Ontario Cap and Trade
Historically, the price of energy includes all costs required to supply and deliver that energy to you, whether it is electricity, natural gas, gasoline, etc. Some of these forms of energy have additional fees associate with them to account for infrastructure such as pipelines or roads. But pricing does not reflect the effects on the environment, specifically global warming or climate change. (If you don’t believe that climate change is real and a direct result of human activity, you can probably stop reading. The rest of this article is of a technical nature, and you probably won’t understand it.)
In order to account for the environmental impact of the various forms of energy, governments have generally turned to two market based approaches; Cap and Trade and Carbon Taxes.
On Jan. 1, 2017, Ontario entered into a Cap and Trade program that closely mirrors Quebec and California, with a goal of being linked to that larger market. It is important for individuals and businesses to understand how the new regulations affect them to minimize costs while meeting program requirements.
Mechanisms for Placing a Price on Carbon
As mentioned above, there are two main methods governments have to place a price on greenhouse gas (GHG) emissions; Cap and Trade and a Carbon Tax.
With Cap and Trade, emission levels can be targeted by the government, and the market reacts through the buying and selling of carbon credits, called “Allowances”. Therefore, governments can precisely set emission levels, and ratchet those levels down over time to meet GHG emission reduction targets and environmental commitments. The downside of Cap and Trade is that a market for allowances has to be created and the regulatory and reporting side is significantly higher than a Carbon Tax. Also, end users do not know exactly what their costs will be as they will be dictated by periodic allowance auctions.
The alternative, a Carbon Tax, is much simpler in that the government places a tax on fossil fuels, and market forces drive energy conservation to reduce costs. The downside to a Carbon Tax is that emission levels cannot be targeted as easily.
In Canada, Ontario, Quebec and Manitoba have opted for Cap and Trade, and have agreements for the three provinces to, ultimately, form a single market. Quebec is already linked to California, so it is likely that the three provinces and one state will form a single market.
British Columbia has had a Carbon Tax since 2008, with a price currently of $30/tonne. Alberta recently implemented a Carbon Tax with an increase from $20/tonne to $30/tonne on Jan. 1 2018.
Cap and Trade Details
The Cap portion of Cap and Trade refers to the government placing emissions limits on large emitters and utilities that supply small emitters. Companies are given allowances (or credits), and those allowances are reduced every year.
But what happens if an emitter goes over their emission allowance? This is where the Trade portion of Cap and Trade comes in. Emitters can purchase allowances from others that have not used all of their allowance. The market sets the price of the allowances through an auction.
How does this reduce GHG emissions? Because there will be fewer allowances over time, emitters will be forced to make decisions. Emitters that are required to purchase allowances may find it less expensive to invest in energy conservation measures (ECMs), thus reducing emissions. Emitters that do not require additional allowances may find that they are better off investing in ECMs and selling excess allowances.
Facilities and natural gas distributors (Enbridge, Union Gas, etc.) with emissions of 10,000 tonnes/yr of GHG (approx. 5.2 million m3 natural gas) must report their GHG emissions.
Facilities with emissions greater than 25,000 tonnes/yr (approx. 12.9 million m3 NG) are considered large emitters and are required to participate directly in Cap and Trade. Facilities with emissions between 10,000 tonnes/yr and 25,000 tonnes/yr can opt into direct participation. The consensus is that it would usually be beneficial for these facilities to participate.
Note that the requirements are based on a per facility basis. In certain instances, facilities can be combined to make a campus that meets the criteria for opting in or mandatory participation.
Facilities with GHG emissions less than 10,000 tonnes/yr and facilities less than 25,000 tonnes/yr who do not opt in to direct participation, still participate indirectly through their natural gas supplier. As of January, the cost of carbon shows up on their bill, and is currently $0.033/m3.
The Ontario government website states that Cap and Trade will not affect electricity prices. This is due mostly to the phase out of coal. Still, the province has natural gas fired peaking plants used to meet heavy demands. Any increase in the electricity commodity costs would have a corresponding decrease in global adjustment charges, resulting in no net changes to your bill.
Currently, there are a surplus of allowances in the Quebec/California market, meaning that there is a downward pressure on carbon pricing. California’s quarterly auction in February sold at the floor price of $13.57, or $17.84 Canadian. This is the lowest price that the auction is allowed to go, indicating that businesses are finding it easier to cut emissions. The February auction saw only 11.6M (18%) of an available 65.1M allowances sold. This indicates that there will be a downward pressure on emission costs. Since the floor price increases 5% per year, we can expect the Cap and Trade portion of natural gas prices to go up $0.00165/m3 in 2018.
Outlook for Combined Heat and Power
CHP economics are tied to both electricity rates and natural gas rates. Understanding those rates and accurately predicting how the rates could change in the near future are critical in making decisions on how to proceed. We believe that electricity costs will continue to outstrip natural gas costs in both near term and long term.
Strictly looking at emissions factors for natural gas and for Ontario’s electricity mix, CHP results in a net increase in GHG emissions. But digging deeper, and looking at how CHP would offset natural gas fired peaking plants (when those plants are in operation) shows that the Ontario electricity emission factor does not reflect the actual emission reductions. The grid emissions reductions for CHP would be more than the increased natural gas emissions from the CHP, as long as most of the waste heat from CHP is offsetting natural gas fired equipment. This means that CHP continues to reduce overall emissions despite the provinces low electricity emissions factor.