An Introduction to Cap-and-Trade and its Impact on Ontario Municipalities

Posted: February 07, 2017
Tagged As: Cap and Trade, GHG Emissions

For many Ontarians the world shifted on its axis a bit on January 1st, 2017. That was the day Ontario’s cap and trade program for greenhouse gas emissions came into effect. Since then, many have raised concerns about increasing energy costs and the impact on communities and municipal governments. With these concerns, it is a good time to take stock of what the program means for Ontario municipalities.

What is Cap and Trade?

Remember acid rain? This was one of the central environmental concerns of the mid-1980s. Sulphur dioxide and nitrogen oxide from power plants and industry were being released into the air, reached lakes and streams through rain, altering their PH levels. In 1991, a treaty between Canada and the United States was put in place to reduce acid rain, including provisions for a cap and trade system for those emissions.

Fast forward to 2015.  To take action against rising temperatures caused by the accumulation of greenhouse gases that trap the sun’s radiation in the earth’s atmosphere, 194 signatories - including Canada - signed on to the United Nations Framework Convention on Climate Change Paris Agreement. Canada’s Prime Minister committed to reducing greenhouse gases by establishing a price on carbon emissions nationally, unless provinces and territories decided to do so themselves. Carbon prices are currently in place in BC, Quebec, Alberta and Ontario. 

Cap and trade lowers emissions by assigning a maximum level for a pollutant. This is then applied to individual polluters with a maximum amount per facility – the cap. Those polluters that emit below their cap level can sell the difference as credits; and those that emit above their cap level can buy them – this is the trade. These costs get passed along to the consumer in the price of the product. As long as the maximum threshold for the pollutant is steady or declines, the overall objective of the policy works. Cap and trade works by establishing a price signal – a cost for the otherwise un-costed pollutant – which then gives polluters the option to pay or avoid the cost by changing their processes.  

The resulting higher cost to consumers is supposed to increase demand for lower emissions, and hence help to lower the cost of less polluting products in the end.  At this point, the Ontario government estimates that it will collect up to $1.9 billion annually through cap and trade from capped companies, and that this will translate to an increase of $13 per month for the average household for consumption of those capped products. The program will be successful when the government’s GHG targets are met and when the carbon price has created incentives for alternative technologies and fuels so that consumers can avoid it. This will mean that if it is successful, cap and trade should collect less and less revenue over time, taking fewer dollars from companies and the economy.

Impact on Municipal Governments

At this time, the cap and trade regulations do not apply to municipalities or their operations. This means that municipal government consumption of greenhouse gas producing fossil fuels will likely be the main impact on municipal budgets. Diesel and gasoline, natural gas for heating or electricity are likely to be the main drivers.

What can Municipal Governments Do to Reduce their Cap and Trade Costs and How can they do it?

Like consumers, municipalities can take a number of actions to reduce their exposure to the costs of cap and trade. They can switch vehicle fuels where possible – natural gas and electric vehicles create less GHGs than conventional vehicles; investments in higher building energy efficiency such as lighting and insulation can reduce energy demand where this has not already been done; and supporting alternative fuels such as solar or hydro where possible.

Municipal governments can also examine their operations with an eye to harvesting energy from their waste – waste management operations and landfills as well as sewer treatment plants may offer new sources of energy and revenue to municipalities while lowering their carbon emissions.

Municipalities that want to take more major steps can develop community energy maps or climate action plans that set out the steps they will take long-term to reduce the GHG emissions in their communities. Provincial support for these activities is to come from the cap and trade funding. These plans can set the direction for communities and businesses and help to focus economic development over time.

For homeowners and residents, the same actions can also help to contain the costs of GHG emissions. Switching to transit, car / ride sharing, or active transportation where available can all reduce fuel needs, while electric vehicle rebates (up to $160 million in Ontario’s Climate Action Plan) can help make the switch to alternative fuel vehicles more affordable. The provincial government has also committed to helping homeowners invest in technologies that reduce home energy consumption.


The Ontario Climate Action Plan sets out how the government intends to spend the up to $1.9 billion annually collected from cap and trade. These include supports that municipal governments, residents, and businesses can access to help them GHG reduction. These include:
  • Up to $20 million for methane gas capture for agricultural and solid waste
  • Up to $225 million to support cycling
  • Up to $170 million for green commercial vehicles
  • Up to $500 million for social housing retrofits
  • Up to $400 million for apartment building retrofits
  • Up to $600 million for low carbon technologies for homes
  • Up to $300 million for a municipal climate change challenge fund
  • Up to $25 million to support community energy planning
  • Up to $1.1 billion to help businesses and industries transition to low carbon technologies

Jordan Landry
Greenbelt Communities should be compensated for the carbon they are sequestering. An impacting portion of Cap and Trade funds should go to supporting these communities.
2/9/2017 9:05:34 PM