Note: This story has been updated with a government response.
The first-ever chunk of Ontario cap-and-trade pollution permits will be put on the auction block next month, with $500 million in potential proceeds for the Liberal government hanging in the balance.
The province’s Ministry of the Environment and Climate Change issued a notice on Jan. 20, that Ontario’s first cap-and-trade auction will be held on March 22. Cap and trade, which aims to mitigate climate change by selling tradeable carbon emission allowances to companies, started in Ontario on Jan. 1. However, the auctions that actually sell the allowances have yet to begin.
Up for sale will be 25,296,367 emission allowances for the 2017 “vintage year,” which each represent one tonne of greenhouse gas. Another 3,116,700 carbon credits of the 2020 vintage will be sold at the same time. The government’s cap-and-trade regulation said it would create 142,332,000 allowances this year (the cap), meaning about 17.8 per cent of all 2017 permits are available for purchase at the first quarterly auction.
A spokesperson for the Ministry of the Environment and Climate Change said in a statement that "The total amount of allowances to be auctioned this year will be based on several factors that are not available at this point," such as allowances set aside for reserve sale, the number of free allowances given out, and the number of future vintage credits sold.
"MOECC is required to deposit free allowances for 2017 into the accounts of eligible capped emitters by February 1, 2017," said the spokesperson. "The amounts were calculated in accordance with the Methodology for the Distribution of Ontario Emission Allowances Free of Charge, which is incorporated by reference into The Cap and Trade Program Regulation (144/16). Public notice regarding the total amount of allowances distributed free of charge and a list of participants that received them will be released 24 months after the distribution."
The price of a cap-and-trade credit is expected to be a minimum of about $18 each, which would make the first auction worth $511 million in proceeds for the government. Cap and trade has been projected to raise about $1.9 billion annually for the province, which will influence the government's bottom line, as the proceeds collected and the programs and infrastructure they are spent on will be recorded in the budget. Premier Kathleen Wynne and the Liberals have vowed to use those proceeds to fund up to $8.3 billion in GHG-reducing programs.
"Allowances are being sold in sealed bid auction," said the ministry spokesperson. "Price to be determined through auction process. The minimum price that the allowances can be sold at, or 'The Ontario Auction Reserve Price’, is set before the auction."
The 'cap' in cap and trade will fall by about 4 per cent each year, reducing the number of allowances that are available for businesses to buy and theoretically reducing the amount of emissions the province produces. Businesses can buy, sell and trade allowances amongst each other after the auction in order to match their greenhouse gas emissions. The cap-and-trade system is also the backbone of the Liberal government's pledge to reduce carbon emissions 15 per cent below 1990 levels by 2020.
The March 22 date for Ontario’s first carbon credit auction will be about a month after a joint auction that will be held by California and Quebec. Ontario intends to link its cap-and-trade system with those of California and Quebec in 2018, prompting warnings by the auditor general and the opposition parties that the province won’t actually be reducing emissions, just buying emission allowances from outside its borders.
California and Quebec had sold out all of their emission allowances since linking their systems in 2014. However, 2016 marked the first year that not all of the auctions were sellouts, with the May auction seeing only 11 per cent of available permits purchased.
Ontario’s Liberal government has said it is confident that the province’s carbon market will see strong and ensure the revenue targets are reached.
The March 22 auction will be conducted online using an "Internet-based" platform, the notice says. "Bidders submit bids in a single-round, sealed-bid auction format," it adds. Companies will also bid on multiples of 1,000 emission allowances, so market participants can't just pop in and buy a couple of carbon credits.