TORONTO—Ontario’s first cap-and-trade auction sold out all current allowances, giving the new market a strong start, but the province’s environment minister warned the real test of the system will be in the emission reductions it brings about.
The March 22 auction brought in $472 million, the government said April 3.
But over the next 15 auctions, to the end of the compliance period in 2020, the market can probably expect “a reasonable amount of volatility and unpredictability,” said Environment Minister Glen Murray.
“The participation rate, whether it’s 100 per cent or 20 per cent or 50 per cent or 60 per cent or 13 per cent, is not the success of the market,” he said. “The success of the market is really based on our ability to reduce (greenhouse gases). We will not expect to get 100 per cent all the time.”
The system aimed at lowering greenhouse gas emissions puts caps on the amount of pollution companies in certain industries can emit. If they exceed those limits, they must buy an equal number of allowances at auction or from other companies that come in under their limits.
Most large emitters in Ontario are receiving allowances for free until 2020, which the government says is meant to prevent them from moving to jurisdictions without carbon pricing. But for now certain electricity importers, natural gas distributors and fuel suppliers are among those required to participate.
Bidders in the first auction included Union Gas, Enbridge Gas, Imperial Oil, the Greater Toronto Airports Authority, the city of Kingston, Ont., the University of Guelph, Ontario Power Generation, Apotex, Labatt, BP Canada Energy Group, Shell Energy North America and Suncor Energy Products Partnership.
The provincial Liberal government hopes the quarterly auctions will bring in $1.9 billion a year, to be invested in programs that reduce emissions and help businesses and consumers adapt to a low-carbon economy.
The auction floor price was $18.07 and the actual settlement price was $18.08. Murray said he was pleased about that because he wanted the actual price to be as low as possible.
“One of the objectives of cap and trade is to manage the transition to a low carbon economy at the lowest-possible prices to Ontarians and Ontario businesses,” he said. “So we didn’t want to see early upward movement on that.”
The successful first auction is a great start for the new market, but it’s good to avoid reading too much into it, said Erica Morehouse, senior attorney with the Environmental Defense Fund.
“It is just one auction and I think the overall success of a program should be judged on the strength of its design and whether it’s able to work to keep carbon pollution in check,” she said.
About one quarter of the future vintages on offer were also sold and while the number may seem low, Murray said it was more than they were expecting. The result shows confidence in the longevity of the market, he said.
Ontario plans to link its cap-and-trade system with a joint Quebec-California market next year, and Murray said he will be in California soon for negotiations.
But when linked, an estimated $466 million will leave the Ontario economy over three years, because it will be cheaper to buy allowances in those jurisdictions, the auditor general has said. Both the environmental commissioner and the auditor have said that means greenhouse gas emissions won’t actually be cut in Ontario.
Progressive Conservative Leader Patrick Brown—whose party is ahead in the polls and could form government in 2018—has said he would dismantle the cap-and-trade system in favour of a carbon tax, with the cost to consumers and business offset through other tax cuts.
Brown was undeterred by the first auction’s success.
“The Wynne Liberals want us to believe they are protecting the environment, but it’s a smokescreen,” he said in a statement. “Their plan sends millions of dollars to one of the richest jurisdictions on earth for emission reductions there, which means failing to cut emissions here at home. This does not make sense.”
NDP critic Peter Tabuns said he is still concerned that revenue could be used to finance projects that are already underway, which wouldn’t help fight climate change.
“We still have our concerns about effectiveness, transparency, fairness, but we do believe the cap-and-trade system is something Ontario needs,” he said.
Since Jan. 1, cap and trade has added 4.3 cents per litre to the price of gasoline and about $80 a year to natural gas home heating costs, in addition to indirect costs that will be passed onto consumers.
The next auction is on June 6.
The report summarizing the results of the auction can be found here.