A guide to Ontario's new cap and trade regime

Ontario has picked up the pace on addressing climate change. On May 18, 2016, the provincial government passed the Climate Change Mitigation and Low-carbon Economy Act, 2016 (the "Act"),¹ quickly followed by two regulations on May 19, as well as two guidance documents incorporated into the regulations by reference:

1. Ontario Regulation 144/16 - The Cap and Trade Program (the "Cap and Trade Regulation") and its incorporated Methodology for the Distribution of Ontario Emission Allowances Free of Charge (the "Methodology"); and
2. Ontario Regulation 143/16 - Quantification, Reporting and Verification of Greenhouse Gas Emissions Regulation (the "Reporting Regulation") and its incorporated Guideline for Quantification, Reporting and Verification of Greenhouse Gas (the "Guideline").

As noted in a previous article, Ontario is currently one of the largest per capita greenhouse gas emitters in the world. The Ontario government intends to use the cap and trade program as a market mechanism to aggressively reduce greenhouse gas emission levels and transition the province to a low-carbon economy.²

On June 8, 2016, the provincial government released Ontario's Five Year Climate Change Action Plan 2016 - 2020, which will be funded by the cap and trade program. The plan is discussed in more detail below.

Framework for Cap and Trade Program

The Act sets out the framework for the cap and program including requirements for quantifying, calculating, reporting and verifying greenhouse gas emissions, and submitting allowances and credits to match greenhouse gas emissions. It also provides the rules for creating and distributing allowances and credits through free allowances, auctions and sales, and it establishes an offset program.

The Cap and Trade Regulation and incorporated Methodology set out the details of the cap and trade program including caps, compliance periods, rules related to registration and participation, details regarding who is a mandatory participant and who can participate as a voluntary or market participant, as well as information on allocating emission allowances.

The Reporting Regulation and incorporated Guideline set out more details regarding quantifying, calculating, reporting and verifying greenhouse gas emissions.

Coordination with Other Jurisdictions

The Act allows for agreements to link Ontario's cap and trade program with programs in other jurisdictions as part of a broader international effort to reduce emissions.³ As we mentioned in a previous article, in 2008, Ontario joined with other jurisdictions, including Québec and California, to create the Western Climate Initiative model cap and trade program. Québec and California already have carbon markets, and Ontario has structured its cap and trade program to ultimately align with these existing markets.⁴

Greenhouse Gases and Reduction Targets

The Act and Reporting Regulation list the greenhouse gases that are covered by the regulatory regime including: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulphur hexafluoride, nitrogen trifluoride.⁵

Consistent with earlier drafts, the Act sets the following targets for reducing Ontario's overall greenhouse gas emissions from 1990 baseline levels:

• A 15% reduction by the end of 2020;
• A 37% reduction by the end of 2030; and
• An 80% reduction by the end of 2050.⁶

These targets are aligned with the recommendations made by the Intergovernmental Panel on Climate Change. The regulatory regime allows the government to make these targets more stringent and to establish additional interim targets.⁷

How will the New Cap and Trade Program Affect Businesses?

Registration deadlines for emitters start this fall, with training for registration starting in July, so it is important for corporations to understand their obligations going forward. We have included a cap and trade program timeline below with key dates for ease of reference.

Activities Covered

Schedule 2 of the Reporting Regulation specifies the activities that are covered by the cap and trade program, including the following types of production: cement; copper and nickel; glass; iron and steel; lead; petrochemical; and pulp and paper; and the following activities: coal storage; electricity generation; general stationary combustion; operation of equipment for a transmission system or a distribution system (electricity); operation of equipment related to the transmission, storage and transportation of natural gas; and petroleum refining.⁸

In addition to being responsible for their own facilities' emissions, electricity importers, natural gas distributors and petroleum product suppliers will be required to obtain emissions allowances for the greenhouse gas emissions associated with their customers (except for customers already participating in the cap and trade program as mandatory or voluntary participants).⁹ The Reporting Regulation includes two tables under Section 12 that sets out the requirements for these emitters.¹⁰

There are different reporting and registration requirements based on emission levels:

• If a facility produces 25,000 tonnes or more of greenhouse gas emissions (carbon dioxide equivalent or CO2e) per year, the owner or operator of the facility is subject to reporting requirements including emission verification requirements, and must register as a mandatory participant in the cap and trade program.¹¹
• If a facility produces between 10,000 and 25,000 tonnes of CO2e per year, the owner or operator of the facility is subject to reporting requirements, and may register as a voluntary participant in the cap and trade program.¹²
• If a facility produces less than 10,000 tonnes of CO2e per year, there are no reporting obligations, but the owner or operator of the facility may apply to register as a market participant in the cap and trade program.¹³

Registration and Reporting

The cap and trade program will take effect on Jan. 1, 2017 with the first 4-year compliance period ending Dec. 31, 2020.¹⁴ Subsequent compliance periods will last three years.¹⁵

