To: Shelley Hyatt…

To: Shelley Hyatt
Senior Policy Advisor
Ministry of the Environment and Climate Change
Climate Change and Environmental Policy Division
Air Policy Instruments and Programs Design Branch
77 Wellesley Street West
Floor 10
Ferguson Block
Toronto Ontario
M7A 2T5

15 November 2017

Public Comment Submission
Ontario Offset Credits regulation under the Climate Change Mitigation and Low-carbon Economy Act, 2016

Overview

Bill 172, Climate Change Mitigation and Low-carbon Economy Act, 2016 was set out to prevent a rise beyond 2 degrees Celsius from industrial sources, as this rise in temperature risks irreversible damage to our environment.[1] For this reason, Ontario has implemented a cap and trade program, which aims to reduce greenhouse gas pollutions by setting a limit on allowable emissions and rewarding innovative companies for achieving greenhouse gas reductions.[2] Within the cap and trade program, offset credits which represent one tonne of CO2e, were introduced as tradable instruments which offer capped emitters flexibility in meeting their compliance obligations.[3] Offset credits originated from the Paris Agreement, setting the groundwork for collaboration on mitigation efforts between parties, and as a result, allowed parties to transfer carbon offset credits between one another.[4] The use of offset credits have allowed global markets to determine the most cost-effective emissions reductions or avoidances meanwhile encouraging emission reduction strategies.[5] Introducing carbon offset credits Regulation in the Climate Change Mitigation and Low-carbon Economy Act will surely aid Ontario in meeting its environmental obligations, but the Regulation is not without its shortfalls. This public comment aims to examine the shortcomings of the carbon offset credits and offers the following recommendations in response.

1. Avoiding Overallocation - Set the Caps Below the Business as Usual Emissions Empirical evidence from existing cap-and-trade programs suggest that caps are not stringent enough.[6] Throughout the implementation of cap-and-trade programs there has been a tendency to overallocate allowances.[7] Thus, Ontario’s cap and trade program regulations should seek to implement a conservative baseline for project emissions reductions and a stringent allowance policy which will guarantee overall mitigation. For example, Japan’s Joint Crediting Mechanism (JCM) is a pragmatic example of how overall mitigation is put into practice. The JCM introduces the concept of “reference emissions” which are set below business as usual emissions therefore upholding the integrity of the program meanwhile ensuring overall mitigation.[8] In contrast, a generous cap and trade program which is overallocated, as the annual caps are set above business as usual emission levels, allows participants to emit more than they emitted in years preceding the program.[9] According to McAllister, this overallocation leads to lower allowance prices, delays in emissions reductions, and the buildup of large allowance banks.[10] As the Climate Change Mitigation and Low-carbon Economy Act aims to reduce its emissions by 15% by 2020, Ontario should seek to enforce a stringent cap, which enables industries to meet our proposed deadlines.

Prices of allowances in existing cap-and-trade programs are arguably the single most important factor and the one most directly under the influence of policymakers.[11] Overallocation of allowances leads to an overabundance of allowances available for purchase in the carbon offset market, which depresses their price making them subject to collapse. The Regional Clear Air Incentives Market (RECLAIM) is an example of an unsuccessful cap-and-trade program due to its overallocation of allowances. Studies of RECLAIM show that its early overallocation was partly responsible for the allowance market failure. With overallocation, industries became accustomed to being able to purchase allowances at low prices whenever necessary and avoided installing pollution control equipment. As RECLAIM was generous with its allowances to begin with, the excess number of allowances never allowed the carbon market to develop robustly.[12] As a result, during California’s electricity crises in 2000, prices for allowances spiked dramatically because of huge increases in electricity demand, and as utilities were ill-equipped to act and lacked the appropriate amount of allowances to cover their emissions cost-effectively, many electric utilities had to pull out from the program.[13] Clearly, in this scenario overallocation led to the detriment of the program, and numerous electric utilities were unable to afford allowances to meet their compliance obligations. This was because the program to begin with, left companies with allowances in excess of their business as usual emissions. As a result, companies were unable to respond when faced with a dramatic increase in allowance price as they never had an opportunity reduce their emissions accordingly.

