The Ontario Cap and Trade Forum, held on April 26th and 27th in Toronto brought together government representatives, industry associations, regulated emitters, and a range of carbon market service providers who all share a stake in Ontario’s emerging carbon market. A number of presentations and panel discussions across two full days provided attendees with key insights that are important to be aware of as the cap and trade system develops.
Three members of the CSG team attended the Cap and Trade forum and put together the following list of 10 key takeaways.
1. Regulated emitters: Post 2020 market design is critical for establishing regulatory certainty.
The Ontario Government will establish the 2021-2030 caps by the end of 2017. During panel discussions, regulated emitters noted that the post 2020 caps will help them plan timeframes for investments in clean technology and carbon reduction initiatives. Regulatory certainty will help to decrease risks and highlight opportunities for low carbon investments.
2. Cap and trade creates business opportunities.
Cap and trade may seem like a regulatory burden. Obvious challenges do exist such as developing a carbon management team and developing strategies for participating in the complexity of auctions. However, industry representatives noted that cap and trade creates opportunities for investing in clean tech. Carbon markets that develop out of the cap and trade program will help to finance carbon reduction projects and improvements in clean technology.
3. Agreement: Linking carbon markets is good for Ontario.
Linking Ontario with the Western Climate Initiative will keep emission allowances at the price floor and increase the pool of low-cost emission reductions. This is good for Ontario emitters because compliance costs will remain low. Lower costs for emitters is also better for Ontario consumers who ultimately bear the costs.
4. More offset projects will come on-line in 2018.
Climate Action Reserve reiterated their intention to complete all 13 offset protocols by the end of 2017. Their work plan is currently on schedule. The finalized offset protocols will allow developers to plan offset projects and reduce emissions throughout the province for 2018 and beyond.
5. Larger carbon markets increase the liquidity of compliance instruments.
Activity in secondary carbon markets will increase when there is a larger number of potential buyers while will result from Ontario linking to the WCI. Furthermore, carbon offset developers will be able to attract more financing when there are more buyers for offsets. Some offset developers noted that a lack of financing options is currently a barrier for moving forward with projects. Financial institutions still view offset projects as overly risky.
6. Aggregation options are required for certain types of offset projects.
Many offset projects have high transaction costs. If spread across multiple offset projects, these transaction costs become less of a barrier and make investments in certain offset projects more economically viable. More reductions in GHG emissions will occur if aggregation options are built into offset protocols.
7. Cap and trade revenues will finance the Climate Change Action Plan.
There is uncertainty around the consistency of revenue generation from government-held auctions. However, all proceeds will help to finance the Climate Change Action Plan. A panel discussed the best areas to direct this revenue which included; transitioning the province towards a circular economy, financial assistance for companies to make significant process changes, and encouraging industry collaboration that would develop mutually beneficial outcomes.
8. Regulated emitters benefit from carbon market service providers.
A number of different presenters and panelists representing emitters noted how they need support from professional carbon market service providers. For example, emitters may lack experience in developing offset projects or purchasing carbon offsets in compliance strategies. Moreover, cap and trade is not the core competency of emitters. Companies like CSG are modelled to fill these needs and provide value for emitters, investors and offset project developers.
9. Carbon markets have an inherent risk of policy change.
Players in carbon markets can’t escape the “stroke of pen” risk. Politicians will continue to play politics with mechanisms for carbon pricing. Policy adjustments are being influenced by a suite of different stakeholders including the environmental justice community, the Trump Administration, opposition political parties, and industry. Working in these markets requires experience and expertise.
10. Cap and trade is here to stay.
Despite the “stroke of pen” risk, the general sentiment at the forum was that there is a small likelihood that a new Ontario Government would do away with the cap and trade program. Large emitters in Ontario have a strong preference for cap and trade because many of them are emissions intensive trade exposed (EITE) industries. Emission allocations in a cap and trade program can prevent leakage. A carbon tax has no equivalent mechanism.