Canada is turning a new leaf on climate change and this will have a real impact on consumers and business. Ontario’s cap-and-trade program, expected to launch January 1, 2017, will require certain emitters to obtain allowances equal to their total emissions. There is some skepticism around this date. Regardless of when introduced, carbon pricing (placing a real cost on the emissions created by business and consumers) is a new reality for those operating in Ontario and elsewhere in Canada
What does this all mean for you?
- The Ontario provincial government is beginning to implement a program to limit carbon and similar emissions by business.
- Over time most businesses will need to consider the financial burden (and opportunity) presented by the cap-and-trade regime in Ontario (and similar regimes elsewhere in Canada).
- The program begins with the largest emitters and gradually increases the scope to include most businesses in the Province with fewer exemptions and ultimately an increased cost.
What is cap-and-trade generally?
In a cap-and-trade program, a government imposes a general limit (or cap) on the aggregate emissions of covered pollutants and provides allowances (or credits) to covered businesses and other entities. Each allowance entitles the holder to emit a certain amount of the covered pollutants. The allowances can be issued for free initially or at a cost determined by the program rules or an agreed auction. The allowances need to be retired at the end of a compliance period. If a business or entity has more allowances than needed, it can either trade those to businesses or entities that need them or opt to bank them for future use. In this way, the strategic management of emissions can lead a business to hold more allowances than needed, and thus these allowances can be viewed as a business asset that may appreciate in value over time. We foresee the development of a trading market in these credits and the creation of financial instruments and trading strategies around them.
Who is covered by the cap-and-trade program?
Participation in the program is either mandatory or voluntary depending on your level of emissions of carbon dioxide equivalent, or C02e.
- Mandatory participation for emitters of at least 25,000 tonnes of C02e annually
- Voluntary opt-in for emitters of over 10,000 tonnes of C02e annually
How do you obtain allowances?
For those obligated to participate in the program, allowances may be acquired in two ways:
- Purchased through a public auction process
- Acquired through free allocation (available to competitively sensitive industries only)
What are the expected costs?
It is anticipated that the cost per allowance will be approximately $14- $18 in 2017 (per the Ontario government’s published estimates). The Ontario government predicts that the price of allowances is expected to rise to $95 by 2030, which will equate to annual expenditures of at least $2 million for each covered participant.
How do you determine your annual emissions?
In preparation for the introduction of the cap-and-trade program, Ontario has amended the Greenhouse Gas Emissions Reporting Regulation to require, among other things, emitters of at least 10,000 tonnes of C02e annually who are engaged in certain activities to begin reporting their emissions.
It is important to note that not all types of emissions are created equal. Emitters must be careful to implement the appropriate measurement techniques to properly quantify their emissions.
What does this mean for the mining industry?
For the mining industry, the Regulations mandate that entities engaged in the smelter or refining of certain metals and emit 10,000 C02e or more annually are required to begin quantifying and reporting their emissions, including businesses involved in lead, nickel, zinc and copper production (for example). The Regulations also include a “catch all” provision for single source emitters of greater than 10,000 tonnes of C02e annually. The definition is broad enough to capture all mining sector businesses.
Here are three things you should now be doing:
- Measure your Ontario emissions.
- Consider whether the greenhouse gas reporting regime applies to you.
- Develop a strategy around the costs and opportunities of cap and trade to your business (whether or not you are captured in the first round of the program).
 To determine a business’s total emissions, the Regulations make use of an impact formula which multiplies each emission type by its global warming potential, the result of which means that emitting one tonne of methane (CH4) is equal to emitting twenty-one tonnes of C02.