Canada: Full Steam Ahead: Ontario Releases Draft Cap And Trade Regulations And Revised Guideline For GHG Reporting

Status of Draft Regulation

• Regulatory proposal for a cap-and-trade regulation (including an appendix presenting detailed technical information for the distribution of allowances to eligible capped emitters for the first compliance period (2017-2020) and details related to early reduction credits) released by MOECC on February 25, 2016 for a 45-day public review and comment period.
• Comments accepted between February 25, 2016 and April 10, 2016.

• Authorized by proposed Climate Change Mitigation and Low-carbon Economy Act (Bill 172) introduced into the legislature on February 24, 2016. This proposal has been posted for a 30-day public review and comment period. Comments accepted between February 24, 2016 and March 25, 2016.
• Bill 172 outlines provisions relating to two main areas: (1) emissions reduction targets and action plans, and (2) cap-and-trade program and use of proceeds.

• The cap-and-trade program will take effect as of January 1, 2017 with the first compliance period ending December 31, 2020. Thereafter, compliance periods will last three years (i.e. starting January 1, 2021 until December 31, 2023, and so on).

• Sources that emit ≥25,000 tonnes of CO₂e/year are subject to the cap-and-trade program.

• In addition to mandatory participants, the Draft Regulation contains provisions for voluntary participants and market participants.
• A facility that is obliged to report emissions under the Greenhouse Gas Emissions Reporting Regulation (O.Reg. 452/09) (the Reporting Regulation), with annual emissions of between 10,000 and 25,000 tonnes, may opt-in to the cap-and-trade program as a voluntary participant. This approach allows companies with smaller emissions profiles to participate on the same basis as larger emitters in the same sector, including access to free allocation of allowances.
• A person who is not an employee of a mandatory or voluntary participant in the cap-and-trade program may apply to register as a market participant.

• carbon dioxide;
• methane;
• nitrous oxide;
• hydrofluorocarbons;
• perfluorocarbons;
• sulphur hexafluoride;
• nitrogen trifluoride;

and such other contaminants as may be prescribed as a greenhouse gas by the regulations.

• All activities set out in Table 2 of the Reporting Regulation that are engaged in at a single facility (i.e. the large industrial emitters).
• Electricity importation.
• Natural gas distribution.
• Petroleum product supply.

The cap-and-trade program will cover approximately 82% of the Ontario's total GHG emissions.

• Industrial and institutional sources with annual GHG emissions ≥25,000 tonnes: at the point of emission (i.e. at the facility).
• Domestic electricity generation: at the fuel distributor level.
• Electricity imports: at the point the electricity enters the province (first jurisdictional deliverer).
• Transportation fuels (including fuel oil and propane): at the distribution level where they are first placed into the market; imports and domestics covered at volumes of 200 litres or more and that are delivered to an Ontario consumer.
• Distribution of natural gas: for distributors of natural gas that, in aggregate, is associated with annual GHG emissions ≥25,000 tonnes, the point of regulation would be at the point the gas is transferred from pipeline into the distribution network for local customers.

Allowance Allocation

• Emitters covered under the program must hold an allowance for every tonne of greenhouse gas emissions released.
• As the cap declines each year, emitters would need to hold a sufficient number of allowances to cover their annual emissions. To comply, emitters could reduce their emissions or purchase allowances in the carbon market.
• Allowances will be distributed through auctions and free-of-charge allocation to industry.
• Emissions attributable to electricity generation would not be eligible for free allocation of allowances, but emissions due to intensive production of a trade exposed good will be eligible.
• Free allocation amount will decline over time. The timing for the decline will be determined before the end of the first compliance period as part of a program review. The proportion of free allowances will decline as other jurisdictions adopt carbon policies, Ontario entities transition to the carbon price, and border carbon adjustments are introduced.
• The rest of the allowances (i.e. those not distributed free-of-charge) will be sold at auction.

• Facility allocations will be determined primarily by three factors and calculated based on the equations set out in the Draft Regulation. The three factors include the following:
  • Assistance Factor (up to 100%); certain emissions intensive and trade exposed industries will receive a higher assistance factor.
  • Base amount for facility, determined according to product-output benchmarks (based on allowances per unit of output), energy use (based on allowances per GJ of energy used) or historical emissions.
  • Cap Adjustment Factor (reflects annual reduction in the cap)
• Examples of sectors or facilities eligible for allocation based on product-output benchmarks: iron and steel making; petroleum refining; grey cement manufacturing; hydrogen manufacturing; beer manufacturing.
• Examples of sectors or facilities eligible for allocation based on energy use: eligibility requirements under this category are based on exclusions set out the Appendix to the Draft Regulation – facilities that use energy in certain processes, operations or activities are not eligible for this type of allocation.
• Examples of sectors or facilities eligible for allocation based on historical emissions: white cement manufacturing; glass manufacturing; ammonia manufacturing; nitric acid manufacturing; carbon black manufacturing; ethylene manufacturing; lubricant manufacturing; styrene manufacturing; magnesium production; high calcium lime production; dolomite lime production; mining, base metal smelting, refining; brick making; and mineral wool insulation manufacturing.
• Direct allocations will also be made to certain participants (as set out in the Appendix to the Draft Regulation), including: Carmeuse Lime Canada; Terra International (Canada) Inc.; University of Toronto; University of Western Ontario; University of Guelph; York University; London Health Sciences Centre; Hamilton Health Sciences Corporation; Queen's University; Emerald Energy From Waste Inc; and Clean Harbors Canada Inc.

