April 13, 2015 2:16 pm
Updated: April 13, 2015 6:59 pm

5 things to know about cap-and-trade legislation

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TORONTO — Ontario Premier Kathleen Wynne has announced the province is joining Quebec premier Philippe Couillard and the state of California in a cap-and-trade system to reduce greenhouse gas emissions.

READ MORE: Ontario premier announces cap-and-trade plan to fight climate change

Wondering what carbon pricing is all about?

Take a look at five things to know about cap-and-trade:

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1. It sets a maximum allowable level of pollution

Cap-and-trade is a system that sets a maximum allowable level of pollution, issues permits to companies specifying how much carbon they may emit per year and then penalizes them if they exceed their limit.

If a company wants to emit more than their limit, it must buy extra permits from companies that are under-emitting their cap – in other words, they can trade permits, putting the “trade” in cap-and-trade.

READ MOREForget federal leadership, panel urges provinces to price carbon now

2. Quebec and California have already linked their systems

Now Ontario will join in, meaning Ontario companies can buy permits from (or sell to) companies in California and Quebec, and companies in California and Quebec may trade permits with Ontario companies.

READ MOREFederal energy minister ramps up rhetoric over Trudeau’s carbon reduction plan

3. Free passes for some companies

Some free permits are given to companies by governments, usually to those in sectors that could suffer from competitors in jurisdictions without cap and trade.

The free permits are aimed at ensuring companies won’t face a competitive disadvantage that could force them to relocate to a cap-and-trade-free zone.

Quebec’s aluminum producers, for example, have been given free permits, as have two oil refineries in the province.

READ MORE: ‘No reason’ Conservatives, NDP shouldn’t get behind Trudeau’s environmental plan: Charest

4. There’s a schedule to follow

Ideally, industries can plan ahead under a cap-and-trade system.

Each year, the cap creeps down on a gradual and predictable schedule.

Relatively low-cost emissions cuts that increase efficiency allow companies to profit by selling cap room to companies that have more difficulty reducing emissions.

READ MORE: Ontario’s carbon tax: Too late to do good?

5. It’s a small part of a bigger puzzle

In the U.S., the Environmental Protection Agency has found that trading permits is generally only a small component of how companies are attempting to meet emissions limits.

In fact, the largest polluters have chosen instead to significantly reduce their emissions before buying allowances from other sources.

Source: The Environmental Protection Agency, the Environmental Defence Fund

© 2015 The Canadian Press

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