News & Updates

Ontario's New Carbon Pricing System

Jan 7, 2021

The Federal Government of Canada has approved Ontario’s proposal to substitute the Federal Output Based Pricing System for the Ontario Emissions Performance Standards program. The Output Based Pricing System, or OBPS, has been the Federal backstop for provinces that did not have their own carbon pricing plans in place. Ontario, among other provinces like Alberta and New Brunswick, had the Federal backstop imposed after they refused to implement their own programs, arguing through the legal system that a carbon pricing plan was unlawful.

Ontario, under the previous Provincial government, captured carbon pricing under a Cap & Trade system in partnership with Quebec and California. In this system, businesses had a minimum threshold emissions limit to meet. If they did not, they were required to purchase carbon credits from other businesses that emitted under the threshold and were therefore given credits to make up the difference. Such a system encouraged competition for reducing emissions, as the credits that could be gained by emitting under the threshold amount were financially lucrative. It also allowed industries and facilities that were unable to curb emissions to purchase additional credits, thereby allowing the overall system to maintain equilibrium.

Once the Ford government came to power, they removed the Cap & Trade system without introducing a program acceptable to the Federal guidelines. As such, the OBPS was introduced in Ontario. Now, the Federal government of Canada and the Provincial government of Ontario have come to terms with Ontario’s newest form of carbon pricing, the Emissions Performance Standards, or EPS.

The pressing question are: What are the changes that can be expected? Will the EPS affect all businesses and people in Ontario? If already a part of the OBPS, does a facility need to switch to the EPS, and should they?

What are the major changes?

The Ontario EPS is very similar in structure and execution to both the Federal OBPS, as well as the Cap & Trade system of the past. All 3 systems charge emitters for polluting over a set limit, and reward under-emitters with a certificate, credit, or other financially valuable unit to trade to other emitters. It is as of yet unclear whether emitters in Ontario will be able to trade credits to emitters in other jurisdictions, as both the OBPS and Cap & Trade system allowed.

The largest change between the EPS and the OBPS is the price of carbon in any given year. The EPS has slowed down the rise of carbon pricing, as shown in Table 1.

 

Table 1: Carbon Cost per Tonne of Carbon Dioxide Emissions

 

Output Based Pricing System

Emissions Performance Standard

2020

$30/tonne CO2e

$20/tonne CO2e

2021

$40/tonne CO2e

$30/tonne CO2e

2022

$50/tonne CO2e

$40/tonne CO2e

2023

$50/tonne CO2e

$50/tonne CO2e

 

Therefore, it is easy to see that in 2021 and 2022 it will be financially beneficial for a facility currently enrolled in the OBPS to switch to the EPS. Additionally, while the OBPS was restricted to a pre-defined list of industries dependent on their NAICS code, the EPS has no such restriction. A Voluntary participant need only emit 10 kilotonnes of CO2e or greater in a year, along with the other requirements already listed in the OBPS. This change will allow for specialty facilities that were ineligible for the OBPS due to their NAICS code to enter into this new system.

Will the EPS affect all businesses and people in Ontario?

As it currently stands, the EPS is only designed for the largest emitters in Ontario, who were previously captured under the OBPS. It does not address the carbon cost that has been added to everyday costs for the average Ontario citizen, like gasoline to fuel their car or natural gas to heat their home. At this point in time, the Federal government has only accepted Ontario’s carbon pricing scheme on large industrial users.

If the Ontario government also succeeds in having its own carbon pricing for residential users, costs will rise for the average person in Ontario. The expected annual additional cost for an Ontario household switching to the proposed Made-In-Ontario Environment plan from the existing Federal program is expected to be $130 by 2022. This difference will diminish over time, but costs will still remain higher under the Ontario program through 2030. The root cause for this difference comes from the Federal rebate program. Every taxpayer gets to claim a tax rebate for the carbon emissions, while Ontario does not supply rebates. Instead, Ontario has tailor fit its program to certain initiatives, like adding more ethanol to gasoline. While it expects these initiatives to outperform the emission reduction of the Federal plan, the rigidity comes at a cost.

If you have a facility under the OBPS, should it be moved to the EPS?

The simple answer to this question is yes. Because the EPS has a ‘lag’ of $10/tonne CO2e in both 2021 and 2022 behind the OBPS rate, it is almost certainly beneficial to make the switch. Additionally, because the EPS does not restrict voluntary registrants by their NAICS code, there are likely additional facilities in Ontario that can now enroll in the EPS that were not eligible for the OBPS. For both cases, a feasibility study should be conducted to provide a cost analysis of making the change. For this and other energy services, Canadian Energy Strategies is a reputable energy consulting firm that can be of help. To connect, please send an email to sales@ces-energy.com.

 

Sources:

https://www.cbc.ca/news/canada/calgary/ucp-kenney-ford-carbon-tax-1.4851782

http://www.gazette.gc.ca/rp-pr/p2/2019/2019-07-10/html/sor-dors266-eng.html

https://www.ontario.ca/laws/regulation/r19241#BK7

https://www.documentcloud.org/documents/7217273-476900662-Wilkinson-Letter-to-Yurek-Sept-20-2020.html

https://ontarioclimateplan.ca/wp-content/uploads/2019/06/Made-in-Ontario-Report-Draft-vF-June-2-19.pdf