ONTARIO CAP & TRADETime is Running Out for Small & Medium Business to Save

An ICF Canada Quick Take

CAP AND TRADE PROGRAM REQUIRES SWIFT ACTION

2

Ontario’s Cap and Trade regulation went into force July 1st.

The program will officially launch on January 1st, 2017.

This can have an enormous impact on the energy-based operating costs of your business.

For example, facilities eligible to voluntarily participate in the cap and trade program could save up to $450,000 per year.

3

Assess how your company will be affected by the cap and trade program, and present your

options

Provide informational presentations and/or workshops to help you navigate the breadth of this

new program

Work with you to support decisions regarding how to participate in program

How ICF can help you

What is the Cap and Trade Program?

The cap and trade program is a central pillar of Ontario’s broader Climate Strategy, in combination

with the Climate Change Action Plan.

The program sets a province-wide limit on greenhouse gas (GHG) emissions from covered

sectors, establishing a market for allowances. These sectors include large emitters (facilities

emitting >25,000 tCO2e), electricity generators, and heating and transportation fuel distributors.

An amount of allowances equal to the annually declining cap will be created each year to be either

sold at auction or allocated free of charge.

4

tCO2e = tonnes of carbon dioxide equivalent (a measure of greenhouse gases)

What is the Cap and Trade Program?

5

Historical

Emissions

Future

Emissions

Historical

Emissions

Future

Emissions

Future

Emission

Target

Business as Usual trajectory

What is the Cap and Trade Program?

The cap and trade program will impose “carbon” costs on all fossil fuel-based energy consumption

and some non-energy-related industrial process emissions across the province.

These costs will be felt differently by different entities depending on size and sector. Many large

emitters will receive a significant portion of the allowances they need free of charge.

Free allocation of allowances is a program design feature intended to protect trade-exposed

industry and help businesses transition to the program.

6Next >> Why should you care?

Why should you care?

Large emitters participate directly in the program.

Fuel distributors are responsible for emissions from all consumers and end-users who do not

directly participate in the program, but will not receive any free allocation, and are expected to

pass on costs incurred as a result of the program to their customers. Therefore, entities not

directly covered by the program (i.e. smaller emitters) will pay the full carbon cost through

increased fuel prices.

7

Expected price increases on fuels in 2017:

3.3 cents/m3 or 0.9 $/GJ natural gas

5 cents/litre diesel

Why should you care?

There is an alternate option for mid-sized facilities emitting between 10,000 and 25,000

tCO2e/year (approximately equivalent to consuming 5 million to 12.5 million m3 of natural gas).

Opt-in to the cap and trade program to become a Voluntary Participant.

Voluntary Participants are eligible to receive free allowances similar to large emitters. This could

represent significant cost savings for many facilities ($150,000 to $450,000 per year) – but only if

fast-approaching reporting, application and verification deadlines are met.

8

Free Allowance Application Deadline: September 1, 2016

Next >> Program Details

Details of the Program

The cap and trade program will cover approximately 80% of total provincial emissions. The greenhouse gases covered under the cap and trade program are:

• Carbon dioxide (CO2)

• Methane (CH4)

• Nitrous oxide (N2O)

• Four groups of fluorinated compounds:

o Hydrofluorocarbons (HFCs)

o Perfluorocarbons (PFCs)

o Sulfur hexafluoride (SF6)

o Nitrogen trifluoride (NF3)

Facilities with total annual GHG emissions of 25,000 tCO2e or more are Mandatory Participants in the

program. Facilities with emissions above 10,000 tCO2e but below 25,000 tCO2e are able to opt-in as

Voluntary Participants. Mandatory and Voluntary Participants will be required to submit allowances equal

to their emissions at the end of each compliance period.

