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Back to square one? Ontario government winds down cap and trade program and overhauls approach to climate change

cap and trade programOn July 25, 2018, the newly formed Ontario Government introduced Bill 4, the Cap and Trade Cancellation Act, 2018 (the “new Act”), which repeals the Climate Change Mitigation and Low-carbon Economy Act, 2016 (the “old Act”) and provides for the wind-down of the province’s cap and trade program[1]. The new Act also sets out a renewed approach to climate change policy. In particular, the Ontario Government is required to establish targets for reducing the amount of greenhouse gas emissions in Ontario. The new Act also provides that the Minister of Environment, Conservation and Parks (the “Minister”) shall prepare a climate change plan and regular progress reports regarding same. To that end, the new Act allows the Minister to appoint panels to perform such advisory functions as the Minister considers advisable.

A quick summary

Under Ontario’s cap-and-trade program, which came into effect January 1, 2017, more than 250 participants bought close to $3 billion in allowances via a series of auctions. The proceeds from these auctions were directed to the Greenhouse Gas Reduction Account, which was used to fund green initiatives for citizens and businesses aimed at reducing GHG emissions. A more detailed overview of Ontario’s cap and trade program and the Ontario government decision to cancel the program can be found in our earlier blog post.

To wind down the cap and trade program, the new Act provides for the following:

  1. retirement or cancellation of cap and trade instruments;
  2. payment by the Crown of compensation subject to various limitations; and
  3. prohibition of any proceeding against the Crown and extinguishment of existing ones.

A closer look

The new Act defines a “cap and trade instrument” to include:

  • an Ontario emission allowance or credit;
  • an emission allowance, offset credit, early reduction credit and reserve emission created under the Quebec Cap and Trade System;
  • an emission allowance and offset credit created under the California Cap and Trade System

Retirement of cap and trade instruments

All cap and trade instruments held in the cap and trade accounts of a participant on July 3, 2018 and not assigned a vintage year of 2021 are retired if they represent less than the amount of GHG emissions reported and verified by the participant between January 1, 2018 and July 3, 2018. If there are more cap and trade instruments in the accounts of the participant than needed to cover the GHG emissions reported and verified by the participant for the prescribed period, the surplus of such instruments is potentially subject to compensation and will be cancelled (see below).

Cancellation of cap and trade instruments

The new Act cancels all cap and trade instruments held in the cap and trade accounts of participants on July 3, 2018, other than those that are retired. In other words, it cancels all cap and trade instruments that represent a surplus as explained above.

Compensation

Under the new Act, subject to certain exclusions, the Crown will pay compensation to participants for each cap and trade instrument cancelled (in surplus) unless they were distributed free of charge or were assigned a vintage year of 2021. The amount of compensation per eligible cap and trade instrument is to be determined in a future regulation. The new Act provides that no person is entitled to compensation for any loss of revenues or loss of profits directly or indirectly resulting from the wind-down of the cap and trade program.

The Ontario Government suggested that it expected to spend up to $5 million in compensation. However, several participants are precluded from compensation such as:

  1. a market participant;
  2. a participant with respect to the importation of electricity into Ontario;
  3. a participant with respect to the distribution of natural gas in Ontario;
  4. a participant with respect to transmission, storage and transportation of natural gas;
  5. a participant with respect to the supply of petroleum products in Ontario; or
  6. a participant with respect to electricity transmission system that has been issued an order under subsection 78(1) of the Ontario Energy Board Act, 1998.

Ultimately, the effect of the new Act is that compensation – and the number of participants actually entitled to it – is expected to be very limited.

Proceedings barred against the Crown

The new Act prevents any cause of action from arising against the Crown or any current or former member of the Executive Council, any current or former employee or any agent or advisor of the Crown as a result of various steps implemented to cancel the Ontario cap and trade program. These steps include the enactment of the new Act, the repeal of the Climate Change Mitigation and Low-carbon Economy Act, 2016 and the retirement or cancellation of any cap and trade instruments. The new Act also provides for the extinguishment of any existing proceedings (regardless when the cause of action arose) and specifies that nothing done in accordance with the new Act and related regulations constitutes an expropriation or injurious affection for the purposes of the Expropriation Act or otherwise at law.

Impact on reporting framework

Along with Bill 4, the Ontario Government also adopted changes to the GHG emissions reporting framework which are effective since August 1, 2018, and require short-term actions from participants.

Essentially, the main regulatory requirements that existed under the now repealed O. Reg. 143/16 (Quantification, Reporting and Verification of Greenhouse Gas Emissions, the “old Regulation”) are included in O. Reg. 390/18 (Greenhouse Gas Emissions: Quantification, Reporting and Verification, the “new Regulation”), with the addition of a new reporting requirement for parties who were “capped participants” and subject to GHG emissions reporting and verification obligation as of July 2, 2018.

As such, these participants are now required to submit a report on their GHG emissions from January 1, 2018 to July 3, 2018 by October 1, 2018 and file their verification report by December 1, 2018.

Coming litigation?

Despite the prohibition of proceedings against the Crown provided under Bill 4, given the very limited scenarios subject to compensation and the significant investments made by Ontario businesses and non-governmental organizations to participate in the Ontario cap and trade program, the Ontario Government remains at risk of being sued by both emitters and stakeholders.

Having recently announced its plans to challenge the constitutionality of the federal carbon pricing backstop (which will proceed in parallel with the Saskatchewan Government’s constitutional reference case that was launched in April 2018), the Ontario Government is placing itself squarely in the cross hairs of the public and legal debate regarding carbon pricing in Canada.

Stay tuned for further developments.

By Selina Lee-Andersen, Cindy Vaillancourt and Andrew West


[1] Bill 4, An Act respecting the preparation of a climate change plan, providing for the wind down of the cap and trade program and repealing the Climate Change Mitigation and Low-carbon Economy Act, 2016, 1st Sess, 42nd Leg, Ontario, 2018. (“Bill 4”).

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McCarthy Tétrault LLP

McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation services, tax law, real property law, labour and employment law nationally and globally.McCarthy publishes a series of blogs to share information with companies to help them comply and manage their businesses. On the Inside Internal Controls blog we will share some of those blog posts sharing their expertise among others, in the areas of Competition/Anti-trust, Corporate and Commercial Law, Intellectual Property, Privacy, Environmental Law, Technology and Litigation. Read more here
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