Released February 25th, 2016, Ontario’s proposed legislative vehicle for its cap and trade regime is largely a list of strong signals of regulatory action. While leaving most things to be detailed in regulation, one of the more important things that the Act establishes (for the most part) is a strong penalty regime. Comprised of 4:1 premiums for under-submitting, fines upwards of $10 million per day, imprisonment for up to 5 years, and administrative penalties of up to $1 million, the consequences to regulatees who don’t comply can be significant.
GHG Coverage, Emission Targets, Reviews, and Progress Reports
Other than the awkward use of “types of greenhouse gas” language, the first few sections of the Act are fairly basic. All seven typical greenhouse gases are covered by the regulations – carbon dioxide, methane, nitrous oxide, HFCs, PFCs, SF6, and NF3. The province-wide GHG reduction targets are codified at section 6 followed by a requirement to develop a living climate change plan that is reviewed every 5 years. In addition to the climate plan review, under section 8 the Minister must publish a progress report on the status of actions in the climate plan.
Duties for Regulatees
The next sections of the Act set out duties and obligations for regulatees. First, is a duty to quantify in accordance with the Province’s Guideline for Greenhouse Gas Emissions Reporting. There are two types of emissions to be quantified: (1) emissions during prescribed activities; and, (2) emissions associated with activities. Both will have their own activities-specific quantification methodologies. Accompanying this duty to quantify is a duty to retain records. Second, is a duty to report followed by a duty to verify. Reporting and verification requirements are the same as the reporting regulation.
Requirement to Submit Allowances and/or Credits
The next group of provisions starts with a duty to submit allowances/credits in an amount equal to the attributed GHG emissions. Past spelling out this duty, the provision goes on to signal that there will be a compliance period, a deadline for submission of allowances/credits, and a mechanism whereby a participant can be exempted from submitting all or part of the quantity of allowances/credits required – but details of these elements will be spelled out in the regulation.
Another important paragraph in this provision sets out the consequences for a failure to submit the required amount of allowances/credits. Those consequences include: (1) Minister may remove allowances/credits from the participant’s accounts equal to the shortfall; (2) participant must repay the shortfall plus a premium of 3 more allowances/credits for each tonne not submitted (i.e. a total of 4:1 repayment for any shortfall); (3) Minister may remove allowance/credits from the participant’s accounts to fulfill the premium; and, (4) participant’s authority to ‘deal’ with allowances/credits in its accounts will be restricted. Following these consequences, if a participant does not submit correctly or does not repay shortfalls or premiums, the Minister may: (1) by order, require the participant to pay an amount (in accordance with the regulation) to satisfy the outstanding obligations; (2) decline to distribute any free allowances; and, (3) by order, impose any other consequence allowed by the regulation.
Registration as Mandatory, Voluntary, and Market Participants
Mandatory participants will be those intended to be covered by the regulation (i.e. industrial facilities >25kt of emissions, electricity importation, natural gas distribution, and petroleum product supply). Voluntary participants will be limited to entities in the same sectors but those facilities with >10kt but <25kt. Market participants are those that meet conditions set out in the regulation (i.e. not an employee of a mandatory or voluntary participant).
Accounts and Transactions
The first provision in this group restricts buying, selling, trading of allowances and credits to only those entities that are registered participants. Upon registration, the Director shall establish on or more accounts for the purposes of dealing with the allowances and credits (buy, sell, trade, submit to the Minister). Each corporate participant must designate an account representative. This group of provisions ends with a section on fair market practices. The section prohibits fraud, market manipulation (i.e. misleading appearance of trading activity or artificial market price), and false or misleading statements.
Emission Allowances and Credits
The first sections send signals about the creation and distribution of allowances – essentially explaining that details are left to the regulations. You’ll find the actual regulation making powers in section 75.
Provisions around the creation of allowances include signals that there may be limit on the amount of allowances created (i.e. set emissions caps) and that the Minister may retire and/or redistribute allowances removed from a participant’s account. Interesting to note that there is no explicit requirement in the Act to limit the number of allowances created or what that limit should be, only that the regulation may set a limit for a period.
Provisions for the distribution of allowances start with a curious reference to distributing allowances for ‘valuable consideration’ – a fancy way to say they are auction/selling allowances. The distribution of free allowances is also signaled here, prefaced by the idea that free allowances are need to support transition to a low-carbon economy – i.e. free allowances will be used to mitigate price impacts for businesses and consumers.
Other signals related to allowances include that there may be a limit on the allowances for sale or distributed for free, that free allowances to a participant may be restricted, requirements for purchasers at auction, purchase limits, and general auction rules. Concluding the provisions on allowances is the standard requirement not to disclose information related to a person’s participation, strategy, bids in an auction(Ontario will be using a sealed bid auction similar to Quebec and California).
The next provisions deal with credits including offset registries and registration, creation of offset and early reduction credits, applications for credits, and issuing and cancelling credits. All of which are fairly standard.
Inspections and Investigations
Powers for inspections and investigations are comprehensive and mirror many of the powers used in the Environmental Protection Act (EPA). Notably, here the power to inspect requires a warrant or court order – different from the power as it exists in the EPA.
Offences and Penalties
Most offences are subject to the following maximum penalties:
|First Offence||Subsequent Offence|
|Individual||$50k/day||$100k/day and/or 1 year prison|
Specified offences are subject to stricter penalties. These offences include:
- failing to submit allowances/credits;
- fraud or market manipulation;
- disclosure of information related to auctions; and,
- obstruction of an officer.
All specified offences (for individuals) are subject to a maximum of 5 years (less a day) imprisonment. In addition, specified offences are subject to the following minimum penalties:
|First Offence||Second Offence||Subsequent Offence|
Specified offences are also subject to the following maximum penalties:
|First Offence||Second Offence||Subsequent Offence|
|Individual||$4 million/day||$6 million/day||$6 million/day|
|Corporations||$6 million/day||$10 million/day||$10 million/day|
Notably, offences under Ontario’s other environmental statutes (mirrored from the EPA) as well as under the Province’s Commodities Futures Act and Securities Act will be considered a previous conviction for the purpose of penalties.
In addition to the penalties on conviction of an offence, the Act provides for administrative penalties. These are absolute liability penalties that can be levied where the Director is of the opinion that a person has contravened or failed to comply with a requirement of the Act or the regulations. They can be imposed independent of a conviction for the offence. The Act sets a one year limitation period for administrative penalties. It also provides for relief from by giving the Director the power to enter into agreements that can cancel or reduce the penalty. The limit for any administrative penalty under the Act is $1 million. The details of how these penalties are applied and how much they will be set at is left to regulation.
The last sections of the Act provide from general housekeeping and administrative authorities. The first is that the Environmental Review Tribunal will hear appeals of certain order and/or decisions under the Act. These include decisions related to registration, closing cap and trade accounts, levying of administrative penalties, and compliance orders.
The next key provisions relate to agreements with other jurisdictions and administration/enforcement agreements. The Minister has the authority to enter into either type of agreement – notably, the Minister alone appears to have the authority to harmonize/integrate with other cap and trade systems.
The last of these provisions are the regulation making authorities. These include all the key powers signaled throughout the Act, including: creating and distributing allowances and credits; registration; quantification; and, the purchase, sale, and trade of allowances and credits. Regulations may also exempt ‘a person or class of persons’ from specific requirements of the Act or regulations.
Overall the Act sets out broad statutory boundaries and leaves much of the details to regulation. The Act does establish details of a robust enforcement and penalty regime, signalling to regulatees that compliance is crucial.
Check back here for more in-depth review and analysis of Ontario’s proposed cap and trade program.