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How Cap and Trade Works

Archived Backgrounder

How Cap and Trade Works

A cap and trade program effectively reduces the amount of greenhouse gas pollution going into our atmosphere by setting a limit on emissions, rewarding innovative companies, providing certainty for industries, and creating more opportunities for investment. The province will work with communities and will consult with industry on the design over the next six months to ensure the system is a made- in-Ontario solution that works best for the province.

The "cap" sets a maximum limit on the amount of greenhouse gas pollution industry can produce. Over time, the cap is lowered, reducing greenhouse gas pollution.

The "trade" creates a market for pollution credits where industries that do not use all their credits can sell or trade with those that are over.

Cap and trade can reward industries that innovate. The less they pollute, the less they pay.

With this move, more than 75 per cent of Canadians will live in a province with some form of carbon pricing.

The proceeds from the program will be reinvested in a transparent way back into projects that reduce greenhouse gas pollution and help businesses remain competitive. These actions will protect the air we breathe, the water we drink and the health of our children and grandchildren.

Financial Impacts of Climate Change

Climate change is already costing the people of Ontario -- it has devastated communities, damaged homes, businesses and crops and increased insurance costs. The 2013 ice storm alone resulted in $200 million in insurance payouts and severe floods in the GTA resulted in nearly $1 billion in damages. The National Round Table on the Environment and the Economy estimated that the economic costs of climate change in Canada would rise from around $5 billion annually in 2020 to between $21 billion and $43 billion annually by 2050.

Carbon Pricing in Other Jurisdictions

As of May 2014, 39 national and 23 sub-national jurisdictions were implementing or were scheduled to implement carbon pricing, and another 27 jurisdictions were considering carbon pricing. Carbon pricing is already in place in jurisdictions that are responsible for more than 22 percent of global emissions.

In British Columbia, five years after a carbon price was first implemented, fossil fuel use had decreased by 17 per cent and the province's economy had outperformed the economy of other provinces.

A report by the University of California Berkeley estimated that cap and trade will add 2.6 cents per litre to the price of gasoline. However, the California Air and Resources Board expects that the amount the average person spends on fuels will decrease from $1,400 to $1,000 by 2020 as a result of improved vehicle fuel efficiency and other measures to reduce fuel use.

In Québec, estimates by government and the oil industry range from 2-3.5 cents per litre on the cost of gasoline.

Ontario first joined the Western Climate Initiative in 2008. Ontario intends to link its market with North America's largest cap and trade system currently in place in California and Québec. In the coming months, Ontario will work closely with both jurisdictions to align its market.

Cap and trade is one of many actions Ontario needs to take to fight climate change. The province will release a strong, forward-looking climate change strategy and action plan to reach its 2020 pollution reduction goal, informed by a recent comprehensive province-wide consultation, including in-person discussions attended by more than 1,500 people, more than 300 ideas and 31,000 votes submitted through a new online consultation tool and over 420 comments on the Climate Change Discussion Paper.

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