Evaluation of Ontario's Cap and Trade Regulation

Using an interdisciplinary framework, this paper evaluates the effectiveness of Ontario's cap and trade regulation to achieve sustained emission reductions. This framework is shaped by six evaluation criteria to assess the program's effectiveness: (1) comprehensiveness in scope and coverage of emissions; (2) distributional fairness in the allocation of allowances; (3) effectiveness of the market design; (4) transparency of accommodations and flexibility arrangements; (5) measurability of emission reductions; and (6) the program's integration potential with broader political, economic and environmental policy initiatives.

First, all greenhouse gas emissions (GHG) emissions consistent with the Kyoto Protocol are covered using upstream and downstream points of regulation. The allowance decline cap will be sufficient to meet provincial emission targets of 15% by 2020. Second, based on a mix of auctioned allowances and transitional assistance, the analysis indicates that the value of allowances distributed can potentially accrue to industries for at least the first compliance period. Third, the effectiveness of the program will depend on enforceability, monitoring and oversight of the market rules to facilitate price discovery. There will be transparency in the criteria for eligibility of free allowances, circumstances allowing for flexibility arrangements, and the reporting of the action plan evaluations every year. Forth, accommodations and flexibility arrangements will be provided to industries to mitigate the risk of carbon leakage and in maintaining competitiveness. Fifth, until the carbon price reaches levels that could prompt significant technological progression by industry, the measurability of emission reductions by 2020 will depend on the implementation of complementary policies set out in the climate change action plan to support sustainable reductions in all sectors of the economy. The measurability of emissions will depend on the enforceability of the submission requirement to confirm facility and provincial level emission reductions. Sixth, Ontario's design of the cap and trade program will be aligned with broader policy goals at the provincial and federal levels.

To inform future program development, key themes are outlined. Monitor the performance of the market rules in creating an efficient, transparent, enforceable and effective market for many years to come, as well as the provision for accommodations and flexibility arrangements. Enhance the measurability and sustainability of emission reductions by ensuring successful implementation of the climate change action plan and assessing the cost-effectiveness of the initiatives funded by cap and trade proceeds. Continue reviewing the implementation of the cap and trade program, progress of the climate change action plan, long-term goals and alignment of the program with forthcoming federal climate policy.