U.S. cap-and-trade system.
Adam Chamberlain is National Chair of the Climate Change Group at Borden Ladner Gervais LLP. Christina Vechsler is an Associate and Raquel Kaplan Goldberg is a summer law student with Borden Ladner Gervais. For more information, see the web site at www.blgcanada.com. The complete text of Moving Forward: A Greenhouse Gas Cap-and-Trade System for Ontario can be found at http://www.ene.gov.on.ca/en/air/climatechange/discussion_paper.pdf
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