The Ontario government on Friday circulated to stakeholders a draft design plan for the Canadian province’s new carbon market, proposing to give regulated industries all of their allowances for free for the first four years while considering the introduction of carbon tariffs as extra protection.

Ontario wants to launch its emissions trading scheme in Jan. 2017, with the first allowance auction to be held two months later, the 66-page report said, confirming comments made by the province’s Minister of Environment and Climate Change Glen Murray to Carbon Pulse on Tuesday.

“We’re pleased to see added clarity on the design options and timeline. Ontario’s direction on some aspects, including addressing competitiveness and expanding eligible offset protocols from the outset of the program, are welcome, but other elements require further dissection and input,” said Katie Sullivan, director of North American policy & international climate finance at the International Emissions Trading Association.

Ontario has also proposed connecting a year later to Quebec and California’s carbon markets, which are linked under the Western Climate Initiative (WCI). However, prior to green-lighting the link, Ontario’s future trading partners may request further discussions on key areas such as its generous allocation levels and its consideration of imposing border carbon adjustments on a number of its trade-exposed sectors.

Environmental campaigners said the design plan “hits the mark” with the exception of the generous free allocations, which the province has suggested it could award to even those industries at low risk of carbon leakage.

“Leakage concerns … are real and they need to be addressed, but if so-called energy-intensive and trade-exposed firms don’t have to pay for any of their emissions, there’s not much incentive to reduce those emissions,” said Environmental Defence’s Allen Braude.

“Neither California nor Quebec … gave out free permits to all the energy-intensive (and) trade-exposed firms. Only firms with a high leakage risk got all their permits free in California.”

Ontario’s Ministry of Environment and Climate Change has requested stakeholders submit comments by Dec. 15, with all feedback collected to be summarised and discussed via a webinar in Jan. 2016.

That will provide some final input before a draft regulatory proposal is tabled in early 2016, but a public consultation will follow.

Ontario is to release a new climate change strategy before the end of the year, outlining a more comprehensive plan to hit its 2020, 2030, and 2050 GHG reduction targets.

However, Friday’s proposal notes that cap-and-trade is to be “primary tool” for achieving Ontario’s 2020 target to cut emissions by 15% below 1990 levels, and that the province’s wider climate strategy will feature measures that complement its carbon market.

Below are Carbon Pulse’s key takeaways from Ontario’s draft design proposal:

LAUNCH

• A Jan. 2017 start is proposed (the earliest date possible due to technological and regulatory considerations), because delaying implementation would increase the rate at which the emissions cap would need to shrink to meet future targets.
• The proposal estimates the cap would need to reduce by 3.7% annually to meet the 2020 target, though it notes some sectors and types of emissions could face different rates of decline. In contrast, Quebec’s declines by 3.2-3.7% between 2015-2020, and California’s by 3.1-3.5% during the same timeframe.
• The 2017 cap would be set at the forecast emissions level for that year (yet to be published), then fall to facilitate meeting the 2030 and 2050 targets of -37% and -80% below 1990 levels respectively.
• Ontario’s first auction is seen held in Mar. 2017, with a goal to align its sales later that year with California and Quebec’s quarterly auctions.
• Ontario is eyeing full linkage to WCI for the programme’s third trading phase (2018-2020), culminating a four-year compliance period for the province that sets a Nov. 1, 2021 deadline to surrender carbon units.
• It added that it is also considering a one-time partial true-up period at an earlier date, where installations would be required to cover a smaller portion of their emissions, in order to help companies prepare for the final compliance period deadline.

