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Ontario releases draft ETS regulation

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On 25 February 2016, Ontario released its draft regulation for a cap-and-trade program starting in 2017. The draft provides details on several major design elements:

  • Compliance period: Three years starting 1 January 2017 with an annual compliance deadline of 1 November the following year.
  • Coverage: The program will cover CO2e emissions from the power sector (including imported electricity and natural gas distribution), industry and petroleum product suppliers. The inclusion threshold is set at 25,000 tCO2e annually. However, entities emitting more than 10,000 tCO2e annually can voluntary opt-in to the program.
  • Allowances: The government will issue 142,332,000 allowances in 2017, with the total number of issued allowances declining 4.2% annually until it reaches 124,668,000 allowances at the end of the first compliance period in 2020.
  • Allocation:      
    Free Allocation: For manufacturers and electricity generation from biomass is likely. The list of entities receiving free allowances will be reviewed in 2020. Entities will have until 1 September preceding the vintage year of allowances to apply for free allocation. Free allocation will be based on four different methodologies: Output-based benchmarking, energy-use based allocation, historical emissions levels (‘grandfathering’) and direct allocation based on actual emissions. Emitters that opt-in to the program can apply for free allocation, which will be based on either output-based benchmarking or energy use. New entrants will not be eligible for free allocation for the first two years of their operation.
    Auctioning: The remaining allowances will be auctioned quarterly. 10% of allowances created with a vintage three years later than current auction year will be reserved for auction. The minimum auction price will increase 5% annually in addition to inflation. The 2017 minimum price will be based on the 2016 CAD 12.82 set at the Québec carbon market auctions, plus a 5% increase and inflation.    
  • Offsets and Credits: Covered entities can use offsets or Early Reduction Credits (ERC) to meet 8% of their compliance obligation. A separate offsets regulation will be proposed later this year. ERCs will be capped at two million credits. Participants can apply for ERCs based on demonstrable emissions reductions from 1 January 2012-31 December 2015.                                                                                                                                
The government will introduce amendments to the regulation once a linking agreement has been concluded with Québec and California. This would include such measures as currency adjustments as part of the auctioning process, adjusting holding and purchasing limits to adjust to the size of the new carbon market, as well as recognizing allowances and credits from the two linking partners.

The draft proposal is now open for 45 days for comments from stakeholders and the wider public.

On 24 February, the government introduced the Climate Change Mitigation and Low Economy Act (2016), which, if passed, would enshrine Ontario’s cap-and-trade program and its 2020, 2030 and 2050 greenhouse gas targets in law. The Act also mandates the government to submit an Action Plan every five years outlining how the province’s reduction targets will be achieved. Finally, the Act would also direct all proceeds of Ontario’s cap-and-trade program into the Greenhouse Gas Reduction Account. The funds from this account would be exclusively used to finance mitigation projects.

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