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Reducing Greenhouse Gas Pollution Through Cap and Trade

Archived Backgrounder

Reducing Greenhouse Gas Pollution Through Cap and Trade

In April 2015, Ontario announced its intention to join the cap and trade system under the Western Climate Initiative, partnering with other jurisdictions, including Quebec and California, and making carbon pricing a cornerstone in Ontario's fight against climate change.

A cap and trade program is a cost-effective way to reduce greenhouse gas pollution. It limits the amount of emissions that can come from the economy (the cap), and then allows those covered by the cap to trade among themselves (the trade) in a flexible and cost-effective way, thereby creating a price on carbon.

Cap and trade allows the market ― not government ― to set the carbon price. The cap also ensures greenhouse gas reductions will occur: this is what makes it different and more certain than other carbon pricing mechanisms.

Cap and trade fights climate change by giving polluters an incentive to cut emissions. It gives companies certainty and predictability, and enables them to find new ways to reduce their carbon footprints such as investing in new clean technologies.

Cap and trade lets the market decide where emissions can be reduced across linked jurisdictions with the least cost, while guaranteeing the environmental outcome required, which is to cut the pollution that is causing climate change. Putting a price on carbon provides incentive to businesses to achieve greenhouse gas reductions at the lowest possible cost.  

  • The "cap" sets a maximum limit on the amount of greenhouse gas pollution that regulated emitters collectively can produce. Each year, the cap is lowered, requiring industry and other greenhouse gas polluters, such as natural gas distributors and other fuel suppliers, to reduce their emissions.
  • The "trade" refers to a market where companies can buy or sell "allowances," or pay others to reduce emissions on their behalf, in order to comply with the cap in the cheapest and most efficient way.

Ontario is on track to achieve its emissions reduction target for 2020 by taking the actions described in the Climate Change Action Plan and gradually lowering the economy-wide cap for emissions.

The Western Climate Initiative cap and trade model is flexible enough to allow more partnerships from sub-national jurisdictions across North America and around the world. Ontario will continue to work with its partners to look for opportunities to expand the carbon market throughout the Americas.

The larger the reach of the Western Climate Initiative's carbon market, the more effective and better positioned the organization will be to contribute to the global effort to fight climate change.

Ontario's cap and trade program is expected to generate proceeds of approximately up to $1.8 to $1.9 billion each year.

How cap and trade and the Climate Change Action Plan work together

Ontario's cap and trade program generates proceeds and is a cornerstone in the fight against climate change. The Climate Change Action Plan helps define how cap and trade auction proceeds will be spent. By law, these proceeds must be invested in projects and programs that help reduce greenhouse gas pollution. Each year, Ontario will publicly report on the status of the actions set out in the plan and the use of proceeds.

All figures in the Climate Change Action Plan are based on estimated proceeds from the cap and trade program and will be refined as program details are evaluated and approved in each year of the five-year plan. They may be adjusted downwards or upwards relative to proceeds collected.

Economic modelling

According to modelling results by EnviroEconomics, a prominent economics consultancy, cap and trade is not expected to have a significant impact on Ontario's GDP, consistent with the experience in Quebec and California.

EnviroEconomics analysis has indicated the provincial impact of the cap and trade program would be equivalent to a 0.03 per cent decline in GDP growth in 2020. Ontario's GDP is projected to grow by about 11 per cent between 2015 and 2020 without cap and trade. With the proposed cap and trade program, Ontario's economy will be 10.97 per cent larger in 2020 relative to 2015.

Households are expected to experience a small cost increase related to carbon pricing. The average energy costs to households for building energy and transport could rise by about $13 per month in 2017. Investing proceeds to help reduce emissions through retrofits and energy efficiency projects will help to mitigate these impacts.

The economic analysis indicates that the cost impact on households could be almost four times higher in carbon tax scenarios ($48, $50 in two carbon tax scenarios) than the Ontario cap and trade program ($13).

The cost of not taking action on climate change is much higher. A recent CitiGroup report notes that, by 2060, failure to act on global warming will cost $44 trillion due to climate change impacts, and that a lower carbon energy mix results in $1.8 trillion in savings by 2040.

Through the Climate Change Action Plan, Ontario is well-positioned to seize the opportunities of a low-carbon economy. According to the Conference Board of Canada, each $100 million invested in Ontario in climate-related technologies is estimated to generate a gain of $107 million in GDP, $25 million in federal and provincial tax revenue and 1,400 new jobs.

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