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Cap & Trade in Ontario

At the beginning of this year, the first compliance period of the Ontario cap and trade program began. The cap and trade program is designed to encourage the reduction of carbon emissions in the province and meet percent reductions of carbon emissions mandated by the Federal Government of Canada. For most, the additional costs of the cap and trade program will be incorporated into utility costs and the cost of producing goods and services; however, other considerations must be made for companies that emit high amounts of greenhouse gases (GHGs).

The concept of cap and trade has existed for decades, but it wasn’t until the signing of the Kyoto Protocol in 1997 that it began to grow in global relevancy. Since then, dozens of countries and jurisdictions around the world have implemented cap and trade. Cap and trade works by setting a limit on the amount of emissions a facility can release. If a facility emits more than the limit allows in a year, they must purchase additional carbon allowances to offset the emissions produced beyond that limit. If they produce less than the limit, the extra allowances can be sold for a profit.

So what effect does cap and trade have on businesses and industry in Ontario?

Companies that are already participating in the cap and trade program are responsible for reporting the emissions associated with using utilities (i.e. electricity and natural gas). For everyone else, utility providers are responsible for participating in the cap and trade program on behalf of the end user. The cost of cap and trade incurred by the utility will be passed on to the end user on a per unit basis. The rate for natural gas is an additional 3.35 ₵/m3 and is buried in the “Delivery” charge. Electricity will not be greatly impacted by cap and trade due to the fact that 90% of the electricity produced in Ontario is emission-free.

By extension of this, the cap and trade program will also have an effect on facilities generating power through the use of Combined Heat & Power (CHP) plants. The economic feasibility of running a CHP plant is largely based on the difference in the equivalent energy costs of electricity and natural gas, known as a spark spread. The greater the spark spread, the more economical a CHP plant is.

Since natural gas is increasing in cost and electricity is not, the spark spread will be reduced. At this point in time, the spark spread is still more than great enough to warrant the use of a CHP plant (of course, other factors must be considered). Additionally, the projected increases in electricity rates outpaces the projected increases in natural gas rates, further widening the spark spread. Nevertheless, changes to the cap and trade program in the future may have an impact and should be monitored.

So what effect does cap and trade have on high emitting facilities?

While cap and trade is fairly passive for small commercial buildings (including most condos, apartments, etc.) and home owners, for facilities that emit more than 10,000 tCO2e (equivalent tonnes of CO2) per year (particularly industrial and institutional), the process becomes a bit more involved. All facilities that emit more than 10,000 tCO2e must have reported their emissions from 2015 to the government by the beginning of June last year. This does not necessarily mean that participation in the cap and trade program is required.

There are three types of participants in the cap and trade program:

  • Mandatory participants: Facilities that produce more than 25,000 tCO2e per year are required by law to participate in cap and trade.
  • Voluntary participants: Facilities that produce more than 10,000 tCO2e per year (but less than 25,000 tCO2e) can opt in to the cap and trade program, but are not required to.
  • Market participants: Facilities that produce less than 10,000 tCO2e per year can apply to become a participant in the trade market for emission allowances.

The Ontario Government has not yet set the limit on emissions and isn’t expected to until 2020. In the meantime, the emissions cap for each building is projected based on the amount that was reported from their 2015 emissions report. Allowances must be purchased that equal this cap. For the time being, most allowances are being given to each facility free of charge to help ease everyone into this system, although the amount of free allowances will decrease year after year. If the free allowances are not sufficient to cover the facility’s emission, more can be bought at auctions held quarterly throughout the year or on the secondary market.

The total number of available allowances (free or otherwise) created by the government decreases each year to correspond with the greenhouse gas reduction targets:

  • 15% from 1990 levels reduction by the end of 2020
  • 37% from 1990 levels reduction by the end of 2030
  • 80% from 1990 levels reduction by the end of 2050

Therefore, companies will have to decrease their emissions or be forced to pay for additional allowances either through trade, auction, or if necessary, a separate pool of allowances made available by the government at significantly higher costs than what would be found in the market. To help create a more stable market, Ontario will join the existing trade market shared by Quebec and California in 2018.

For some, the cap and trade program will add an additional cost from the utility, but will otherwise go unnoticed. For institutional and heavy industrial facilities, cap and trade provides more opportunity to improve the built environment and introduces another facet to integrate into the ever evolving world of energy efficiency.