ENV 350 FINAL ESSAY: CARBON PRICING IN

ONTARIO
Global warming is the most important issue especially when designing and
implementing environmental policies. Average global temperatures have climbed by
0.8 degrees Celsius since 1880 [1]. The concerning issue is the fact that the rate of
this warming is increasing and the IPCC (Intergovernmental Panel on Climate
Change) reports that 11 out of the past 12 years are among the dozen warmest
years since 1850 [1]. It is evident from these statistics that global environmental
policies need to be redesigned and existing policies need to be more stringent so as
to curb greenhouse gas emissions and hence reduce global warming.
Canada proposed cutting its emissions to 17% below 2005 levels by 2020 [2].
However the current Canadian GHG emission reductions are not sufficient and as we
get closer to 2020, it seems unlikely that the emissions targets will be achieved.
There have been regulations passed such as restrictions on coal-fired power plants
and new fuel emission standards for passenger cars and light trucks [2]. However,
these regulations alone are insufficient in reaching the desired emission targets.
Each individual province in Canada has a different GHG emission profiles. This data
along with the population in these provinces highlights which provinces need a
more stringent environmental policy. Provinces such as Alberta have a high
greenhouse emissions per capita [2]. While Albertas emissions are concerning as
compared to other provinces, I will be focusing on Ontarios environmental policies
as Ontario has the second highest greenhouse gas emissions in Canada [3]. Ontario
had a 24% contribution to Canadas total emissions in 2012 [2].
Ontario has its own emission targets set at 15% below 1990 levels by 2020 and
80% below 1990 levels by 2050 [3]. Before getting into the carbon pricing plan for
Ontario, it is essential to make note of key regulations that are already addressing
the GHG emission issue in the province. The key stake holders involved with
designing and implementing new environmental policies in Ontario include the
provincial government, various environmental organizations, the industrial sector
and the public. The government tries to collaborate with other provincial
governments and set provincial emission targets. Data from industry in key in
determining the quantity of greenhouse gases being released to the atmosphere on
an annual basis. The government also actively engages with representatives from
the industrial sector and environmental organizations to address environmental
issues. Certain regulations and acts such as the Green Energy Act of 2009 helped
Ontario bring in renewable sources of energy so as to promote clean energy [4]. The
shutting down of all coal power plants by 2014 along with other provincial directives
such as incentives for electric vehicles in 2010 led to Ontario meeting its 2014
emission target (6% below 1990 levels) [4].
Although the Ontario government has passed several regulations to minimise GHG
emissions, the total emission reduction required is far greater than the emission
reductions being currently achieved. In April 2015, Premier Wayne announced that

Ontario would be implementing a cap and trade to limit GHG pollution [5]. The cap
and trade program will ensure Ontario meets its 2020 emission reduction targets.

The case study explores the various cap and trade design issues and options
proposed for Ontario. The key actors as outlined by the case study include the
Ontario provincial government and industries namely supplier and distribution firms
that have a direct role in GHG emissions. The case study evaluated the various
properties a good cap and trade system should have and proposes relevant design
options based on this criteria. Furthermore, the case study explores the possibility
of linkage with cap and trade programs in Quebec and California.
The case study states that cap and trade program will promote productivity and
innovation to transition Ontario households and businesses to a low carbon
economy while simultaneously reducing linkage. This is achieved by the
reinvestment of cap and trade auction proceeds into various green technologies
such as energy retrofits. Linkage with California and Quebec is under review as per
the case study. Prior to linkage, it is crucial to understand the characteristics of
Quebecs and Californias cap and trade programs and use this data to design a
compatible Ontario cap and trade program. Ontario also makes use of other regional
programs such as the EU Emissions Trading Scheme to aid with cap and trade
design.
Timing is another crucial issue covered by the case study. In order to meet Ontarios
2020 emission targets, and using a 2017 start date, it is calculated that the cap
needs to decline by 3.7% per year to achieve the 2020 targets. Taking these
numbers and comparing with the annual decline in Quebecs and Californias cap, it
is proposed that Ontarios program begin in January 1, 2017.
Program coverage is detailed by the case study as being an essential factor in
ensuring least cost emission reductions. A broad coverage ensures that more
reductions can be achieved by the cap and trade program and it incents the broad
behaviour change needed to support the 2020 GHG reduction target. As per the
case study, some of the proposed broad sector coverage include electricity
generated/imported in the province, industrial and large commercial institutions and
transportation of fuel.
The next issue addressed is the point of regulation issue. The case study suggests
moving the compliance obligations upstream, to the fuel distributor level simplifies
the administration of the cap and trade program. To accomplish this, some of the
proposed de options as mentioned by the case study include covering domestic
electricity generation at the fuel distributor level and covering industrial and
institutional sources with annual GHG emissions greater than 25,000 tonnes.
Furthermore, the issue of emissions coverage is covered by the case study. The
proposed options include covering both fixed process and combustion emissions
since broader coverage gives more scope for long term emission reductions.

