Love them and leave them: Taking a Closer Look at the Implications of Ontario’s Announcement to Cancel its Cap-and-Trade Program

As promised during the election campaign, Ontario Premier-Designate Doug Ford announced that Ontario’s incoming government would dismantle the greenhouse gas (GHG) emission trading system, which has been in force in Ontario since January 1, 2017. In a press release issued on June 15, 2018, Mr. Ford indicated that his cabinet’s first act once his government is sworn in will be to take immediate action to cancel the province's current cap-and-trade scheme. This will include serving notice of its withdrawal from the joint agreement linking Ontario, Québec and California's cap-and-trade markets as well as the Western Climate Initiative, and challenging the federal government’s jurisdiction to impose a carbon pricing scheme on provincial and territorial jurisdictions that do not have carbon pricing systems that align with the federal benchmark. More details on the federal carbon pricing backstop, which is expected to come into force in 2019, are available in our earlier blog post.  

Overview of Ontario’s Cap-and-Trade Program

Ontario’s cap-and-trade program is authorized under the Climate Change Mitigation and Low-carbon Economy Act, 2016 (the Act) and its implementing regulations, a key climate change policy initiative of the now defeated provincial Liberals. In particular, the cap-and-trade program was the primary tool to help Ontario achieve its ambitious GHG reduction targets of 15% below 1990 levels by 2020, 37% by 2030 and 80% by 2050. Under the regime, industrial sectors including manufacturing, electricity and fuel distribution are required to purchase emission allowances to cover each tonne of GHG emissions resulting from their activities and the combustion of fuel distributed. On September 22, 2017, Ontario entered into a formal agreement with the Province of Québec and the State of California to join their carbon market starting on January 1, 2018. As a result, joint auctions have been held since the beginning of the year and have involved the purchase and sale of allowances among Ontario, Québec and California entities from a common pool of allowances. During the most recent auction of emission allowances held on May 15, 2018, a total of 90,587,738 current (2016 and 2018 vintage) GHG emission allowances were sold at a settlement price of $18.72 CAD, and a total of 6,057,000 future (2021 vintage) allowances were sold at a settlement price of $18.56 CAD. However, the program enabled a number of trade-exposed industrial companies to receive a significant portion of free allowances from the Government, thus reducing the need to purchase allowances. The trading system provides that the amount of free allowances distributed to emitters declines every year, thus gradually increasing either GHG reduction efforts or cost of allowances needed to close the gap between free allowances received and total GHG emissions reported during a given compliance period.

The Act provides that all auction proceeds shall be directed to the Greenhouse Gas Reduction Account, which has raised $2.87 billion so far. This account is used to fund green initiatives that reduce or support reduction of GHG emissions.

Recent Developments and What to Expect Next

Although legislative action will likely be required to terminate the Ontario cap-and-trade program, the consequences of Mr. Ford’s announcement are already tangible. On June 15, 2018, a market notice was issued stating that Québec and California “were working together to ensure that the environmental integrity and stringency of [their] cap and trade program and market is maintained” and the Compliance Instrument Tracking System Service (CITSS) was modified to prevent transfers of compliance instruments between entities registered in Ontario and entities registered in either California or Québec. Also, the most recent auction notice regarding the next joint auction sale scheduled for August 14, 2018 indicated that the Ontario Government has decided to decline participating to the coming auction sale and that, as a result, Ontario entities will be excluded from the auction. The cancellation of the cap-and-trade program in Ontario has also resulted in the effective closure of several green initiatives programs funded by the Greenhouse Gas Reduction Account including the GreenON Industries Program which provided significant financial support for eligible clean technology projects and large-scale technology deployment and facility modernization and the GreenON Small and Medium Businesses program which offered financial incentives for capital retro-fits and energy saving projects.

Mr. Ford’s announcement on June 15 was quickly followed by a press release from the Québec Minister of Sustainable Development, Environment and the Fight against Climate Change confirming that Québec would cooperate with the Ontario’s government in order to minimize any impact on the carbon market. Although the Minister expressed confidence in the long-term survival of the Québec-California market, the medium- and long-term impacts of Ontario’s withdrawal remain to be seen.

Following the official dismantling of Ontario cap-and-trade program, claims against the Ontario Government are expected from companies that were subject to the province’s program.

Ontario businesses have incurred significant costs to participate in the cap-and-trade program to date, having spent over $2.8 billion for allowances which may no longer have any value. The Ontario Government is at risk of being sued by emitters and non-governmental organizations but the outcomes of such claims are extremely difficult to predict.  

On the federal front, Mr. Ford’s intent is aligned with that of the Saskatchewan Government, which launched a constitutional reference case before the Saskatchewan Court of Appeal in April 2018, challenging the federal government's ability to impose a carbon pricing scheme on the provinces and territories. Mr. Ford has declared that he will be directing his incoming attorney general to use “all available resources at the disposal of the government to challenge the federal government's authority to arbitrarily impose a carbon tax on Ontario families”. It will be interesting to see the outcome of the upcoming constitutional battle that will be waged by Saskatchewan and Ontario. A decision from the Saskatchewan Court of Appeal on the reference question is not expected until later in 2018. In fall of 2017, the Manitoba Government (which will implement a fixed carbon price of $25 per tonne on January 1, 2019) obtained an independent legal opinion on the constitutionality of the proposed federal carbon pricing backstop. The opinion concluded that there is a “strong likelihood that the Supreme Court of Canada would uphold” the proposed carbon pricing backstop based on the federal government’s taxation power.

McCarthy’s climate change and carbon market team will continue to closely monitor the next moves of Ontario Premier-Designate Doug Ford regarding the Ontario GHG emission trading system and the impacts on companies that are currently registered to the system.

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