We congratulate the Ontario government on its announcement today that it will join the greenhouse gas, cap and trade emissions trading system under the Western Climate Initiative (WCI), of which Ontario has been a member since 2008.

Although there has been debate as to whether a carbon tax, such as that in British Columbia, is a more efficient method of pricing carbon, Ontario appears to have concluded that there are more economic opportunities to be gained from a cap and trade system.

The government intends to align its trading system with those already operated by its WCI partners, Québec and California. The province says that it will work with communities and will consult with industry on the design of the system over the next six months to ensure the it is a “made-in-Ontario solution that works best for the province”.

What is “Cap and Trade”?

A cap and trade program effectively reduces the amount of greenhouse gas pollution going into the atmosphere by setting a limit on emissions. The “cap” sets a maximum limit on the amount of greenhouse gas pollution that industry can produce. Over time, the cap is lowered, reducing greenhouse gas pollution. The “trade” creates a market for pollution credits where industries that do not use all their credits can sell or trade with those that are over their credit allocation.

Offset Credits – An Opportunity for Non-regulated Parties to Participate

Although not specifically mentioned in the government announcement, Ontario’s cap and trade scheme will almost certainly include an opportunity for non-regulated parties to participate in the system through what are known as offset credits.

Although cap and trade is intended to regulate large emitters of greenhouse gases, emissions trading markets benefit from the increased market liquidity that is provided by additional participants. Partnering with other jurisdictions, such as Québec and California is one way of providing liquidity. Another is to allow participation by non-regulated parties through offset projects.

Broadly speaking, these are projects that demonstrably and permanently remove greenhouse gas emissions from the environment and that go beyond what is required by the law or would occur in the normal course of business. Such projects can earn valuable credits that can be traded in the system. Offsets are envisaged by the WCI and already form part of Québec’s emissions trading system.

What Will Happen to the Money Raised Trough Cap and Trade?

The government says that it will reinvest the money raised through cap and trade in a transparent way back into projects that reduce greenhouse gas pollution and help businesses remain competitive. Projects may include helping families consume less energy through more energy-efficient appliances or housing, building more public transit to reduce the number of vehicles on the road, and helping factories and businesses reduce greenhouse gas pollution.