The Ecofiscal Commission firmly supports the advancement of the Ontario cap-and-trade program as a means to price carbon and reduce greenhouse gas emissions in an effective and cost-effective manner.

In November, the Government of Ontario released program design options for its incoming cap and trade system that will be linked with Quebec, Manitoba and California. In this submission, the Ecofiscal Commission is pleased to note a number of smart and practical approaches to policy design outlined in the November 16^th options document:

• We support Ontario’s intended direction to link immediately with Quebec’s market, adopting a proven carbon pricing architecture.
• We applaud the intention to broadly cover greenhouse gas emissions.
• We strongly agree with the proposed option to reduce Ontario’s cap annually in order to achieve the province’s 2020 emissions targets.

6 Recommendations for Targeted, Temporary, and Transparent Free Allowance Allocation

It is worthwhile to consider competitiveness concerns and carbon leakage in the design of any carbon pricing policy, as addressing these issues is important for both economic and environmental policy performance. As Ontario continues to develop its cap and trade program design, we suggest that the government consider the following recommendations in its approach to addressing carbon leakage with free permit allocations:

1. An explicit policy objective of Ontario’s cap and trade program design should be to address genuine business competitiveness concerns defined specifically by the risk of leakage.
2. The sole purpose of free allowance allocation should be to achieve the above stated objective.
3. Free allowance allocation should be narrowly targeted to industries and firms that meet clearly defined thresholds for genuine competitiveness risks.
4. The thresholds that define level of risk should be grounded in objective data, and the process by which firms are evaluated in terms of their risk should be public and transparent.
5. All free allowance allocations should be time-limited, with a clearly articulated end date.
6. Base allocations to firms should be determined by output benchmarks.