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Ontario Environment Minister Glen Murray, pictured in 2013, said Ontario and Quebec are also looking at other areas to co-operate on the environmental front.Fred Lum/The Globe and Mail

Ontario and Quebec are planning to link the two provinces' cap-and-trade programs even more closely, with a joint system of carbon "offsets" meant to encourage more companies to cut greenhouse gas emissions.

Environment Ministers Glen Murray and David Heurtel unveiled the deal on Friday at a joint meeting of the cabinets in Quebec City.

Under cap-and-trade, the government sets a limit on the total amount of carbon that can be burned and issues allowances to companies specifying exactly how much they may emit. If a company wants to burn more than its share, it must buy extra allowances from a company that has used less. Earlier this year, Ontario announced it will join the cap-and-trade system in place in Quebec and California, meaning companies will be able to buy and sell allowances across the three jurisdictions.

Now, Ontario and Quebec will work together to issue credits, or "offsets," to companies and other organizations that develop projects to reduce greenhouse gas emissions. They can then sell the credits to companies that have emitted more than their share of carbon under the cap. The idea is to give companies an extra profit motive to create environmentally friendly projects.

The projects can include everything from wind or solar farms to programs that produce more energy-efficient buildings to recycling programs.

Quebec already offers credits for offset programs dealing with agricultural manure, disposal of methane at garbage dumps and the destruction of gases that destroy ozone. The plan now is for the two provinces to develop a system to offer credits for numerous other offset programs.

Creating one set of rules for offsets in both provinces is meant to be more efficient, and make it easier for businesses that want to participate.

"If Ontario and Quebec did this separately, it would create more complexity and it would cost twice as much," Mr. Murray said in an interview. "There are economies of scale."

Developing comprehensive rules for the offsets is also meant to avoid pitfalls that other carbon offset systems around the world have encountered.

Some offset programs, for instance, have been criticized for subsidizing emission reduction programs that probably would have happened anyway, such as companies selling carbon offsets for new trees they would have planted regardless. In one extreme case, chemical factories in China were accused of deliberately producing more harmful gases so they could then destroy them and sell the offset credits to European companies.

Mr. Heurtel said the provinces will develop rules that prevent such things from happening, and ensure that offset credits go only to companies undertaking real emissions reductions that would not have happened otherwise.

"We go through a very extensive analysis to avoid those pitfalls," he said. "The protocols are set up to encourage innovation and implement innovation within the jurisdiction of the carbon market."

Quebec has rules, for example, that restrict offset credits to programs that cut greenhouse gases that are not already mandated by other regulations. They are also limited to projects that are cutting emissions over and above the common practice for their industry. Companies are also allowed to cover only eight per cent of their emissions by buying offsets, an incentive to cut their own emissions as well.

Mr. Murray said Ontario and Quebec are also looking at other areas to co-operate on the environmental front, such as installing stations along highways for natural-gas fuelling and charging electrical vehicles.

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