Submitted to the…

Submitted to the Environmental Registry of Ontario (ERO)
ERO # 013-3738 - https://ero.ontario.ca/comment/reply/node/466/comment
Cap and Trade Branch
77 Wellesley Street West, 10th Floor Ferguson Block
Toronto, Ontario, M7A 2T5

IETA COMMENTS ON BILL 4 (ERO #013-3738)
Cap and Trade Cancellation Act, 2018

The International Emissions Trading Association (“IETA”) appreciates this opportunity to share input on the Government of Ontario’s Bill 4, Cap and Trade Cancellation Act, 2018. IETA believes that policy certainty, meaningful consultation, and fair treatment should be embraced as core principles to inform future Bill 4 discussions and climate plan transition activities for the province.

IETA is the premier international business voice on climate markets and finance. Our multi-sector, non-profit organization represents over 150 international companies, including many with investments and operations providing employment and value creation across Ontario. Our expertise is regularly called-upon to inform climate policies that deliver demonstrable greenhouse gas (GHG) emission reductions, address industrial competitiveness, spur and protect jobs, enable fair and realistic program implementation (and transition), and balance economic efficiencies with societal benefits.

For two decades, our business community has remained committed to supporting least-cost market approaches to achieve climate goals. For Ontario, we believe such measures should form the backbone of provincial climate action to 2030 and beyond. These powerful market tools must be underpinned by environmental integrity and allow for flexible compliance while enabling cross-border program alignment.

OVERVIEW & EXECUTIVE SUMMARY

Our comments are structured around two core sections: Section 1 features guiding principles to inform an effective and equitable climate plan transition for Ontario; and Section 2 contains more detailed input associated with specific sections of Bill 4.

Under Section 1, a set of guiding principles are identified and discussed as follows:
A. Fair Transition (including compensation and distribution of funds);
B. Transparency & Clarity (including determination of Ontario GHG targets);
C. Certainty & Stability;
D. Recognition of Past Policy Strengths & Weaknesses; and
E. Ontario in the International Context.

Under Section 2, we provide more detailed input and recommendations on various elements of the proposed Bill. Specific sections addressed by IETA are summarized below:

1.0 Targets, Climate Plan & Minister’s Progress Reports
2.0 Cap and Trade Instruments – Retirement & Cancellation
3.0 Compensation in respect of cap and trade instruments
4.0 General – No Cause of Action
5.0 General – Continuation of Account

SECTION 1: GUIDING PRINCIPLES FOR ONTARIO CLIMATE PLAN TRANSITION

The following captures IETA’s high-level priority input on Ontario’s proposed Bill 4, organized by guiding principles to inform a sound and meaningful climate plan transition.

A. FAIR TRANSITION (INCLUDING COMPENSATION & DISTRIBUTION OF FUNDS)

Under the cap and trade program, hundreds of Ontario – and non-Ontario – business and investors acted responsibly and in good faith to comply with enforceable program requirements. These entities actively invested in measurable carbon reduction activities and a market they considered reliable.

Businesses and their market behavior must be fairly considered, quantified and addressed in any transition plan to preserve investor confidence while dictating appropriate compensation in both level and scope. Businesses that acted on the basis of existing laws should not be penalized for prudent compliance behaviour.

B. TRANSPARENCY & CLARITY

We are encouraged to see this formal consultation period on Bill 4, including requests for input on Ontario’s new climate plan. These avenues of meaningful consultation with stakeholders, throughout the critical transition period and development of the new plan, should become more open and frequent. This is particularly true for business and market participants who invested, planned and attempted to comply under previous Ontario climate laws and regulations.

Openness and transparency throughout Ontario’s climate plan transition will prove vital. Ensuring that all stakeholders, particularly those directly affected by the material policy transition, must be approached, fairly represented and have their interests and concerns dealt with in a reasonable manner. This will prove essential for ensuring that Ontario’s policy transition is conducted in a way that is readily-defendable both within and outside of the province. This will also nurse legitimacy to the political process for broad business and investor confidence in Ontario and its management of economic and financial issues related to addressing climate.

