What cap and trade means to manufacturers

Ontario has put a price on carbon, and whether they like it or not, some manufacturers will need to focus on enhancing their energy efficiency efforts to avoid added costs.

Premier Kathleen Wynne’s Liberal government has made Canada’s most-populous province the fourth – alongside Alberta, BC and Quebec – to implement a carbon pricing model.

Although the specifics of Ontario’s cap and trade carbon endeavour won’t be known until the fall, experts say it will likely mimic programs in California and Quebec.

Early estimates suggest cap and trade will add between $1 billion and $2 billion to Ontario’s coffers annually, which the Wynne government says will be reinvested into programs to develop more efficient appliances and housing, building more public transit and infrastructure, and the recently announced Ontario Pension Plan.

There are two possible outcomes for manufacturers: don’t do anything about energy efficiency and pay the price, or avoid penalties by investing in new technologies that reduce the operation’s share of greenhouse gas (GHG) emissions.

Doug Dittburner, area manager for power services at Campbell’s Soup in Toronto and vice-chair of the Canadian Industry Program for Energy Conservation (CIPEC) Food and Beverage Task Force, believes cap and trade is the right thing to do.

“[Cap and trade] must make manufacturers reduce energy use, and there’s a ton of resources available to make that happen. If you sit around and do nothing, you’re going to pay the price.”
Here’s what manufacturers need to know.

In a nut shell
Cap and trade is a market-driven mechanism that places a hard ceiling on emissions allowed in each sector of the economy. It typically rewards innovative companies that invest in technologies to reduce GHG emissions principally from the burning of fossil fuels such as coal or oil – known contributors to climate change.

Companies that produce emissions below their allocations are given credits or allowances for the difference, which can be sold to companies that exceed their limits. The cap reduces over time, so those who don’t meet emissions targets will eventually pay more.

A joint system already operating in California and Quebec sets a cap on emissions and hands out some permits to industry while auctioning off others. Proceeds are plowed into green programs, such as investments in public transit and infrastructure.

The intention is to create a market large enough to trade carbon credits on the stock market. In California, credits are actually auctioned off to heavy emitters.

In Ontario, large industrial emitters typically include steel, concrete and car manufacturers, oil and chemical facilities, pulp and paper mills, waste disposal facilities and brewing operations.

Pricing typically reflects the monetary value of emissions and governments are implementing these programs to recoup some of the costs of climate change. The Wynne government pegs those costs at around $5 billion.

The Western Climate Initiative began in 2007 when the US states of Arizona, California, New Mexico, Oregon, and Washington agreed to collectively develop a regional target for reducing greenhouse gas emissions, and to design and implement a market-based program to achieve it.

Ontario, along with BC, Manitoba and Quebec, joined in 2007 and 2008 and collaborated on the design for the WCI Regional Program released in July 2010 with the intention of reducing regional GHG emissions by 15% below 2005 levels by 2020.

Economic analysis suggests the WCI plan will save $100 billion by 2020.

For manufacturers
Canadian Manufacturers & Exporters (CME) says to sustain manufacturing’s competitiveness the program must be accompanied by incentives that encourage investment in productivity-enhancing technologies, machinery and equipment that reduce emissions.

“We need to ensure that doing business in Ontario and Quebec is more attractive than in competing jurisdictions or companies will relocate elsewhere,” says Jayson Myers, CME’s president and CEO.

“Otherwise it will turn out to be another tax on industry that will slow the investments that have already allowed Ontario and Quebec manufacturers to make significant strides in reducing emissions.”

Nancy Coulas, CME’s director of energy and environment policy, says she expects Ontario’s program to directly impact companies that emit over 25,000 tonnes of CO2. If it follows Quebec’s model, transportation and comfort heating fuel costs will likely increase.

She recommends manufacturers invest in new machinery and equipment, and to take advantage of the recently extended federal Accelerated Capital Cost Allowance.

“This will not only help with emissions reductions, but also enhance their productivity,” she says. “If that happens, manufacturers could benefit.”

Dittburner says there are also a number of government-run energy-efficiency programs available to manufacturers, for both larger and small-and-medium-sized businesses.

CIPEC, an industry and federal government partnership that focuses on improving Canada’s industrial energy efficiency while reducing GHGs, now includes more than 1,400 companies and trade associations. It provides cost-shared assistance services for ISO 50001 implementation pilots, energy management projects, process integration studies and computational fluid dynamics studies.

Ontario’s Independent Electricity System Operator’s (IESO’s) saveONenergy program is also worth a look, he adds.

Its business programs provide manufacturers and industrial users with retrofits, audit funding, process and systems analysis and small business lighting incentives.

Qualifying companies receive up to 50% of the costs to upgrade old or inefficient equipment, up to 50% for energy audits, $50,000 for engineering studies and up to 70% of capital costs for energy efficiency upgrades.

Not (really) a tax
Cap and trade isn’t a carbon tax, such as those already in place in Alberta and BC, where a price is set for carbon and the amount of emissions depends on whether or not emitters find cheaper alternatives. It regulates the amount of emissions – the cost is determined by the market where credits are bought and sold.

“A [carbon] tax provides us with the price of emissions, but we don’t know what the impact on emissions will be as a result of the price,” says Keith Brooks, director of the clean economy program at Toronto’s Environmental Defence Alliance.

“There’s a great deal of certainty about what’s going to happen to emissions levels, but you don’t always know what’s going to happen with price in a well designed cap and trade system.”

BC’s carbon tax, introduced in 2008, returns proceeds to industry via tax breaks or other incentives. It’s estimated the tax has reduced fossil fuel use by 17%.

Alberta targets its heaviest emitters, which are taxed-based on how much they emit annually. It invests proceeds into innovation programs.

Brooks says with cap and trade any revenue collected by the government is used to drive emissions reductions.

What could change
Naturally Ontario’s Progressive Conservatives have cried foul, likening the legislation to a “tax on everything,” which will hurts consumers with price increases on everything from gas to groceries.

So, we could eventually pay a little more for cars or a can of beer.

In Quebec, it’s estimated oil prices went up between $0.02 to $0.035 cents per litre; and as much as $0.10 per gallon in California.

Brooks says a lot will depend on how the system is actually set up.

Quebec protected its aluminum producers by giving them free pollution credits, because they face international competition and have little control over prices.

Ontario manufacturers will have a better idea how cap and trade will affect their businesses in the fall. In the meantime, they should be thinking more seriously about energy management strategies.

This article appears in the May/June 2015 issue of PLANT.