9Next >> Quick Facts

Quick Facts

10

Compliance Periods:

1. 4-year period beginning 2017 through 2020

2. 3-year periods starting in 2021

Coverage:

Mandatory: Facilities with annual emissions of 25,000 tCO2e or more

Voluntary: Opt-in for facilities with annual emissions of 10,000 tCO2e or more, yet below 25,000

tCO2e

Fuel distributors are covered on behalf of their customers’ emissions, and are expected to pass

down the carbon cost on fuel bills

Allowance Distribution: Quarterly auctions and transitional assistance to covered participants

Trading: Ontario economy-wide coverage in 2017, with plan to link with California and Quebec under

WCI starting in 2018

Next >> Allowance Distribution

Allowance Distribution

11

The cap and trade program distributes allowances through two major mechanisms:

1. Free allocation: Eligible Mandatory and Voluntary Participants can apply to

receive free allowances from the government

2. Auction: Allowances will be sold by the government in quarterly auctions

Participants may also trade allowances amongst one another in a secondary market.

Allowance Distribution

12

Allowance Auctions

Allowances

$/Tonne Price

Natural Gas Distributors, Fuel

Suppliers, Electricity Importers

Free Allocation

Energy

AllowancesLarge Emitters >25,000 tCO2e

Allowances

Higher Energy Price

Opt-In>10,000 tCO2e

The amount of allowances allocated freely will be determined for each eligible facility individually. The formulae to

calculate the allocation amount are based on a number of metrics including sector-wide benchmark emissions

intensities, production data, facility-specific energy use data, facility-specific historic emissions baselines, and current

facility emissions. There are five main allocation methods and facilities may be eligible for multiple methods. It is crucial

for facilities to understand the data requirements and meet the application deadline.

Next >> Applying for Allowances

End – User:- Small & Medium Industry- Commercial & Institutional

Buildings- Households

Applying for Allowances

13

Mandatory participants are required to apply for free allocation of allowances by September 1,

2016.

Positive (or qualified positive) verification statements for 2015 emissions reports – the basis for the

calculation of 2017 free allowance allocation – must also be submitted by September 1st.

Applying for Allowances

14

Facilities must apply to register as Voluntary Participants – forms will be available early July.

Voluntary Participants will also be subject to the September 1st deadline to apply for free

allowance allocation.

The MOECC has indicated, however, that positive verification statements for 2015 emissions reports

may be submitted at a later date. The MOECC has urged potential opt-in facilities to prepare the

verification statements as soon as possible since applications to register and applications for free

allowances cannot be approved without the verified 2015 emissions report.

Next >> Registration

Registration

15

For all participants…

Registration in the Compliance Instrument Tracking System Service (CITSS) is a prerequisite for market

participation. The two-step registration process includes online registration, notarized paper forms and

two levels of MOECC verification that is expected to take several weeks to complete. Disclosures of

corporate associations and ownership have to be provided to MOECC to monitor the allowance holding

limits. The MOECC will be holding training webinars for CITSS registration in July and August to facilitate

a smooth registration process for participants.

Note that the application to register as a Voluntary Participant must be approved before CITSS

registration can be started.

Next >> Timing

Timing

16

CITSS registration deadline for all participants is November 30, 2016.

Allowances allocated by MOECC will not be transferred if the account registration processes in CITSS

have not been completed by the transfer date (February 1, 2017).

Voluntary Participants cannot begin the CITSS registration process until registration as a Voluntary

Participant has been approved.

Next >> CHP Considerations

Combined Heat and Power Considerations

17

Treatment of combined heat and power (CHP) is highly facility-specific and depends on sector and

ownership arrangements.

In rare cases, CHP could save on carbon costs, but typically will result in higher costs (minimal to

significant).

Large institutions are eligible to receive free allowances for all on-site emissions 2017-2020 – this

includes CHP if it is on-site and owned/operated by the institution. If not, other allocation methods may

apply.

18

If you already have CHP: Make sure you fully understand how the allocation formulae apply to you and

get data ready for the application deadline.

Note that there are some allocation changes under consideration which may impact facilities with third-

party owned/operated CHP, and institutions.

