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What Ontario Businesses Need to Know About Cap and Trade

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The smart money is on reducing energy consumption.

The writing is on the wall: the sustainable economy is here, and it’s here to stay. With the landmark signing of the Paris Accord at the United Nations Framework Convention on Climate Change in late 2015, 191 countries agreed: it’s time to take a stand on global warming. It’s time that we all walk the walk and take action to dramatically cut greenhouse gas (GHG) emissions on a global scale.

ghgtargetsEven before the UNFCCC, Ontario had set aggressive GHG reduction targets. In May of 2015, the Ontario government announced its reduction targets for 2050: an ambitious 80% reduction from 1990 GHG emission levels. Ontario has been a leader in environmental protection and clean energy, as evidenced by the off coal program put into action in 2007 – a time when coal fired electricity generators accounted for 25% of the electricity generation in Ontario. As of 2014, in the largest climate change initiative to date in North America, Ontario officially retired the last of its coal fired generators.   We replaced the high-emissions coal generators with cleaner renewables, nuclear, and natural gas fired generators. The refurbishment of Bruce Power to full operational capacity was a cornerstone to this plan, providing 70% of the energy required for the off-coal program.

Ontario’s commitment to reduce GHGs ahead of an official federal action prompting us to do so shouldn’t come as a surprise, but our previous actions to reduce GHGs from electricity generation poses a unique challenge: Ontario has already reduced a significant portion of our GHG emissions and will need to look elsewhere to get a handle on the problem. Enter the cap and trade policy. The compliance period begins on January 1, 2017 – so how is this going to impact your Ontario business?

The basics of cap and trade.

In the cap and trade system, the government will release a limited number of allowances for emissions, creating a cap on overall emissions. Companies can then buy and sell these allowances amongst themselves. Clean companies can benefit from selling off their credits, and emissions-heavy companies can purchase credits for sale. The system is geared to reduce overall emissions by reducing the cap gradually year over year, while incentivizing companies to invest in cleaner processes and lower energy usage.

Who is required to purchase cap and trade credits?

For most Ontario businesses, purchasing cap and trade credits will be voluntary. Mandatory participation is required of only certain large industries for now– namely cement, glass, petrochemical, copper and nickel, iron and steel, pulp and paper, and energy generation and storage.

Electricity generators and natural gas and petroleum distributors will need to obtain additional allowances for the greenhouse gas emissions of their customers. In other words, the carbon generated for the production of electricity for your facility or the natural gas your business burns will be offset by credits purchased upstream by the distributors. These will be passed on to you, the consumer, as an additional cost on your electricity or natural gas bill.

So how will cap and trade impact my electricity costs?

Virtually all emissions from the electricity sector in Ontario are related to natural gas fired generation. Natural gas generators will pay for the cost of their carbon indirectly, through the upstream purchase of credits by the natural gas utility (Enbridge or Union Gas). The natural gas utility will pass on the additional cost of these credits as a charge – an additional $/unit of natural gas – for the natural gas consumed by the generator. This will translate to an increased cost to produce electricity and an overall higher price of electricity.

The best way to offset the impacts of the cap and trade program, and to do your part to ensure sustainability for the future, is to reduce the overall energy usage and footprint of your facilities.

How much will this additional cost be?

The Ontario emission allowance floor price at auction will be the higher of the auction reserve prices from Quebec and California, with an increase of 5% plus inflation each year. This increased charge (will be passed on to the generator as a higher fuel price. Through using the above methodology, the projected increase of natural gas to the commodity will be ~0.94/MMBtu in 2016.

This increased fuel price will, in turn, be passed on to the electricity consumer as a higher price of electricity on the open market

How can I benefit from cap and trade?

Overall, cap and trade will have an upward impact on electricity rates in Ontario. But there is an opportunity here.

For a majority of Ontario businesses, offsetting the effects of Cap and Trade will require a reduction in the downstream products you consume that are being regulated by the program, namely electricity and natural gas consumption. In other words, the best way to offset the impacts of the cap and trade program, and to do your part to ensure sustainability for the future, is to reduce the overall energy usage and footprint of your facilities.

But first you must find the inefficiencies in your operations to reduce the electricity you consume – and thereby reduce your emissions. The Bruce Power Saver can help. It’s an energy management system that helps you regularly analyze and understand your energy consumption data, so that you can eliminate wasteful energy use, identify anomalies and develop a continuous plan for improvement.

Looking for more information on cap and trade? Here are some additional resources available from the Province of Ontario:

 

Join us as we discuss the impacts of the new cap and trade regulation, and more, at our upcoming encore presentation of our Fall 2016 Market Insights webinar on October 13 at 11:00 am.


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