Ontario could offer some cap-and-trade exemptions to big polluters

Ontario's Environment Minister is suggesting the province will go easy on industrial polluters under its coming cap-and-trade program, which is aimed at driving down greenhouse gas emissions to battle climate change.

Glen Murray said he is prepared to give a break to some industries and companies, particularly ones who have already made reductions.

Mr. Murray's comments come as polluters line up to lobby the government for exemptions under cap-and-trade. A Globe and Mail review found more than 20 companies and industry associations currently registered to lobby on cap-and-trade. These include lobbyists from oil and gas, auto manufacturing, electricity, pulp and paper and chemicals.

The program, which will start in 2017, is a marquee part of Kathleen Wynne's environmental policy that the Premier is expected to tout when she plays host to the Climate Summit of the Americas in Toronto this week. Cap and trade will put a hard limit on greenhouse gas emissions and require companies to have permits, also called allowances, to burn carbon.

While there are still many details in the system to be worked out, Mr. Murray said he is considering allocating free permits and allowing some industrial polluters a longer time frame to build the necessary infrastructure – such as new heating and cooling systems or changing their fuel supply – to make further reductions. He pointed to the electricity and paper sectors as industries that have done a good job cutting emissions.

"You don't want people who are already near their goals to have to pay twice for the reductions," he said. "That's where the free allowances come in."

The minister said he meets regularly with industry, but played down the effect of lobbying.

"This is not a stupid government. This is a smart government that wants to do the right thing," he said. "That's a litmus test for the integrity of a cap-and-trade system: no fudging, keep the lobbyists out of the room and let's actually get down to real economics."

Most industries say they support cap-and-trade, but warn that without free allowances they will find it hard to compete internationally against companies in jurisdictions that do not price carbon. On the other side, experts and environmentalists argue giving too many breaks to industry will make the system ineffective.

The Canadian Fuels Association, which represents oil and gas companies, wants government to give some free permits to oil refineries in the province, which it says have already cut carbon emissions by 30 per cent since 1990.

"We have been making the case that, like other energy-intensive and trade-exposed sectors, we do need to have adequate free allowances," said Lisa Stilborn, the association's vice-president for Ontario. "We have to be globally competitive … competition is getting stiffer and stiffer. That's just the reality."

The industry is also pushing for the right to mark the cost of cap and trade on motorists' bills when they fill up at the pump.

Cement Association of Canada president Michael McSweeney, who sits on a government climate-change advisory panel, said some emissions in his industry cannot be reduced without cutting production and should therefore not be covered by the cap. Other emissions that can be reduced should receive some free permits, he said.

"The first lesson from other jurisdictions is to ensure that measures are in place to ensure that GHG emissions do not simply 'leak' to other jurisdictions that do not have effective carbon pricing in place," he wrote in an e-mail. "This will require an exemption for process emissions, and at least in the short and medium term, free allowances that decline over time for energy intensive and trade-exposed sectors."

David Struhs, vice-president of corporate communications at pulp and paper company Domtar, argues industry should not have to pay for any of the permits to burn carbon it will receive from the government. Instead, he said, the carbon price should only come in when companies start buying and selling the permits between themselves.

Mr. Struhs said he will be meeting with officials in Ms. Wynne's office and the Environment Ministry this week. His company has also hired Bob Lopinski, a Liberal insider who helped run Ms. Wynne's successful election campaign last year, as a lobbyist.

"Ontario, if they're not careful, could cause a displacement of the industry," Mr. Struhs said. "As it shifts, the contracts we have with suppliers in Ontario are cancelled, direct and indirect employment goes down and, worst-case scenario, we become uncompetitive and leave."

Economic analysis suggests these concerns are overblown. A 2009 study from C.D. Howe, which ran a series of economic models to determine the effect of carbon pricing, found the effect on companies' bottom lines was small and "competitiveness concerns for the entire economy and fears of substantial emissions leakage are largely unfounded."

Chris Bataille, a Vancouver energy-policy consultant who led the study, said there are only a few industries – iron and steel, chemicals, fertilizer and cement – that could genuinely use help from the government defraying the cost of carbon pricing. For other sectors, he contends, it isn't necessary.

The purpose of carbon pricing is to send a signal to the market that it is cost-effective to cut emissions, he said, and giving too many exemptions would thwart that goal.

"There are probably three or four sectors that could use support but, for the rest of the economy, there is just no point," Mr. Bataille said. "You'd be dampening the long term-signal by subsidizing. With cap-and-trade systems, the trick is to keep them as simple as possible and with as few exceptions as possible, with as few loopholes as possible."

Louise Comeau, executive director of Climate Action Network and a member of the government advisory panel, argued that the province should make the design process for its system more transparent so the public can be certain the system hasn't been unduly affected by lobbying.

"This idea of industries making deals with the goverment is one that needs to be challenged," she said. "At some point, this should all be taken to a public forum where experts in particular fields can contribute and look at what's there."