Combined Heat and Power Considerations

19

If you are considering CHP: Evaluate whether different design choices can help minimize compliance

costs. Include potential cap and trade costs in your business case and risk assessments.

Combined Heat and Power Considerations

Next >> Managing Costs

Managing Costs

20

Looking ahead – managing long-term compliance costs

Successful participation in Ontario’s cap and trade program requires not only swift administrative action

but also the development of a long-term strategy to minimize compliance costs. Facilities will need to

consider a multitude of factors in developing their compliance strategy:

• Minimizing compliance obligation through emissions reductions and offsets

• Optimizing bid strategies at quarterly auctions

• Purchasing allowances on secondary WCI markets

• Using banking provisions to take advantage of arbitrage opportunities in the carbon market

Next >> Are You Ready?

Are you ready?

21

The countdown is on.

There are less than SIX months until Ontario’s cap and trade program imposes a cost on carbon, and

less than TWO months for eligible facilities to apply for free allocation of allowances. Now is the time to

determine what this means for your business.

Next >> What to do next

What you need to do

22

Initial Steps to be completed by early to mid-August

• Quantify 2015 GHG emissions based on Ontario’s GHG Reporting Regulation

• Estimate future annual emissions based on GHG Reporting Regulation and any foreseeable

business changes, e.g. facility expansion, addition of CHP unit, etc.

• Quantify amount of free allocation expected based on free allocation methodologies

prescribed by the MOECC

• Conduct risk assessment to determine whether to opt-in to cap and trade program or not

(also considering administrative costs/burden of doing so)

• Consider participating in MOECC informational webinars scheduled for July and August

related to free allowance application and CITSS training

What you need to do

23

Steps if Decision to Opt-in is made:

• Have 2015 GHG emissions report verified by an accredited Verification Body (as soon as

possible)

IMPORTANT: a verified emissions report is a prerequisite to receiving approval on your Voluntary

Participant registration AND free allowance allocation applications

• Complete registration to become a Voluntary Participant

• Complete application for free allowance allocation (application due September 1)

• Complete CITSS registration – a two part process (application due November 30)

Next >> How can ICF help?

How can ICF assist you?

24

Assess how your company will be affected by the cap and trade program, and present your

options

Develop a risk assessment customized to your business needs to identify key opportunities

and challenges related to the decision to opt-in to the cap and trade program or not

Offer informational presentations and/or workshops (e.g. Cap and Trade 101,

understanding free allocation methodologies, etc.)

Develop context/content to support application for free allocation based on the methods

prescribed by the MOECC

Quantify your emissions in accordance with Ontario’s GHG Reporting Regulation

Support your consultations with the MOECC

In the longer term

Identify emissions reduction opportunities including energy efficiency and upcoming

incentive programs

Support development of allowance acquisition strategies

ICF

25

ICF International (NASDAQ:ICFI) provides professional services and technology solutions that deliver

beneficial impact in areas critical to the world's future. ICF is fluent in the language of change, whether

driven by markets, technology, or policy. Since 1969, we have combined a passion for our work with

deep industry expertise to tackle our clients' most important challenges. We partner with clients around

the globe—advising, executing, innovating—to help them define and achieve success. Our more than

5,000 employees serve government and commercial clients from more than 65 offices worldwide.

In Canada, ICF focuses on critical topics including energy, the environment and climate change. ICF

offers a robust portfolio of services across all of Canada’s energy and environmental marketplaces.

With more than 30 years of experience in Canada in support of businesses and government, our

Canadian team operates from three offices (in Ontario and Saskatchewan) to best serve our clients’

needs.

icfi.com

Get Started Now - Contact Us

Duncan Rotherham

Vice President

duncan.rotherham@icfi.com

416.341.0389

Mabel Fulford

Senior Associate

mabel.fulford@icfi.com

416.341.8953

Julie Tartt

Senior Manager

julie.tartt@icfi.com

416.341.0127