C. CERTAINTY & STABILITY
In ongoing conversations with many of Ontario’s largest companies, these entities consistently emphasize the fundamental importance of policy consistency and certainty for continued operation and growth. Proper functioning of policy requires certainty in terms of the shape and timetables of policy execution, not least with respect to compliance obligations within that policy. Ontario businesses must know what they are expected to do, when, and how.

Canada and Ontario are not immune to growing distrust in the legitimacy and continuity of policy decisions. Regulatory risk continues to be a growing concern and trend for investment, insurance and risk management communities. This ultimately translates into real impacts on domestic businesses these entities support and influence. Without clear, stable policy decisions or direction, the resulting cost impacts and risk premiums are sizeable on business decisions and evaluations for capital and investment.

D. RECOGNITION OF REAL STRENGTHS & WEAKNESSES

We recognize that the Ontario government aims to cancel, repeal, and revoke the existing climate legislation and regulations in no uncertain terms. However, the most pragmatic and prudent way forward would be to first examine and identify functional policy components under the previous Ontario program, with a view to preserving certain elements – perhaps in a modified form – to be leveraged and woven-in to Ontario’s new climate plan. Some components worth careful examination may include: opportunities for growth and risk-mitigation offered by cross-border and cross-provincial partnerships; use of market mechanisms to reduce emissions at least-cost to Ontarians; and maximized use of compliance flexibilities to reduce program costs while driving clean innovation and investment.

E. ONTARIO IN THE INTERNATIONAL CONTEXT

The Government continues to emphasize that Ontario is “open for business”, and IETA applauds and supports this sentiment. However, since June 2018, the manner in which the government has proceeded towards eliminating cap and trade and related climate programs is perceived as rushed, reactive and damaging. Actions to date have already undermined confidence in Ontario as being “open for business” across major industry and investor groups. Ontario solidifying a reliable and equitable cap and trade transition (and compensation) process and future decarbonization pathway will be watched carefully by business owners, investors and trade partners.

Major investors and credit rating agencies are becoming increasingly conscious of climate impacts and risk management. A growing number of these groups are demanding quantifiable climate financial disclosures and low-carbon scenarios-planning. Ontario has enjoyed a leadership position on economic growth and climate action underpinned by quantifiable climate action plans and disclosure. We therefore strongly encourage the government to move forward in a manner that enhances – rather than hinders – this position as a global leader and an attractive jurisdiction for investment.

SECTION 2: DETAILED COMMENTS ON BILL 4

The following shares more detailed input and recommendations around specific sections of Bill 4.

1.0 TARGETS, CLIMATE PLAN & MINISTER'S PROGRESS REPORTS

Clarity is required on provincial climate target-setting. Does the government remain committed to reaching Ontario’s 2030 and 2050 climate targets, as set out in the statute to be repealed? Or will the government set new near GHG targets under future legislation? If the latter, how will public consultation and evidence-based analytical activities weave-in to the new target-setting process?

We urge further public consultation and (environmental/cost) impact analyses to inform any new Ontario climate target(s) and plan. Any targets should not only respect Ontario’s GHG emissions profile and in-province abatement opportunities, but also national and international “levels of climate ambition” and growing trends around cooperative market approaches.

IETA strongly supports the establishment of GHG targets (including re-confirming targets established by the previous government) and a robust, defensible, evidence-based climate plan by Ontario. As currently written, Bill 4 does not prescribe timelines for the establishment of Ontario GHG targets, nor does it include set reviews and revisions of provincial targets. The proposed legislation also fails to prescribe creation of the new climate plan, plan revision processes overtime, and the preparation/publication of progress reports. Firm timing requirements, guidance and policy aims and outcomes should be featured in final legislation.

2.0 CAP AND TRADE INSTRUMENTS – RETIREMENT & CANCELLATION

Significant improvements and clarity are required around the proposed retirement and cancellation of instruments language.
Section 6(2) addresses the “aggregate amount of all (GHG) emissions attributed to the participant in respect of the prescribed time period” in determining the number of eligible instruments that will be retired. In the absence of regulation that sets out how emissions will be attributed and the beginning and end dates of the prescribed period, there is uncertainty as to the application of the retirement described in Section 6(2). Further, the order in which allowances will be chosen for retirement in Section 6(1) is not clear, so the surplus could be entirely free allocations – a scenario that is irrelevant, under compensation provision as currently drafted, but could become relevant should that provision be amended in final legislation (as suggested below).

