About Cap and Trade
Although the Ontario government cancelled its Cap and Trade program in 2018 on the erroneous basis that it was a carbon tax, the program is still operating in other provinces, and in several U.S. states, including variations thereof. Governments have benefited from the C&T program as it offers generous financial assistance to businesses, consumers, and governments to transition to the low carbon economy without raising taxes, and at the same time it makes significant reductions in greenhouse gas emissions over a short period of time.
Having a better understanding of how the C&T program works is worthwhile as it is a government program that addresses the climate crisis in a meaningful and substantive way in a short period of time, and that is the purpose of including this section.
What is Cap and Trade?
Cap and Trade programs are modelled on the Canadian C&T program set up in 1985 to cap Sulphur dioxide emissions, the cause of acid rain in the Great Lakes. It was so successful at reducing emissions that the United States, and northern Europe joined in to cap this airborne trans-boundary pollutant.
C&T comprehensively reduces greenhouse gas (GHG) emissions from all known sources – industry, facilities, and vehicles by a specified amount at the end of the compliance period; and it engages governments, businesses, and individuals to achieve these goals. In comparison, a carbon tax is limited to the Ministry of Finance taxing fuel at the pump without a specific GHG reduction target, or an accurate accounting of GHG emissions.
Ontario was a founding member of the Western Climate Initiative (WCI) along with Quebec and the state of California, but it took eight years for Ontario to activate its C&T program, and when it did, the program provided billions of dollars without raising taxes. The funds were used for many green initiatives in transportation and other infrastructures, investments in green innovations, green bonds, and generous green subsidies for electric vehicles and energy improvements in residential and commercial buildings. When Ontario was internationally and nationally linked with the California and Quebec C&T programs on January 1, 2018, it formed the second largest low carbon economy in the world.
The Ontario Ministry of the Environment and Climate Change (MOECC) operated the C&T program like a securities market with strict accountability, transparency, and enforcement by making the participants’ chief officer, or members of the board of directors directly responsible.
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 was $14.68 (the Quebec reserve price for March 2022 was $18.69).
- Allowances are financial instruments.
- Participants buy allowances at the joint auction, or over the counter from a market participant who acts as a broker.
- Participants can only sell excess allowances over the counter with a market participant, or directly to other participants.
What type of participants are in the C&T program?
There were three types of participants in Ontario’s C&T program based upon their annual GHG emissions: mandatory, voluntary, and market.
Mandatory Participants - Facilities
Mandatory participants were facilities that had their emissions capped. They emitted more than 25,000 metric tonnes of GHG annually, and started reporting their verified emissions since 2010. The C&T program provided 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 were 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 had set aside 2 million free emissions allowances as a one-time incentive that could be sold for a profit to other participants in the program.
Mandatory Participants – Fossil fuel and electricity
These mandatory participants had their emissions capped; however, they did not get free allowances. They were the natural gas distributors, petroleum suppliers that sold more than 200 litres of product, and electricity importers. The natural gas distributors added a C&T charge (not a tax) to their customers’ bills that was eventually itemized for the consumer like the HST. Petroleum suppliers included the C&T charge to their customers’ bill at the pump. The natural gas and petroleum suppliers then had the funds from their customers 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 had lower emissions than mandatory participants, but elected to enrol in the C&T program because of its many benefits. Their emissions were capped and they received free allowances. They were subjected to the same requirements as mandatory participants, but emitted 10,000 or more metric tonnes of GHG annually.
Market participants had no emissions compliance and were independent. Market participants facilitated the carbon market with the buying and selling of allowances either over-the-counter, or buying at the joint auction. SMV Energy Solutions was a registered market participant until the Ford government cancelled the C&T program in 2018.
Consumers were subject to the carbon charge on natural gas (methane), and on gasoline and diesel purchases at the pumps by the mandatory participants in the natural gas, fossil fuel, and imported electricity sectors.