Cap & Trade

Cap & Trade

Introduction to Cap & Trade

In Ontario and Quebec, the Cap & Trade program was created to incentivize businesses to reduce their carbon footprint based on a market system of trade.

 In general, businesses must report their usage of natural gas and other fuel consumption methods - but do not need to report their electricity use - under the Cap & Trade Program. Businesses that produce over 10,000 tonnes of CO2 are required to report their usage, but only those that produce over 25,000 tonnes of CO2 will have a "cap" to adhere to. 

"Caps" are based on the reported emission data from the previous two (2) years prior to the current period (i.e. the 2017 cap is based on the reported emissions from 2015 and 2016). It should be noted that the caps are fluid, and organizations need to be aware of changes from year to year.

 In an effort to reduce emission levels gradually, business allowance rates will decrease by an average of 4.5% each year until final emission levels are reached. These modest reductions can be achieved by replacing carbon intensive fuels with cleaner natural gas in the first few years, but later years will require more innovation and the implementation of new, "greener" technologies.

Available Technologies on the Market 

Technologies that were feasible and financially viable in the past may no longer be under the Cap & Trade program. As the industrial sector moves to a post-carbon environment, new and different technologies will become prominent. The good news is that many "new" technologies on the market are already utilized by many businesses in Ontario and have been successful - both financially and environmentally. Examples of this include biomass; biogas/renewable natural gas; solar thermal; and converting systems that use natural gas as their main source to electrical. 

There are also new and emerging technologies that are commercially viable (as demonstrated in other parts of the world) but (as of yet) are not widely adopted in Ontario: ORC (or waste heat to power); microgrids; and geothermal power.

Furthermore, new research and development technologies, such as carbon capture and storage and alternative energy storage methods (i.e. pumped hydro, compressed air, non-lithium batteries), are also making headlines. However, while the reward may be great, the risk is also great (at this time).

While ridding businesses of boilers and other carbon-intensive units remain the goal, using these technologies more efficiently is also an option (especially in the first few years under this program). Using an organization like CEM Engineering can help you meet both your long-term and short-term carbon goals, ensuring both financial and environmental success.

The Debate: Combined Heat and Power Systems 

Cogeneration [including Combined Heat and Power (CHP)] is considered a "general stationary combustion activity" as it uses carbon (in the form of gas) as its main input source. However, because CHP systems ultimately produce electricity, businesses may be eligible to receive emission allowances under the Cap & Trade program.

 ...Sadly, not everyone receives these allowances.

 For now, it depends on whether you are implementing the system pre- or post-introduction of the Cap & Trade program. It should be noted however, that new legislation supporting the installation of CHP systems is materializing...but only for specific industries.

The debate over CHP allowances is hardly concrete, and the legislation will most likely change (once again!) in the future.

 Overall, the decision to implement a CHP system depends greatly on your businesses' industry, production levels, and reasoning. Leaning on an organization like CEM Engineering to help you decide if implementing a CHP system alleviates production issues, makes financial sense, and fits into your carbon emission allowance is highly recommended.

BUYER BEWARE: Despite common myths, the efficiency of the cogeneration equipment does not matter!

Carbon Trading – How Does it Work? 

Without a price on carbon, big polluters don't pay for the CO2 they emit. The real cost of this is borne by the planet in the form of climate change

Under the Cap & Trade program, polluters must purchase an allowance, or a permit, for every ton of CO2 they emit. These can be government-issued or bid for at an auction. The total number of permits a business can buy are "capped".

As a result of this trading scheme, a market is created. Businesses are now able to trade carbon allowances (also known as permits) on the free market. Companies that emit more than their allowance can buy permits from those who require less. Classic supply and demand.

With this program in place, it creates an incentive for businesses to reduce their pollution and invest in cleaner forms of energy.

Emission Groups

1 – Under 10,000 tonnes CO2

Businesses who fall under this category have no duty to participate or report in the Cap & Trade Program, but they can if they wish.

Businesses in this category should look for opportunities to lower your costs based on energy prices, in order to increase your selling opportunities.

2 – 10,000 – 25,000 tonnes CO2

Businesses in this category have an obligation to report their consumption usage, but do not have to participate in the Cap & Program. CEM can help clients determine if it makes financial sense to enter the program now and/or in the future when further reduced GHG emission limits are in place.

3 – Over 25,000 tonnes CO2

Businesses who produce over 25,000 tonnes of CO2e MUST participate in the Cap & Trade Program.

Businesses who are below the 28,000 tonne cap can produce up to 26,000 tonnes, and sell up to 2,000 tonnes

On the other hand, businesses who are above the 28,000 tonne cap can produce up to 29,000 tonnes, and buy up to 1,000 tonnes

GOOD NEWS: If businesses emit under 25,000 tonnes for three (3) consecutive years, they may become exempt from reporting!

Financial Benefits

The Cap & Trade program has given many foreign investors and parent companies pause when financing new projects; there is a greater internal pressure to implement "greener " technologies and to reduce fossil fuel usage despite the large price tag for these technologies. However, with the implementation of the Cap & Trade program and the potential for carbon taxing in the future, these technologies have a viable payback period and can be individualized based on each businesses' needs.

To help finance these projects, the government has created funding banks which will be used for Greenhouse Gas reduction efforts in communities, residential areas and throughout the industrial sector. Programs specifically made for businesses include: 1) CME Smart Green, 2) the Ontario Centres of Excellence, and 3) National Resources Canada (also known as NRCan).

In addition to receiving funding through a Cap & Trade designated program, additional funding can be sought once a project has been decided on. Funding for Detailed Engineering Studies (DES) and Capital Cost recovery can be sought from the following organizations: 1) HONI, 2) IESO, and 3) Save on Energy/Process and Systems Upgrade Program, which CEM Engineering can help acquire.

FOR THE FUTURE: Businesses in Ontario, Quebec and California should look to combine with one another in order to increase the number of allowances available.

CEM’s Commitment 

While the legislative changes under the Cap & Trade program can be worrisome and confusing for businesses, CEM Engineering has been committing itself to becoming an expert on this subject since its inception in 2001.

 Through expanding our expertise to new disciplines and technologies and committing ourselves to understanding the environmental landscape (including the market itself, new legislative changes, and creating strong relationships with key environmental partners), CEM has the depth and experience that businesses can rely on during this transition period (and beyond).

CEM will continue to focus on developing energy solutions and promises to never align itself to a specific technology - as every business deserves and requires a different solution, because no two businesses are the same.

 CEM has been committed to helping our clients achieve their energy and environmental goals.

 ...And with the implementation of the Cap & Trade program nothing has changed - we will continue to help businesses make sound energy decisions, not only during this transition period, but also in the future.

For further information, please feel free to contact us at 905-935-5815; info@cemeng.ca

To read our full primer on cap and trade, please click here