Section 7 purports to cancel various instruments, issued under California or Quebec laws, where they happen to be held in the account of a “participant” (as that term is defined in Bill 4). While the jurisdiction of Ontario over participants may be broad, it would be helpful to understand if that is acceptable to the authorities in California and Quebec – a step that could help preserve good relations with authorities in those jurisdictions.

Under Section 7(1), MECP should recognize that many instruments to be cancelled were purchased in good faith by participating entities, as both a compliance instrument under the cap and trade program and a financial instrument with economic value. This is not appropriately recognized under the currently-proposed compensation framework. Participating entities, who held instruments in their cap and trade accounts on 3 July 2018, should be treated fairly and the value of instruments purchased/held considered as part of the compensation framework.

We note that Ontario Regulation 386/18, prohibiting registered participants from purchasing, selling, trading or otherwise dealing with emission allowances and credits, became effective while agreed transactions in these units were pending. This has left affected parties with unfulfilled transactions, potentially at great cost. We believe that efforts to determine these costs should be made and affected parties be considered for appropriate compensation.

3.0 COMPENSATION IN RESPECT OF CAP AND TRADE INSTRUMENTS

The proposed compensation framework – as outlined in Bill 4 and otherwise communicated by MECP officials – is of significant concern to IETA and the broader business community.

It is of paramount importance that the Ontario government recognize carbon instruments purchased in good faith by participating entities as both compliance and financial instruments – instruments that still hold economic value. The proposed compensation formula and framework language – found in Sections 8 and 9 of Bill 4 – fail to reflect the true circumstances and costs incurred by a host of program participants who purchased instruments and should be entitled to compensation.

Significant work to prepare fair and defensible compensation approaches – with all parties who have been directly and indirectly affected by the program cancellation and transition – lies ahead. Further priority observations and recommendations associated with both proposed framework and formula segments of draft legislation are shared below.

If Bill 4 is adopted as currently written, program participants (mandatory and voluntary) who acquired sufficient/surplus instruments to cover their attributed emissions will be treated the same as participants holding insufficient/deficient instruments than required to cover attributed emissions. Despite both scenarios being deemed “acceptable” and legal under cap and trade rules, this proposed approach undeniably tilts the competitive playing-field in the favour of the latter (i.e., those that were waiting to purchase instruments). It is important to note that we saw an initial 4-year Compliance Period (CP1) in Ontario’s cap and trade system, so buying instruments in advance of CP1 deadline (i.e. November 1, 2021) were prudent decisions for certain companies, but perhaps not for others. This reality does not mean that companies were “playing” the market. Rather, they were behaving as many market participants would - via future planning and hedging, which we see daily across numerous commodity markets (e.g., coal, gas and electricity). As such, the Ontario government should be fair and consistent in how they treat participants across the breadth of markets, including the carbon market, and not unduly or even unlawfully punishing certain participants.

Further, the compensation approach, as proposed by MECP, does not take into consideration entities that purchased allowances via their Ontario CITSS account for use in other jurisdictions, nor does it account for the purchase of offsets, which did occur. Due to the manner in which the program was dismantled, there are a number of cross-jurisdictional CITSS account issues regarding the management of allowances that need to be considered. Not taking these issues into consideration has unfairly created winners and losers.

We consider the proposed treatment highly unfair and request that the final compensation formula cover the costs of acquired emissions that are retired.

We strongly oppose the exclusion of market participants from the compensation framework, as stated in Section 8(4)(1). These participants, in good faith, provided market liquidity and significant capital in many cases to support the functioning of the market. Punishing such entities for investments and business behavior that, other than being in the cap and trade system, runs wholly counter to Ontario being “open for business”. We also oppose the exclusion of entities referred to in other paragraphs of Section 8(4). This is especially true in the case of regulated entities, if costs incurred to acquire instruments could not/cannot be passed through to consumers (e.g., fuels or electricity) due to regulatory restraints.

