What is Cap and Trade?
Cap and trade is not a carbon tax, but a carbon market that generates substantial revenues for governments and participants.
Cap and Trade (C&T) programs are modelled on the Canadian cap and trade program set up in 1985 to cap Sulphur dioxide, the cause of acid rain in the Great Lakes. It was so successful that the United States, and northern Europe joined to cap this airborne transboundary pollutant.
C&T comprehensively reduces greenhouse gas (GHG) emissions from all known sources – industry, buildings, and vehicles by a specified amount at the end of the compliance period; and it engages governments, businesses, and individuals. A carbon tax is limited to fuel at the pump that is collected by the ministry of finance without a specific GHG reduction target.
Ontario is a founding member of the Western Climate Initiative (WCI) and officially joined when its C&T program came into effect on January 1, 2017. The program is worth billions of dollars to the economy. On January 1, 2018 Ontario was internationally and nationally linked with the California and Quebec C&T programs to form the second largest low carbon economy in the world.
The Ontario Ministry of the Environment and Climate Change (MOECC) operates the C&T program like a securities market with strict accountability, transparency, and enforcement that makes the chief officer, or members of the board of directors directly responsible.
Ontario’s first compliance period ends December 31, 2020 when emissions and allowances must be trued-up.
What are emission allowances?
- One emissions allowance is equal to one metric tonne of GHG emissions. The 2018 Ontario reserve price for 1 allowance at the joint auction is $14.68.
- Allowances are financial instruments.
- Participants buy allowances at the joint auction, or over the counter from a market participant.
- Participants sell excess allowances over the counter with a market participant.
What type of participants are in the C&T program?
There are three types of participants in Ontario’s C&T program based upon their annual GHG emissions: mandatory, voluntary, and market.
Mandatory Participants - Facilities
These mandatory participants are facilities that have their emissions capped. They emit more than 25,000 metric tonnes of GHG annually. They’ve been reporting their verified emissions since 2010. The C&T program provides them with free emissions allowances worth hundreds of millions of dollars during the first compliance period to help finance the transition to the low carbon economy. Starting in 2018 the free allowances are being reduced annually by 4.57%.
As a financial reward to encourage capped participants to true-up early in the first compliance period, the Ontario government has set aside 2 million free emissions allowances as a one-time incentive.
Mandatory Participants – Fossil fuel and electricity
These mandatory participants have their emissions capped; however, they do not get free allowances. They are the natural gas distributors, petroleum suppliers that sell more than 200 liters of product, and electricity importers. They add a C&T charge to their customers’ bills which provides the funds for them to purchase the allowances needed to match the emissions as a result of the sale of their products.
The fossil fuel and electricity mandatory participants started reporting their GHG emissions in 2016, and their verified reporting in 2017.
Voluntary participants elect to enroll in the C&T program because it is beneficial. Their emissions are capped. They are subject to the same requirements as mandatory participants –facilities, but emit less than 25,000 and more than 10,000 metric tonnes of GHG annually.
Market participants have no emissions compliance and are independent. Market participants facilitate the carbon market with the buying and selling of allowances either OTC, or at the joint auction. SMV Energy Solutions is a registered market participant.
Contact us at SMV Energy Solutions to buy or sell emissions allowances.