Reporting obligations will continue under the current Greenhouse Gas Emissions Reporting Regulation (Ontario Regulation 452/09 under the Environmental Protection Act) until all reporting is complete.¹⁶

Mandatory Participants

Mandatory participants need to register by Nov. 30, 2016.17 The information required for registration is set out in Schedule 1 of the Cap and Trade Regulation.¹⁸

Voluntary and Market Participants

For emitters that are not required to register under the Act, the Cap and Trade Regulation contains provisions for voluntary participants and market participants. As noted above, a facility with annual emissions between 10,000 and 25,000 tonnes that is obliged to report emissions,¹⁹ may opt into the cap and trade program as a voluntary participant.²⁰ Voluntary participants may register in 2016 if they meet the criteria set out in section 29 of the Cap and Trade Regulation.²¹ There are also opportunities to register as a voluntary participant in 2017 or after 2017.²² Those who register as voluntary participants will be subject to the same requirements as mandatory participants, including the requirements to verify reported emissions. A person who is not a mandatory or voluntary participant may apply to register as a market participant.²³

Registration Training

While the deadline for registration for the cap and trade program is November, registration opens in early August 2016. All participants in the cap and trade program must first register to use the Compliance Instrument Tracking System Service ("CITSS"), an online program used by North American jurisdictions with cap and trade programs. CITSS tracks emissions allowances and offset credits. The Ministry will hold training sessions in July and August to cover the CITSS registration process. The registration process will take several weeks to complete, from submitting forms and security clearance documents to securing approval from the program director.

The Cap and Trade Regulation sets out application requirements for registration as an account agent as well as different classes of agents.²⁴

Emission Allowances

Under the Cap and Trade Regulation the Minister is required to create a set number of emission allowances that decreases each year.²⁵ One allowance is equal to one tonne of greenhouse gas equivalent (CO₂e). Regulated emitters will only be able to emit the amount of greenhouse gases permitted by their allowances.

Initially, a certain number of free allowances will be available for distribution to eligible participants.²⁶ The Cap and Trade Regulation and incorporated Methodology set out the application eligibility requirements for free allowances. Eligible participants can apply for free allowances in order to cover their emissions and the number allocated to them will be calculated based on the Methodology.²⁷ The application period for free allowances will begin in July 2016. The deadline for applying is Sept. 1, 2016 (Note: on Sept. 1, 2016, this deadline was extended to Sept. 16, 2016).

Auctions and Sales

As the total number of allowances in Ontario decreases each year and free allowances are phased out,²⁸ emitters will have to reduce their emissions or purchase allowances in the carbon market. Only registered participants, be they mandatory, voluntary or market, will be able to purchase, sell or trade emission allowances and credits.

The first auction for emission allowances is expected to take place in March 2017. Each year there will be four auctions with a single round of bidding.²⁹ The Minister may also offer distribution of allowances by sale starting in 2017. A maximum of four sales are allowed per year.³¹

Enforcement

Potential fines for non-compliance range from a minimum of $5,000 for individuals and $25,000 for corporations to as high as $6 million for individuals and $10 million for corporations.³²

What will happen to the proceeds from the Cap and Trade Program?

The Act establishes a Greenhouse Gas Reduction Account for the proceeds from the cap and trade program.³³ Schedule 1 of the Act sets out a list of climate change initiatives that could be funded from the account including: public transit, clean-tech innovation for industry, electric vehicle incentives and housing retrofits.³⁴ However, the Act requires the Minister to prepare a more specific Climate Change Action Plan that may be funded by the Greenhouse Gas Reduction Account.³⁴The provincial government may revise the plan and must review it every five years.³⁵

As noted above, on June 8, 2016, the Ontario government released its first Climate Change Action Plan: Ontario's Five Year Climate Change Action Plan 2016 - 2020 (the "CCAP"). The CCAP addresses the leading sources of greenhouse gas emissions in Ontario, including: transportation, industry, and energy inefficiency in buildings and homes. The government also plans to addresses climate change through better land use planning, and by supporting the research and development of low-carbon technologies. Among other plans to reduce emissions, the government intends to create incentives for the purchase of electric vehicles, increase the availability and use of lower-carbon fuel, improve public transportation, and provide incentives for apartment building energy retrofits.

Looking Ahead

The ministry has advised that it will release additional draft regulations for consultation in 2016 on:

1. Offset credit, describing the projects that will be eligible for offset credits. Mandatory and voluntary participants will be able to use offset credits to satisfy up to 8% of their total compliance obligation in place of emission allowances;
2. Administrative monetary penalties, describing what types of contraventions attract which administrative monetary penalties; and
3. First Nations impact mitigation, exempting certain fuels delivered to reserves for use by First Nations from the cap and trade program.

The Ontario government has also advised that it will continue to work with Québec and California to link Ontario's carbon market with theirs. The Ministry anticipates proposing an amendment to the Cap and Trade Regulation in mid-2017 to facilitate this linkage.

Cap and Trade Program Timeline