The most apparent problem with existing cap-and-trade programs is that they have not generated high enough allowance prices to trigger significant emissions reductions from the corresponding industries.[14] For instance, the Chicago Emissions Reduction Market System (ERMS) was designed with such extensive overallocation, it was environmentally ineffective as it was not as stringent as pre-existing conventional regulations.[15] The excess of tradeable credits and low price of allowances provide little incentive for technological innovation to control greenhouse gas emissions. In fact, trends in emissions reductions before and after the implementation of RECLAIM illustrate a slowing down of emissions reduction.[16]
If more allowances were allowed than needed to cover the business as usual emissions, then banked allowances will not represent emissions reductions but rather sources for industries to emit more in the future.[17] While the usefulness of banking emission reductions has been recognized, banked allowances have been criticized for allowing industries to emit beyond the caps legally.[18] The Acid Rain Program (ARP) is an example of where overallocation resulted in the buildup of a large allowance bank. In fact, by the end of phase 1 in 1999, the ARP banked 2 years worth of emissions, and as a result were able to exceed the annual allocations every year except 2006 by at least 7%.[19]
Therefore, as the Climate Change Mitigation and Low-carbon Economy Act seeks to implement offset credits in its cap-and-trade program, the caps should be stringent as to not allow for overallocation, as this leads to lower allowance prices, delayed reduced emissions, and a buildup of large banking allowances. To remedy this, Ontario should follow Japan’s Joint Crediting Mechanism, and set its caps below the business as usual emissions, as more stringent caps ensure overall mitigation.

2. Ensure That Offset Credits Being Used Actually Attribute To Emissions Reductions     

A jurisdiction with a poorly designed offset program could significantly undermine the capacity of the cap-and-trade program in producing real and cost-effective carbon emissions reductions.[20] Carbon offset credits allow mitigation activities outside the cap-and-trade system, thereby providing a mechanism for industries to meet their compliance obligations outside the cap and trade program, and ultimately lowering costs.[21] Offsets credits have great political appeal because they significantly lower overall compliance costs, however, the difficulty with offset provisions is whether or not they result in real emissions reductions that would not have occurred without the program.[22] In fact, for carbon offset credits to reduce emissions effectively, credits should only be given to projects with measurable reductions that would have not occurred without the offset credit program.[23] However, this would require a rigorous screening process which would further incur transaction costs.[24]
The world’s largest offset program, the Clean Development Mechanism (CDM) has taken many approaches to ensure real emission reductions.[25] However, as the use of international offsets grow, the largest share of projects and credits have gone to China and India. As China’s emissions grow unparalleled, many political stakeholders feel that China should commit to a more stringent emissions reduction plan, and object to transfers enabled to China under the CDM. Similarly, the carbon offset credits implemented in Ontario should not allow large industries to simply purchase offset credits from smaller industries and thereby enable it to meet its compliance obligations. Rather a stringent emissions reductions plan should be imposed on larger corporations, to ensure that offset credits being used actually attribute to emissions reductions. One solution to the distributional problem in the carbon offset credit is to focus international offsets on poorer countries, or emphasize regional or local offset programs.[26] In the United States, there was a highly successful cap and trade program called the “NO Budget Program”. This program was especially successful because the efforts were focused on capping emissions from utilities in the specific region.[27] In fact, local offsets are more costly, but are favored by local authorities, and regional programs in North America have been given preference to offsets from regional or domestic emissions reduction projects.[28]
Another example of an unsuccessful implementation of the cap-and-trade program includes the Bush Administration attempting to enact a cap and trade program for the control of mercury. This was largely unsuccessful because mercury itself is ill-suited for regulation under a market-based trading scheme. Incidentally, mercury’s harmful effects are highly localized, and under a cap-and-trade program a large mercury polluter could avoid reducing emissions by buying allowances in other localities creating “hotspots” of highly polluted areas to continue to go unregulated.[29] Thus, Ontario should consider carefully which substances are to be included in the cap-and-trade program, as substances such as mercury, which are highly localized would be of a detriment rather than a benefit to the program.
Another existing area of concern for the growing carbon offset market is the credibility and transparency of offset credits. Currently, existing standards are not consistent, and there is no single regulatory structure that binds offset providers to adhere to any particular standard.[30] Furthermore, there is no global established agreement on which standard is the most credible measure of quality amongst the providers.[31] As a result, there are widespread instances of people or organizations buying worthless credits which do not yield any reductions in carbon emissions.[32] To remedy this, registries have been created to exchange and track the holding of credits and allowances in the carbon offset market. This is because the carbon market infrastructure is not only concerned with accounting and tracking emissions and credits, but also their integrity and quality.[33] Offset registries track and account for the production and consumption of offset credits by attaching a distinct serial number to each tonne of avoided greenhouse gas emissions. Some regulated carbon markets combine the role of inventory and offset registries. The EU uses a transaction log, which records the exchanges of allowances or credits, and a registry which records the holdings of allowances and credits.[34] As there has been a growing movement towards the use of carbon offset credits, the need for credit integrity and a standardized process is overdue. Similarly, Ontario needs to incorporate a standardized process for project approval and a method to measure those wanting to develop offset projects. Furthermore, this standardized process must allow stakeholders to demonstrate how much the project reduces emission and how their project lives up to the standard.
Therefore, establishing a baseline is absolutely essential to creating a successful offset program. As long as offsets are real and verifiable through a transparent and standardized process then offsets do not undermine the integrity of the cap set out in the cap and trade program. However, if there are reasons to believe that offsets are likely to produce a significant amount of gaming or lack appropriate regulatory control, then complementary policies may be necessary to produce real and meaningful reductions that the cap could no longer ensure.[35]

