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Cap-and- Trade
Integrated Environmental Policy Division August 2010

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Ontario Climate Change Action Plan (CCAP) • Greenhouse gas (GHG) reduction targets of 60/0by 2014 and 150/0by 2020 from 1990 levels Role of Cap and Trade • Cost-effective tool to meet electricity and industry targets and transition to low-carbon economy

Ontario GHG Emissions

by Sector (2008)

Transportation (62 Mt) 33%

Industry (49 Mt) 26%

Waste (7 Mt) 4% Agriculture (11 Mt) 6%

Electricity (27 Mt) 14%

Ontario 2009 Budget • "... continue to work closely with the Province of Quebec on cap and trade and will continue to make progress as a member of the Western Climate Initiative towards the development of a cap and trade system for North America in 2012"

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Need to ensure compatibility with emerging North American system • Lower cost reductions • Mitigates competitiveness impacts • Reduces risk of border measures on exports Ontario Partnerships • Memorandum of Understanding (MOU) with Quebec • Member of Western Climate Initiative (WCI) - Core Partners: California, New Mexico, Ontario, British Columbia, Quebec • Observer in: - Regional Greenhouse Gas Initiative (RGGI): Northeastern states - Midwestern Greenhouse Gas Reduction Accord (MGGRA): Midwestern states and Manitoba • Member of The Climate Registry and International Carbon Action Partnership

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United States • Congress developing climate change bills - House of Representatives passed energy and climate bill: cap and trade for electricity, industry and fuels (June 2009) - Progress delayed in Senate • US Environmental Protection Agency (EPA) developing GHG rules / performance standards to come into effect in 2011 - Congressional action could override or defer EPA rules Canada • Announced proposal to regulate coal-fired electricity generation based on performance standards starting in 2015 • Signalling US alignment (cap and trade or performance standards) • Open to negotiating equivalency agreements with provinces moving forward to regulate GHGs - British Columbia, Saskatchewan and Nova Scotia have Agreements in Principle with Canadian government

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Western Climate Initiative (WCI) • Commitment to implement cap and trade for industry and electricity in 2012, transportation and home heating fuels in 2015 - July 27, 2010 Detailed Program Design: flexibility on timing / sectors • Core partners releasing regulations in 2010 - New Mexico draft regulation conditional on other jurisdictions' participation - California timing could be influenced by November 2010 election / cap and trade referendum Regional Greenhouse Gas Initiative (RGGI) • Electricity sector cap and trade since 2009 - Collaborating on transportation sector, including Low-Carbon Fuel Standard 3 Regions • WCI, RGGI and MGGRA exploring linking - Raised profile as Congress action delayed

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Some Building Blocks In Place • Enabling Legislation passed December 2009. Provides authority to implement • Reporting Regulation filed December 2009. Requires annual GHG reporting for facilities emitting over 25 kt C02e - First reports (2010 emissions) due July 2011 Implementation Work Underway - Funds obtained through RBP to support implementation Extensive Consultations - Launched December 2008 with discussion paper on high-level principles - Consultations on enabling legislation and offsets in 2009 - Multi-sector and electricity stakeholder groups formed in 2009; ongoing discussions on design elements

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Industry • Trade and competitiveness issues (especially if not aligned / timed with US) • Uncertainty regarding investment requirements for compliance • Concerned about US EPA regulatory approach

ENGOs, Environmental Commissioner of Ontario • Progress on CCAP targets, Ontario leadership through action

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Appendix 1: Primer on Cap-and-Trade

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Western Climate Initiative Partners: California, Oregon, Washington, Arizona, Utah, Montana, New Mexico, British Columbia, Manitoba, Ontario, Quebec Observers: Alaska, Colorado, Idaho, Kansas, Nevada, Wyoming, Saskatchewan, Nova Scotia, the Yukon, Mexican border states of Baja California, Chihuahua, Coahuila, Nuevo Leon, Sonora,Tamaulipas Regional Greenhouse Gas Initiative Participating States: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont Observers: Pennsylvania, Ontario, New Brunswick, Quebec Midwestern Greenhouse Gas Reduction Accord Members: Iowa, Illinois, Kansas, Michigan, Minnesota, Wisconsin, Manitoba Observers: Indiana, Ohio, South Dakota, Ontario

