Ontario to implement cap-and-trade system

April 6, 2015

As recently reported to the Globe and Mail newspaper by government sources, Ontario Premier Kathleen Wynne is preparing to implement a cap-and-trade system for greenhouse gas emissions as part of the Province’s strategy to combat climate change. The initiative would be tied to Quebec and California’s existing cap-and-trade system, which held its first joint auction of greenhouse gas allowances in December, 2014, and its second in March, 2015. An official announcement is expected by Ontario Environment Minister Glen Murray in the near future, with further details to come later this spring and summer.

Under a cap-and-trade system, Ontario would limit the amount of carbon that can be emitted by certain businesses and raise money by selling or auctioning emissions permits that represent the right to emit a specific volume of carbon. Permits are then traded on secondary markets. Companies that wish or need to emit more carbon than the regulated cap or than the permits they then hold must purchase permits from other companies that plan to emit less than the limit. Proponents of a cap-and-trade system will note that forward looking businesses can adopt cleaner or more efficient energy uses and thus profit under a cap-and-trade system by holding excess emissions permits that are available for sale. Under the current joint Quebec-California program, companies are able to trade carbon allowances across jurisdictions to comply with local greenhouse gas emission limits. A Quebec company, for example, could purchase allowances from a certified greenhouse gas emissions reduction project in California in order to comply with its own Quebec provincial targets, and vice versa. Initial estimates indicate that a cap-and-trade system in Ontario could raise between $1 billion and $2 billion per year which would then likely be invested in green programs.

Ontario’s cap-and-trade system has been contemplated since at least 2008, when the Province agreed to price carbon emissions by signing the Western Climate Initiative with Quebec, British Columbia and California. Despite passing enabling legislation for a cap-and-trade system a year later, the Province never moved forward. Premier Wynne may have the momentum and political opportunity to implement cap-and-trade now.

As discussed here, Ontario recently initiated a 45-day public review and comment period on climate change, following the government’s release of its climate change discussion paper. The paper, which identifies the risks and challenges associated with climate change in Ontario, and the public comment period, was aimed at informing the government’s decision on its climate change strategy, as it questioned which carbon pricing mechanism to adopt in the Province. Unlike Quebec, for example, British Columbia utilizes a carbon tax that puts a price on every tonne of carbon burned. It appears that Ontario will proceed down a path similar to Quebec and employ cap-and-trade (at least in part) to address climate change policy.

We will be sure to update this blog with any new developments. In future blog posts, we will explain in greater detail the mechanics underlying the current California and Quebec systems and will provide commentary on the details of the Ontario cap-and-trade regime as they unfold. As in any program aimed at achieving policy aims through capital markets and commercial means, the devil will be in the details. We will examine these details in future blog pieces.

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