3. Indigenous Engagement Should Include Consent

Special attention should be paid to Indigenous communities’ recommendations as the Regulations and Protocols for EBR 013-1460 (Regulations) are being drafted. Indigenous communities have been recognized as having a special connection with the land and as keepers of traditional ecological knowledge and their contribution to public comments should be given special weight. At his climate speech in Paris in 2015 Prime Minister Trudeau said "Indigenous peoples have known for thousands of years how to care for our planet. The rest of us have a lot to learn."[36] Ontario has recognized this knowledge in the legislation and the preamble of the Climate Change Mitigation and Low-carbon Economy Act states:

The Government will continue to involve and engage… First Nation and Métis communities in the ultimate goal of fostering a high-productivity low-carbon economy and society in Ontario…[and that] First Nation and Métis communities have a special relationship with the environment and are deeply connected spiritually and culturally to the land, water, air and animals. They may offer their traditional ecological knowledge as the Government of Ontario develops specific actions. [37]

The Act also states that Indigenous knowledge shall be considered when the province is preparing a climate change action plan. “If a First Nation or Métis community offers its traditional ecological knowledge to the Minister, the Minister shall take into consideration the role of traditional ecological knowledge with respect to the action plan.”[38] Ontario’s current five-year action plan contains four pages dedicated to an action area called ‘Collaborations with Indigenous Communities’. However there is only a single mention of how Ontario will engage with Indigenous communities in the carbon economy. It says that Ontario will establish a fund that will include support for the development of carbon sequestration projects.[39] Funding of projects in which Indigenous communities grow or protect forests is an important initiative as long as the communities are consenting to this use of their lands. The Regulation Proposal Notice that is currently posted on the Environmental Registry states, under ‘Other Public Consultation Opportunities,’ that:

Ontario is committed to additional engagement with Indigenous organizations and communities. The ministry has been working to establish relationships with Indigenous organizations. Through these discussions, Indigenous organizations and communities have expressed interest in various aspects of the program and Ontario is committed to working together to explore potential opportunities for participation.[40]

While it is encouraging that Ontario wants to explore areas in which Indigenous communities can and will participant in the carbon offset economy the province should also obtain consent before protocols are put into place that will directly or indirectly impact these organizations and communities.
The United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP) states governments seek free prior and informed consent from Indigenous peoples before enacting legislation that will affect them.
States shall consult and cooperate in good faith with the indigenous peoples concerned through their own representative institutions in order to obtain their free, prior and informed consent before adopting and implementing legislative or administrative measures that may affect them.[41]

UNDRIP also states that Indigenous peoples have the right to manage their lands and other resources[42] as well as the right to conservation and protection of the environment.[43] Since Ontario has recognized that Indigenous peoples have a special connection to the land and to the air, all carbon offset Regulations should require Indigenous consent before being finalized. Writing for KAIROS in 2015, John Dillon said that carbon offset regulations should include meaningful engagement with Indigenous peoples.

Indigenous leaders insist that land use and forestry preservation plans must not proceed without consultation and the Free, Prior and Informed Consent (FPIC) of the peoples affected, as required by the UN Declaration on the Rights of Indigenous Peoples. They insist that Indigenous peoples are in the best position to take care of their own lands based on their own cultural and spiritual traditions.[44]

A recent press release on the Ontario Energy Plan by the Chiefs of Ontario states that First Nations are not currently, and need to be, full participants in the provincial development of energy programs.