The next issue revolves around new and expanding facilities. These facilities are
important for Ontarios economic expansion. It is crucial for the proposed cap and
trade program to ensure growth of such facilities is encouraged while maintaining a
level field with existing facilities in terms of GHG emissions. The key actors involved
in this issue would be industry and institutions and do not include fuel
suppliers/distributors. The proposed solutions include delaying the compliance
obligation for facilities starting operations from January 1, 2016 onwards. New
facilities would have a compliance obligation in their third year of operation whereas
existing facilities will have a compliance obligation starting with the first year they
exceed the threshold of 25,000 tonnes of GHG emissions. The plan will have provide
the flexibility for firms with GHG emissions below the threshold to join the program.
However as per the case study, firms that opt in will not be allowed to opt out of the
program.
Some of the market design features are outlined in the case study along with the
Ontarios proposed design options. In terms of the registration requirements, one of
the proposed options is that all new and existing covered entities are required to
register. Some market rules such as placing a limit of the total number of
purchased allowances help define the market design features of Ontarios proposed
cap and trade program. Auction rules, trade rules and strategic reserve sales are
also considered and potential design options are highlighted for each of these
components.
Another important issue outlined by the case study is the price stability
mechanisms associated with the cap and trade program. It is important to ensure
carbon prices are within a certain range. The Quebec-California cap and trade prices
will be used as a benchmark. Lastly issues such as carbon leakage, compliance
requirements and enforcement and penalties play an important role in determining
the stringency of Ontarios proposed cap and trade plan.
The Ecofiscal Commissions report on The Way Forward for Ontario details the
principles and provides recommendations for the proposed cap and trade program
in Ontario. The report makes four crucial recommendations that forms a good
theoretical framework especially when evaluating the various design options
outlined in the case study. The recommendations proposed by the ecofiscal
commission are as follows:
1. Stringency of policy should rise gradually and predictably over time in order
to drive meaningful emissions reductions. The report states that once the
cap and trade program is established, it is crucial for the provincial
government to lower the cap gradually so as to meet the desired emission
reduction targets in the province. Furthermore, mechanisms to manage price
volatility also play an important role in determining the stringency of the
policy. Lastly, penalties for non-compliance also contribute to the overall
stringency of the policy.
2. Make coverage of policy as broad as practically possible while maintaining
the integrity of the system. The report highlights the importance of
establishing a point of regulation. Who is covered by the policy is critical in
defining the policy coverage. The report highlights the benefits of using a cap

on distributors and suppliers of fuels as opposed to a downstream cap which

is levied on consumers. A downstream cap proves to be extremely complex in
terms of management by the government. The California and Quebec cap
and trade program uses a combination of upstream and downstream caps.
The report also suggests that Ontario should avoid exemptions or exclusions
to ensure more cost effective, fair and transparent policy. Lastly, as per the
ecofiscal report Ontario should be careful with the use of offsets, which can
further broaden coverage but only if they are credible and represent real and
verifiable emissions reductions.
3. Aim to auction all allowances; the scope for free allocations should be
narrow, rules-based, and transitional. According to the ecofiscal report,
Ontario should auction most allowances to make the policy more cost
effective and transparent. Although free allowances help address issues such
as competitiveness and leakage concerns, these issues are more short term
and should be minimised. Lastly, Ontario as per the report should not provide
free allowances to sectors in which emitters can pass on costs.
4. Seek out opportunities for linkage. The report recommends linkage with the
cap and trade programs in Quebec and California. The cap and trade program
must be designed with linkage in mind thereby making it easier to link the
program to other provincial cap and trade programs.

References
[1]
http://news.nationalgeographic.com/news/2004/12/1206_041206_global_warming.ht
ml
[2] http://www.cbc.ca/news/canada/how-canada-s-provinces-are-tacklinggreenhouse-gas-emissions-1.3030535#ON
[3] http://pricecarbonnow.org/
[4] http://www.ontario.ca/page/climate-change
[5] Ontario Cap and Trade Case Study