IETA is concerned with the Bill and MEPC’s supposition that cap and trade costs were primarily passed from market participants to consumers, and thereby market participants do not require full compensation for purchases. Not all costs of allowances purchased have been passed – or can/will be passed – through to consumers. For instance, consider two clear and concrete examples where costs simply cannot be passed through to consumers:

1) For Ontario fuel and gas distributors, some may have purchased more allowances than required until 3 July 2018, as it made sense based on price at time of purchase and the fact that most participants expected the system to continue – these costs cannot be passed on; and
2) Industrials have no way to pass through costs and allowances purchased based on their expected short position in CP1 – once again, units that were purchased in good faith.

We hold major questions and concerns about the proposed formula, under Section 8(1), to determine compensation (i.e., A = B – C – D). This proposed formula is extremely and unjustifiably narrow and excludes far too many program participants who likely warrant compensation. The proposed formula only applies to entities that purchased allowances above their actual emission limits and excludes free allowances. Based on market intelligence and analyses, this becomes only a small number of potential entities and only under rare circumstances.

IETA urges modified legislation, with MECP regulatory support, to broaden the formula and eligibility for compensation to participants, including those who allocated free allowances. Government should be open and transparent with entities throughout this process. If the formula were to change and broaden based on these recommendations, MECP currently holds the data to: determine how many instruments were purchased; under which circumstances they were purchased; and by whom they were purchased. This information can then be used inform a more appropriate revised formula to deliver compensation at a more adequate scale.

Finally, we note that allowances with a 2021 Vintage (V2021) are not eligible for compensation (resulting from the deduction of “D” in the compensation formula). This proposal is despite the fact that these V2021 allowances were acquired for value by certain participants. We are not aware of any reason, suggested by the Ontario government, for this proposed exclusion. In the absence of a compelling reason for the exclusion, we request that term “D” be eliminated from any final compensation formula.

4.0 GENERAL – NO CAUSE OF ACTION

IETA is deeply concerned about Section 10 of Bill 4. If adopted as currently written, this section provides that “no cause of action” could arise against the Crown including due to: the retirement or cancellation of cap and trade instruments pursuant to the Bill; and, in that context, any proceedings brought against the Crown would be set aside.

Section 10 may be interpreted as obstructing and restricting the rights of good faith program participants in the cap and trade system, depriving them of access to the courts for a determination of their rights. This may be viewed as contrary to the rule of law. IETA therefore encourages MECP to ensure that there is a clear and transparent legal process, which treats participants fairly and allows for proper pathways for dispute resolution and/or compensation.

5.0 GENERAL – CONTINUATION OF ACCOUNT

Ontario will unquestionably see costs associated with the winddown of the cap and trade program. IETA does not take issue with the use of the former provincial Greenhouse Gas Reduction Account (GGRA) to support covering some of these costs. However, we also hope to see MECP preserve the original purpose of the account, which is to fund activities that measurable reduce in-province GHG emissions and caution full or partial redirection of GGRA funds to the Crown as general revenues.

CONCLUSION

To be clear, IETA cannot support actions taken to date regarding the cancellation of Ontario’s cap and trade system, and how it has been communicated to both program participants and linked jurisdictional partners. We remain deeply concerned about the potential scale of socio-economic, legal, reputational and environmental implications to Ontario from rushed program cancellation and dismantlement. That said, we genuinely believe there are various smart modifications that could be made to the existing policy, in order to satisfy concerns of the current government and electorate – for example, reducing costs for everyday Ontarians and enhancing economic competitiveness while preserving compliance flexibilities that were valuable to businesses. IETA recognizes that the Ontario government has been unwavering in its actions to dismantle the current program, but must urge MECP to reconsider their strong stance on this issue.

Once again, we appreciate this opportunity to record our comments on Bill 4, Cap and Trade Cancellation Act, 2018. IETA looks forward to further constructive engagement with provincial officials, as legislation becomes final and related regulations and climate transition are undertaken.

If you have questions or require further information, please contact IETA Managing Director, Katie Sullivan, at sullivan@ieta.org