Going forward First Nations need to be equal partners through inclusion in participatory processes and policy development that will drive the implementation of this plan. First Nations are poised to level the playing field and become major players in the energy field. However, we – which also includes all Ontarians – can only succeed when First Nations are fully involved in program development.[45]

Because the Chiefs of Ontario have very recently stated that do not feel as if they are full partners in the current discussion in Ontario about energy and climate and because UNDRIP calls for free, prior, and informed consent when states draft and enact legislation and because the government of Ontario has recognized, in statute, the value of traditional knowledge in environmental concerns, the content of the carbon offset Regulations should be approved by Ontario’s Indigenous peoples.

4. Offset Credit Restrictions in the Sarnia Area

Whether or not the government of Ontario obtains free, prior, and informed consent from Indigenous communities for the proposed Regulation, the province should also consider restricting the amount of credits that can be purchased in the Sarnia area. In October 2017 the Toronto Star published a news report that followed an investigation into the health effects of the air pollution around Sarnia. There are fifty seven facilities registered as polluters with the Canadian and U.S. governments, all within twenty five kilometres of Sarnia and the Aamjiwnaang First Nation is surrounded on three sides by the polluters. In October 2017 the Environmental Commissioner of Ontario published the Environmental Protection Report, Good Choices, Bad Choices. The report states “Governments and industry have long failed to remedy environmental issues that adversely affect the health, ecology and economies of Indigenous communities across Ontario.”[46] One of the worst polluted areas that is highlighted in the report is Aamjiwnaang.

The multitude of pollutants released into the airshed every day result in frequent, serious air quality issues. In addition, community waterways and soil are heavily polluted with many of the same pollutants. Significant benzene and other hydrocarbon spills have contaminated the soil and water, and remediation work has often been slow. As noted above, many of these pollutants can damage trees and other plants, and harm fish and wildlife.[47]

In October 2007, the environmental law charity, Ecojustice released the findings of an investigation into air pollution in Sarnia, Exposing Canada’s Chemical Valley. In this publication they write that, along with many other air pollutants, Sarnia emits large amounts of greenhouse gases (GHGs).

Sarnia emits more than one fifth (21 per cent) of Ontario’s total greenhouse gas emissions from industrial facilities reporting to the greenhouse gas program. The industrial facilities in the Sarnia area emit more greenhouse gases than the industrial facilities in many provinces such as New Brunswick (12,610,793 tonnes carbon dioxide equivalents) and British Columbia (12,443,950 tonnes carbon dioxide equivalents). Greenhouse gas emissions from Sarnia area facilities increased 4 per cent from the previous year, 2004.[48]

Ontario requires participation in the cap and trade program for companies that generate 25,000 tonnes (t) of greenhouse gas emissions (CO2e) per year.[49] The Suncor refinery in Sarnia generated 652,642 CO2e(t) in 2015.[50] Recently Ontario announced plans to conduct a health study at Aamjiwnaang and to take “further steps” to improve air quality.[51] While this health study is ongoing Ontario should restrict the amount of offset credits that are allocated in the area. In 2014, the United Nations Special Rapporteur on the Rights of Indigenous Peoples released a report that found that Indigenous peoples in Canada “face the highest risks to their health, economy and cultural identity from any associated environmental degradation.”[52] As part of Ontario’s ongoing commitment to reconciliation and to ensuring a better future for First Nations, Inuit, and Métis people[53] the Regulations for carbon offsets should include restrictions on carbon offsets in Sarnia.

Conclusion     

In order for the Regulations and Protocols for EBR 013-1460 to reflect the purpose of the Act and extend the environmental benefits of greenhouse gas mitigation we propose that Ontario consider our recommendations: That Ontario set the caps below the business as usual emissions in order to limit overallocation; ensure that the offset credits that are being used actually attribute to emissions reductions; that Indigenous engagement includes consent; and that there are offset credit restrictions in the Sarnia area.

