Ontario prepares cap-and-trade system to put a price on carbon, reduce emissions

Ontario is preparing to introduce a cap-and-trade system to put a price on carbon emissions and reduce greenhouse gases, but it will mean extra costs for businesses.

• Ontario to detail cap-and-trade system for carbon emissions in coming days
• Environmental watchdog says Ontario gives large scale water users a free ride

A document circulated to industry and business leaders this fall for comment shows the Liberal government wants to reduce Ontario's greenhouse gas emissions to 15 per cent below 1990 levels by the year 2020.

It says the cap and trade scheme will have to start by Jan. 1, 2017, and would require that the limit on emissions decline by 3.7 per cent each year to achieve the 2020 target. Quebec's cap is scheduled to decline between 3.2 and 3.7 per cent a year between 2015 and 2020, while California's is set to decline 3.1 to 3.5 per cent.

The first auction of emission allowances for Ontario companies would be held March 2017, and similar auctions would be held quarterly, initially just for Ontario but eventually joint sales would be held with Quebec and California.

Industrial and institutional sources that produce at least 25,000 tonnes of greenhouse gas emissions a year would be able to purchase carbon allowances that they can hold or trade with others if they come in under their own cap in any year.

The province also wants to allow sales from a strategic reserve of carbon allowances, but only so companies can comply with their current emissions cap.

The document shows there are a lot of rules still to be worked out, such as which sectors should be covered by cap and trade, which ones should get free carbon allowances to help them adjust to the system, and who should make those decisions.

There's also a concern about what the experts call "leakage," the fear that some businesses or industries could leave Ontario for other jurisdictions that haven't put a price on carbon, which gives those areas a competitive advantage.

"A cap and trade program will promote productivity and innovation to transition Ontario households and businesses to a low-carbon economy while reducing the risk of carbon leakage," said the paper listing design elements for the plan.

Ontario plans to link its cap and trade plan with similar schemes in Quebec and California, which the discussion paper said would "help level the international playing field by harmonizing carbon prices across jurisdictions."

It would also help standardize reporting requirements and provide a common approach for assessing emission reductions.

The plan could cover two types of emissions: those from the combustion of fossil fuels and fixed process emissions involving "chemical or physical reactions, other than combustion," where the primary purpose is not energy production.

"Including fixed process emissions would encourage reduction of those emissions and would create a reward for discovering new ways of creating products with lower process emissions," said the discussion paper.

A coalition of 50 business, labour, agricultural and environmental groups calling itself the Clean Economy Alliance says putting a price on carbon is the best way to combat climate change, and rejects suggestions it will harm the economy.

"Jurisdictions around the world are putting a price on carbon," said Tim Gray of Environmental Defence. "In those places the sky has not fallen, but emissions have."

Environment and Climate Change Minister Glen Murray said the polluter pay principle is what's behind the cap and trade scheme to put a price on carbon emissions, and he's optimistic the new Liberal government in Ottawa will help Ontario with its plan.

"There's a huge amount of enthusiasm and excitement right now, because the previous government would not even allow us to talk about climate change at federal-provincial tables," said Murray.

The price of gasoline rose slightly in Quebec and California after they adopted a cap and trade system, but it's not clear if Ontario will offer rebates or other offsets to help individuals cope with the additional costs of the new plan.

The Progressive Conservatives have called it a "tax on everything" since companies will likely pass on costs of cap and trade to consumers.

There are estimates the plan could generate up to $2 billion a year in revenue for the Ontario government, which Premier Kathleen Wynne has pledged would be reinvested in projects to help the province get to a lower carbon economy.

The Liberal government has promised to release its climate change strategy by the end of this year, and will release the draft regulations on cap and trade early in the new year for public comment.