Cap & Trade Explained

There is a multitude of approaches for individuals, communities, and governments to curb climate change. From neighbourhood recycling programs to government incentives aimed at implementing energy efficiency measures in buildings, there is certainly progress being made towards sustainable goals. The approach making recent headlines, particularly in Ontario is Cap & Trade. The state of California and province of Quebec have already implemented this and Ontario will be joining the Western Climate Initiative with them to curb carbon emissions.

Ontario has decided to put a price on carbon in an effort to curb pollution and reach their climate change goals. The regulation took place on July 1st, 2016, see here for the detailed publication. The main points covered in the regulation are as follows;

  • Greenhouse gas emission caps
  • Entities covered by the program
  • Compliance
  • Auction and sale of allowances
  • Distribution of allowances

There will be a limit put on how much carbon dioxide can emit into the atmosphere, this is referred to the “cap” and will apply to facilities that emit over 25,000 tonnes of carbon annually. Emitters with under 25,000 tonnes can also voluntarily participate in the program. Once the cap is set, companies will have an opportunity to purchase carbon credits at a public auction held in January 2017. These credits are essentially an allowance for companies to emit freely, so they would purchase as many they anticipate will be needed to continue production. While this is contested as it does not directly reduce consumption as the company may continue to pollute, there are many positive effects of the Cap & Trade program being implemented.

The “trade” in Cap & Trade will be when Company A buys a surplus of credits (whether or not they need it) and is then sold to Company B (likely above market value). This is where things get very interesting as a new Carbon Market is developed in Ontario, we will only be able to tell how the program will play out and who will be capitalizing on its potential.

The companies involved in the program will have to follow strict guidelines as the “cap” is lowered from year to year, eventually reaching carbon neutrality. This will essentially force companies to not only energy efficient measures into their operations, but may have to rethink entire ways of doing business, ensuring that there is little to no impact throughout their lifecycle.

All proceeds from the program will be put into the Green Investment Fund which will contribute to government incentives, funding sustainability and energy efficiency projects provincially. So while critics may argue that this program is simply another cash grab from the provincial government, the reality is that funds from this program will go directly to assisting Ontario on its path to sustainability.