• Quarterly auctions – initially separate; joint auctions once the program is officially linked to Quebec and California.
• Sealed bid, single round, lots sizes of 1000 allowances, uniform price.
• First auction: March 2017 stand-alone auction (to be aligned with Quebec and California's schedule where auctions are currently held every quarter).
• Participants must provide financial guarantee covering full value of any bid.

A summary of the results of the February 2016 Quebec-California auction is available online.

• Ontario will align its reserve price with the price in the joint Quebec-California market for 2017. The 2016 reserve price in Québec and California was CAD $12.82 and US $12.73 respectively.

Strategic Reserve

• 5% of total allowances from the cap each year will be set aside by the province in a strategic reserve and made available to Ontario emitters at fixed prices to manage price impacts in the event there is high demand for allowances.
• Ontario plans to align its price tiers with the price in the joint Quebec-California market for 2017. For Quebec and California, these price tiers were set at $40, $45 and $50 per allowance in 2013, escalating annually at 5% plus inflation and converted to Canadian currency.
• Only covered entities can purchases allowances from reserve and allowances can only be used for compliance.

• Early Reduction Credits will only be awarded for reductions of eligible emissions during the reduction period between January 1, 2012 and December 31, 2015.
• Eligibility criteria and calculation methods are set out in the Appendix to the Draft Regulation.

• A holding limit will apply to any registered entity, which will depend on supply of allowances in the market.
• A purchase limit prevents covered entities from purchasing more than 25% of allowances sold at auction; for non-covered entities the limit is 4%.

Market Flexibility

• Purchasers and covered entities would be allowed to bank allowances, without restrictions on the amount of allowances that may be banked or on how long they may be banked (subject to holding limit).

• Borrowing of allowances from future compliance periods will not be allowed (with possible exception for complying with penalty rule).

• Ontario intends to allow the use of offsets for compliance in its program, and to take account of protocols for project types currently accepted in Quebec and California. The draft regulation for offsets will be released later in 2016.
• Ontario plans to:
  • establish an Offset Credit Registry;
  • issue offset credits for emissions reductions and removals from eligible projects within Canada;
  • allow for the aggregation of projects (bundling of identical projects for reporting purposes);
  • recognize offset credits issued by California and Quebec, in anticipation of linking to Ontario's program; and
  • limit use of offsets to up to 8% of the total compliance obligation.

• Initial four year compliance period to allow harmonization in a linked program with Quebec and California's compliance periods. Subsequent compliance periods will be three years.

Emissions Reporting and Verification

• Capped participants must report annually under the Reporting Regulation (as required since 2010).

• All participants must register with MOECC to participate in allowance trading market.

• Third party verification is required for sources emitting ≥25,000 tonnes per year, or exceeds another verification threshold listed in the Reporting Regulation.

Compliance and Enforcement

• Following a compliance period, all entities with a compliance obligation must surrender a number of compliance units (e.g. allowances, offset credits) equal to their emissions during the period. This process is commonly referred to as a true-up.
• Acceptable compliance units for true-up include emission allowances, strategic reserve allowances, early reduction credits and offset credits issued by Ontario.
• For entities with a compliance obligation, the requisite number of compliance units from each entity's compliance account will be placed into a retirement account and retired.
• Any entity participating in the cap-and-trade market (including voluntary participants) may choose to voluntarily retire allowances or offset credits to benefit the environment.
• An entity will be permitted to use offset credits for up to 8% of its total compliance obligation for each compliance period.

• An entity with excess emissions will be subject to a three-to-one compliance penalty where an additional three allowances for each allowance short at true-up is required, plus the allowance originally owed (meaning that four allowances must be surrendered for every tonne not covered in time).

• Enforcement measures for the cap-and-trade program are aligned with those measures set out in the Quebec and California cap-and-trade programs.
• Potential fines for non-compliance with the Act or related regulations range from minimum fines set at $5,000 and $25,000 to maximums as high as $4 million and $6M million for individuals and corporations, respectively, on first convictions. The Act also allows for the issuance of administrative monetary penalties, which are similar to the environmental penalties that can be issued under the Ontario Environmental Protection Act and the Ontario Water Resources Act.

Linking

• Ontario intends to link its proposed cap-and-trade program with the existing programs in Quebec and California, which will likely occur in 2018.
• Ontario will propose any necessary amendments to the regulations to facilitate linking of the Ontario program with the programs of Quebec and California once linking agreements are in place (Quebec and California are currently parties to a linking agreement for their joint program). These amendments would include:
  • recognition of allowances and credits from Quebec and California;
  • adjustment of the holding limits and purchase limits to account for the size of the linked markets; and
  • currency adjustments related to the auction.
• Manitoba has indicated that it plans to join the linked program as well.