[1] Bill 172, Climate Change Mitigation and Low-carbon Economy Act, 2016 (Preamble)
[2] Ontario, Cap and trade, online <https://www.ontario.ca/page/cap-and-trade>.
[3] Cap and trade: compliance offset credits and protocols, online <https://www.ontario.ca/page/cap-and-trade-offset-credits-and-protocols>.
[4] Casper Chiquet “Offsets Under the Paris Agreement” 2016 50-52 at 50 [Chiquet].
[5] Cap and trade: compliance offset credits and protocols, online <https://www.ontario.ca/page/cap-and-trade-offset-credits-and-protocols>.
[6] McAllister K. L. “The Overallocation Problem in Cap-and-Trade: Moving Toward Stringency” (2009) 395-445 at 410 [McAllister].
[7] Ibid at 410.
[8] Chiquet supra note 4 at 52.
[9] McAllister supra note 6 at 410.
[10] Ibid at 413.
[11] Ibid at 414.
[12] Ann E. Carlson “Designing Effective Climate Policy: Cap-and-Trade And Complementary Policies” 2013, 207-248 at 221 [Carlson].
[13] Ibid at 221.
[14] McAllister supra note 6 at 419.
[15] Ibid at 419.
[16] Ibid at 420.
[17] Ibid at 423.
[18] Ibid at 424.
[19] Ibid at 424.
[20] Carlson supra note 12 at 224.
[21] Richard G. Newell, William A. Pizer, Daniel Raimi “Carbon Markets 15 Years after Kyoto: Lessons learned, New Challenges” 2013, 123-146 at 136 [Newell].
[22] Carlson supra note 12 at 225.
[23] Newell supra note 22 at 137.
[24] Ibid at 137.
[25] Ibid at 137.
[26] Ibid at 138.
[27] Carlson supra note 12 at 219.
[28] Newell supra note 22 at 138.
[29] Carlson supra note 12 at 221.
[30] Kathy Dhanda and Laura P. Hartman “Ethics of Carbon Neutrality” at 120.
[31] Ibid at 120.
[32] Ibid at 119.
[33] Steven Berstein, Michele Betsill, Matthew Hoffman, Matthew Paterson “Tale of two Copenhagens” 2010 161-173 at 167.
[34] Ibid at 167.
[35] Carlson supra note 12 at 226.
[36] John Dillon, “Will Canada listen to Indigenous peoples on carbon offsets?” Rabble, 10 December 2015 online < http://rabble.ca/blogs/bloggers/kairos-canada/2015/12/will-canada-listen-to-indigenous-peoples-on-c arbon-offsets>. [Dillon]
[37] Climate Change Mitigation and Low-carbon Economy Act, 2016 SO 2016, CHAPTER 7, Preamble. [Act]
[38] Ibid s 7(2).
[39] Ontario, Ontario’s Five Year Climate Change Action Plan 2016 – 2020 at 40.
[40] Environmental Registry, EBR Registry Number: 013-1460, Regulation Proposal Notice, online: <http://www.ebr.gov.on.ca/ERS-WEB-External/displaynoticecontent.do?noticeId=MTMzNTQz&statusId=MjAzM Dc1&language=en>.
[41] United Nations, United Nations Declaration on the Rights of Indigenous Peoples, UNDRIP, UN Doc 07-58681, (2008) article 19. [UNDRIP]
[42] UNDRIP supra note 6 Article 25.
[43] Ibid Article 29.
[44] Dillon supra note 1.
[45] Chiefs of Ontario, “Regional Chief Isadore Day statement: First Nations still not equal partners in Ontario’s long term energy plan” 27 October 2017, online <http://www.chiefs-of-ontario.org/node/1608>.
[46] Ontario, Good Choices, Bad Choices (October 2017) online < https://eco.on.ca/reports/2017-good-choices-bad-choices/> at 8.
[47] Ibid at 124.
[48] Ecojustice, Exposing Canada’s Chemical Valley (October 2007) online < https://www.ecojustice.ca/wp-content/uploads/2015/09/2007-Exposing-Canadas-Chemial-Valley.pdf> at 22.
[49] Ontario, Cap and trade, online <https://www.ontario.ca/page/cap-and-trade>.
[50] Ontario, Greenhouse gas emissions reporting by facility, 2015 data, online <https://www.ontario.ca/data/greenhouse-gas-emissions-reporting-facility>.
[51] Carolyn Jarvis and Andrew Russell, “Ontario government commits to fund health study after ‘Chemical Valley’ investigation” Global News 16 October 2017 online <https://globalnews.ca/news/3805442/ontario-government-commits-to-fund-health-study-after-chemical- valley-investigation/>.
[52] James Anaya, Human Rights Council Report of the Special Rapporteur on the rights of indigenous peoples, United Nations, 27th Session Agenda Item 3, (General District, 2014) at 17.
[53] Ontario, Ministry of Indigenous Relations and Reconciliation online <https://www.ontario.ca/page/ministry-indigenous-relations-and-reconciliation>.

[Original Comment ID: 211335]