SCOPE

• The ETS is to have a broad scope, nearly economy-wide and covering all emissions that can be “reliably measured of estimated”. Coverage is to include:
  • Power sector including imported electricity
  • Industry
  • Institutions
  • Transportation fuel including propane and fuel oil
  • Natural gas distribution (heating fuel)
  • Waste-to-energy facilities are also being considered
• Emissions threshold and power generator/fuel distributor obligation levels are to be similar to WCI’s.
• All regulated sources and emission types are to join scheme from beginning (i.e., no sectors to be phased in later).
• New industrial and institutional entrants are to be “treated in a manner that fosters growth while maintaining a level playing field with existing facilities”.
• Installations that begin operating from 2016 would face compliance in their third year of operation, while existing facilities that expand beyond the emissions threshold would need to comply the year they qualify.
• Ontario will allow entities in regulated sectors that have emissions below the threshold to participate voluntarily, while those that see their emissions fall below the limit can choose to stay in or leave the scheme.
• “If Ontario links with Quebec and California, anticipate that there would be limited flexibility (on market design) as parameters must be harmonised to allow for the use of shared infrastructure and to maintain the same level of rigour,” the proposal said.

FREE ALLOCATIONS VS AUCTIONS

• The document suggests that most allowances could be given away for free initially, including 100% of those allocated to all industries and institutions, regardless of their risk of carbon leakage.
• The free allocation levels are to be calculated using “a method based on California’s approach” and decline over time, with the rate of reduction to be determined via a programme review before the end of the first compliance period.
• Installation-level allocations could also take into account product-output benchmarks or early reduction credits, with other influencing factors included whether other jurisdictions adopt carbon pricing policies or whether Ontario imposes border carbon adjustments.
• Any allowances not given away for free or set aside in a strategic reserve would be sold at auction.
• Allowance auction revenues should be reinvested in complementary measures to support GHG reductions, including “made-in-Ontario” initiatives that help households and businesses cut both CO2 and costs by funding building retrofits and low-carbon transportation options.
• The strategy proposes setting a minimum price through an auction reserve price, and introducing a strategic reserve to control price rises. Both will be aligned with those in the WCI from 2017, but Ontario’s strategic reserve could differ from those in Quebec and California in that Ontario may withhold a flat 5% of total allowances annually (compared to a rising percentage in WCI). However, Ontario’s reserve sale price tiers would be aligned with its partners’.

BORDER CARBON ADJUSTMENTS

• Ontario said it is mulling introducing border carbon adjustments for electricity and fuels, while two ministries are also “actively considering” applying them for other sectors to be covered by the ETS.
• It notes California’s consideration of similar measures to protect its cement industry.

BANKING & PENALTIES

• The plan proposes allowing participants to bank allowances through to future compliance periods, with no restrictions on how long the units can be banked or how many (other than the holding limits currently enforced under WCI).
• However, borrowing from future allocations will not be allowed, with a possible exception for those companies facing non-compliance penalties.
• Ontario proposes adopting WCI’s non-compliance rules, which include obliging an installation that didn’t surrender sufficient carbon units to submit four times the number it failed to hand in.

OFFSETS

• Ontario proposes limiting the use of offsets to 8% of verified emissions, matching WCI, and says it will recognise those issued by Quebec and California.
• It wants to also allow offsets generated from initiatives anywhere in Canada, and let identical projects be bundled together for reporting purposes.
• The proposal notes the Ontario-Quebec partnership announced earlier this year to develop a series of common offset protocols, adding that a Nov. 27 deadline has been set in a tender to help develop 10 more methodologies, including:
  • N2O reductions from fertiliser management in agriculture
  • Emissions reductions from livestock
  • Organic waste digestion
  • Organic waste management
  • Forest projects (i.e. reforestation, improved forest management)
  • Afforestation
  • Urban forest projects
  • Grassland conservation
  • Conservation cropping
  • Refrigeration systems
• The document did not mention whether Ontario would follow California’s ‘invalidation period’ model or Quebec’s state-run buffer pool that replaces any annulled credits, though sources, citing the provincial partnership, suggested it would likely be the latter.

The report noted that Manitoba, Ontario’s neighbour to the west, is also considering launching an emissions trading scheme.

By Mike Szabo – mike@carbon-pulse.com

Not yet signed up to CP Daily? Subscribe to our free newsletter here