(Updates Ontario power sector emissions levels based on new ministerial data)

Ontario should consider a number of important issues faced by North America’s first carbon markets including stemming financial outflows, experts said Monday, as the Canadian province prepares to release draft rules for its emissions trading scheme.

Ontario is designing a cap-and-trade programme to help the province meet its goal to cut emissions by 37% below 1990 levels by 2030, and is hoping to link its market with those of California and Quebec under the WCI programme.

The scheme’s rules are expected to be published for consultation shortly, while the market’s launch is anticipated for 2017.

But like neighbouring Quebec, Ontario’s large and easy GHG abatement options may be limited, meaning it may have to rely heavily on importing California allowances to get its emissions down less expensively.

That, however, could lead to hundreds of millions of dollars flowing out of province.

“(Ontario must) think carefully about the flows of dollars given how the markets are structured,” said Paul Hibbard, vice president of the Analysis Group, on Monday.

He was reflecting on the experiences of RGGI, North America’s first carbon market, as part of a panel discussion at a Canadian carbon market conference in Toronto organised by EUCI.

As of the Nov. 1 deadline for WCI compliance for 2013-2014, California’s biggest emitters were sitting on a surplus of more than 30 million allowances.  In contrast, Quebec is forecast to be a net buyer of 14.4-18.3 million California units by 2020, said Mark Purdon of the Quebec Institute of Carbon, citing two studies – outflows that could send more than half a billion dollars California’s way.

“When (Ontario’s) electricity sales to New York go into negative pricing, that’s pretty much front page news pretty much every time and Ontarians frankly hate it,” said Devin McCarthy, director of generation and environment at the Canadian Electricity Association.

“So if the compliance mechanism is the outflow of dollars to purchases (carbon units), I can imagine that will raise some eyebrows.”

NO COAL

Ontario has phased out all of its coal-fired generation over the past decade, meaning the vast majority of its electricity now comes from low-carbon nuclear and hydroelectric sources.

This has led power sector emissions to drop from over 30 million tonnes in 2005 to around 11 million currently, pushing the sector’s share of Ontario’s total GHG emissions to around 7%.

And with natural gas as the only major remaining CO2-emitting electricity source, accounting for at most a 10% share at any given time, that narrows the abatement options within the province’s power sector.

“There’s not much improvement that can be made in (gas), and if there was it would have already been done,” another delegate from a large utility based in Western Canada said.

“The carbon markets in Ontario and Quebec are very inelastic because of the nature of the (power) fleet … Where you’re going to (cut carbon), I don’t think it’s going to be in the electricity sector,” he added.

TRANSPORT & INDUSTRY

Ontario’s two biggest sources of emissions are transportation and industry.

Cutting transportation emissions typically involves more stringent vehicle fuel standards or increasing the price at the pump to encourage less demand.

Delegates at the conference noted that introducing a carbon component to gasoline prices as part of Ontario’s carbon market may be more digestible by drivers at the moment amid lower crude oil prices worldwide, but may have limited effect on cutting CO2 as it would push prices up slightly, keeping them within a normal range seen over the past few years.

Meanwhile, while industry may face increased risks of carbon leakage under an Ontario cap-and-trade programme, some delegates noted that a comparatively weak Canadian dollar could cushion the scheme’s initial impact and help keep manufacturing in Canada.

“The foreign exchange issue cannot be overstated,” the Western Canadian utility delegate said, referring to its potential impact on an Ontario carbon market.

“One of the best strategies that Ontario could employ, given how adamant they are to connect to California, is maybe some pre-hedging with financial instruments … But it’s not that simple because you also need an active desk that’s going to lock in or manage your forex exposure.”

Delegates heard that another way to lessen the impact of the Ontario scheme’s introduction could be to increase the usage limit for carbon offsets above the 8% currently imposed by Quebec and California as a way of reducing compliance costs, curbing provincial cash outflows, and fuelling low-carbon innovation in the province.

PRICE COLLAR

While many of the features of Ontario’s carbon market are expected to be similar to those in Quebec and California, one panellist said the province should consider modifying the allowance price collar as imposed under WCI.

Carbon units in the scheme face a price floor and ceiling that started at $10 and $40 respectively, and that both increase annually at a rate of 5% plus inflation.

“There’s this compounding effect and as we look at post-2020 regulatory amendments (to the scheme), by the time we get to 2030 that $30 spread becomes $90, so that will need to be looked at, I believe, to get some price certainty, which is why it was put in in the first place,” said Brad Neff, manager of long-term energy policy at California-based utility Pacific Gas & Electric.

He added that Ontario should also be mindful of which CO2 measurement units to use, as California currently uses metric tonnes while RGGI, and potentially other future state or regional markets emerging under the Clean Power Plan, measure in short tons.

“All those little things need to be worked out as we bring these (markets) together.”

By Mike Szabo – mike@carbon-pulse.com