The proposed legislation to wind down Ontario’s cap and trade program is of significant interest to Koch Industries, Inc. (Koch) and Koch appreciates the opportunity to provide this submission on Bill 4, Cap and Trade Cancellation Act, 2018.
Under the previous government’s Climate Change Mitigation and Low-carbon Economy Act, 2016, (the CT Law) the Ontario cap & trade program was linked with California and Quebec’s programs on January 1, 2018 and operated jointly as part of the Western Climate Initiative (WCI). Koch’s participation in the market for WCI compliance instruments is not voluntary. While Koch does not support the concept of cap and trade, Koch companies have mandatory compliance obligations in both Ontario and California and Koch has participated in the WCI cap and trade program through five Koch companies – INVISTA (Canada) Company, Flint Hills Resources, LP, Georgia-Pacific Gypsum, LLC, Guardian Industries, LLC, and Koch Supply & Trading, LP (KS&T). Under the CT Law, these Koch companies have been fulfilling their mandatory obligations as one corporate compliance group in order to comply with the purchase and holding limits set out in the cap & trade regulations.
Koch participated in Ontario’s cap and trade auctions through its wholly-owned subsidiary, KS&T, in order to meet the mandatory obligations of the CT Law through a single entity with the requisite expertise in cap and trade auctions. The total compliance obligation of Koch companies in the WCI program through 2020 was estimated to be approximately 4 million tonnes.
Koch respectfully submits that Bill 4, as currently written, will create arbitrary and unjustified distinctions, and create winners and losers through the proposed compensation scheme. Bill 4, as it presently reads, will disadvantage entities that diligently met their “mandatory participant” compliance obligations through multi-national corporate compliance entity that is registered as a “market participant,” as such terms are defined in the CT Law. In contrast, companies that did not meet their compliance obligations in a timely manner will be unfairly rewarded in a manner that is entirely antithetical to the purpose and intent of the statutory scheme and any other legitimate purpose. Specifically, entities that did not promptly purchase compliance instruments to meet their expected compliance obligations under the cap and trade program are no longer expected to true up their accounts, while companies, like Koch, that purchased emission allowances to meet their compliance obligations are unduly and significantly penalized. Whether a company wins or loses in relation to Bill 4 may be decided simply by the jurisdiction in which the company happened to hold its compliance instruments.
Further, Koch has the potential to be financially harmed by the current approach set out in Bill 4. Specifically, Koch purchased compliance instruments to meet its obligations, which now appear to be stranded in Ontario. Koch procured these compliance instruments in the joint auction held in May 2018 to meet Koch’s current compliance obligations. These allowances were delivered to KS&T’s Ontario registry account on June 11, 2018. When Ontario froze all registry accounts on July 3, 2018, these allowances effectively became stranded and Koch companies now have more compliance instruments in their Ontario registry accounts than required to fulfill their Ontario emissions obligations and too few to meet their mandatory obligations in linked jurisdictions. As a result of the freeze, Koch cannot meet its compliance obligations in the WCI without procuring additional allowances at substantial additional cost to Koch.
It is our hope that the government will amend Bill 4 in order to ensure just and equitable treatment for Koch’s corporate compliance group operating in Ontario. Our proposed amendments to Bill 4 below, offer a solution that includes requiring all mandatory and voluntary participants to match their actual attributed emissions through July 3, 2018 with existing compliance units (please see amendment to Bill 4 Section 6.2 below).
The government may also wish to undertake a fact-based assessment to determine the entities that should be eligible for compensation and the quantum of such compensation. In doing so, the government has the ability to mitigate any unintended, arbitrary outcomes of its proposed legislation (such as a compensation system that arbitrarily excludes specific market participants based only on their definitional classification) by moving to a fact-based system that examines the type of activity of the registered participant and related losses in order to determine if they are “compensation-eligible” (please see amendment to Bill 4 Section 8 4(1) below).
Section 6(2) Retirement
Eligible instruments of a participant are retired as follows:
1. If the number of eligible instruments of the participant is equal to or greater than that aggregate amount of all greenhouse gas emissions attributed to the participant in respect of the prescribed time period, the number of eligible instruments equivalent to that aggregate amount shall be retired.
2. If the number of eligible instruments of the participant is less than the aggregate amount of all greenhouse gas emissions attributed to the participant in respect of the prescribed time period, all of the eligible instruments shall be retired, and the participant shall procure for retirement from a pool of instruments assembled by the Minister additional eligible instruments equal to the difference between the quantity of greenhouse gas emissions attributed to the participant and the number of eligible instruments retired by the participant pursuant to Section 6(2)1, such purchases to be made in accordance with and at a rate no lower than a minimum price of CAD$18.72/tonne established by the regulations
Section 8(4) No compensation, specified participants
1. A participant that was registered as a market participant within the meaning of the Climate Change Mitigation and Low-carbon Economy Act, 2016, excluding any market participant related to and acting for, on behalf of, or in relation to a mandatory participant pursuant to section 14(1)(1) of the Climate Change Mitigation and Low-carbon Economy Act, 2016 and section 2 of Ontario Regulation 144/16.
Thank-you for your timely consideration of these submissions.
Koch Industries, Inc.
Submitted October 11, 2018 7:28 PM