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• • • • • • •

Inventory of GHG emissions Set a cap - overall limit on GHGs emitted Cap divided into units called allowances Government can distribute allowances free of charge or auction them off Trade occurs when allowances are bought and sold Trading allows flexibility for facilities to comply in the most cost effective way Lowering the cap over time reduces emissions

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To comply, facilities surrender a number of allowances at regular intervals (e.g. annually), to cover their emissions Companies develop their own compliance strategies - If emissions seem likely to be above their allocated allowances, facilities can either reduce their emissions or purchase allowances from others

Trading helps facilities comply with their regulatory obligations at the lowest possible cost - Facilities in capped industries with high abatement costs can purchase from companies that can reduce emissions more cheaply

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• •

To provide an additional compliance option, offsets can be included in the cap and trade program Offsets are projects undertaken by entities outside of the capped sectors, that either reduce emissions or remove carbon from the atmosphere - The projects must meet specified criteria (set by regulator) to ensure reductions are real - Examples of non-capped industry reductions include tree planting (forestry), reduced tillage (agriculture) and methane destruction (landfills and wastewater treatment) Offsets can be sold to the capped industries for compliance purposes (i.e. same manner as other sources)

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Emissions data are reported and reside in a MOE database Trades are tracked to ensure compliance using an electronic database called a registry Reporting Database Tracks: ·Emissions by industry • Verifications • Supporting data

Registry Tracks: • Allowance ownership • Offsets ownership; • Transfers of allowance and offset (trading) • Compliance with the cap

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Emissions reporting is essential to the success of a cap and trade system: - Data inform cap setting and allowance distribution - Data ensure credibility of emissions trading transactions - Data are required to demonstrate compliance with cap and trade regulations

Approximately 200-300 Ontario facilities are required to report their GHG emissions under Ontario's GHG reporting regulation (0. Reg. 452/09) - Effective January 1, 2010 operators of facilities in specified industries that release 25,000 tonnes or more of GHGs are required to report their emissions on an annual basis

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Cap and trade is an effective way of reducing emissions and stimulating innovation and new technology

Cap and trade can help Ontario achieve its Climate Change Action Plan targets while at the same time providing flexibility for industry to reduce their emissions at the lowest cost

Cap and trade supports the green economy and accelerates Ontario's transformation to a low-carbon economy with associated new green jobs

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• •

Regulation requires industry to limit emissions to 200 tonnes Emitter A and Emitter B are both emitting 110 tonnes and both must reduce their emissions to 100 tonnes to be in compliance with the regulation. They incur different costs to make reductions

EMITTER B Reduces emissions by 10 tonnes at a cost of $3 per tonne Total Cost = $30

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A regulation establishes a cap on industry emissions of 200 tonnes and allocates 100 allowances each to Emitter A and Emitter B where both A and B are emitting 110 tonnes

EMITTER B Reduces emissions by 5 tonnes at a cost of $3 per tonne = $15 EMITTER B buys 5 allowances/tonnes from EMITTER A for $10 Total Cost $15 + $10 = $25

The overall cost of achieving the 20 tonne reduction in emissions is $30 under an emissions trading program as compared to $40 under a traditional command and control approach

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Government - Sets the goal and reduces cap over time to meet targets - Determines which industries or sectors are covered - Allocates allowances (free or by auction) - Establishes the rules and monitors performance/compliance through reporting and verification Industries - Determine the most efficient way to comply - Employ emission reducing technology and/or trade allowances/offsets to meet the cap Financial Sector - Supporting services including brokerage, verification, consulting, financing, etc.

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