Ontario formally signed an agreement Friday to link its cap-and-trade system with Quebec and California's joint market on Jan. 1, 2018. Ontario's system has been operating on a stand-alone basis this year, and joining the Quebec-California market means the three jurisdictions will hold joint auctions and harmonize their regulations.

Here is a basic explanation on how Ontario's cap-and-trade system works.

  • Ontario has set a greenhouse gas emissions cap of roughly 142 megatonnes for 2017.
  • Companies that pollute at least 25,000 tonnes per year have to have a number of allowances equal to their emissions.
  • One allowance is equal to one tonne of carbon dioxide equivalent.
  • The allowances are available for purchase at quarterly auctions. Participating businesses can also buy and sell credits to each other on a secondary market.
  • Most large emitters are receiving allowances for free until 2020, which the government says is meant to prevent them from moving to jurisdictions without carbon pricing.
  • Fuel distributors and electricity importers will not receive the free allowances.
  • The emissions cap will decline each year, from 142 megatonnes in 2017, to 136 megatonnes in 2018, to 131 megatonnes in 2019, to 125 megatonnes in 2020, which is equal to the government's target of getting emissions 15 per cent below 1990 levels by 2020.
  • As the emissions cap declines and fewer allowances are available, the government hopes the incentive increases for companies to invest in technologies that cut their emissions.
  • The settlement price at the three quarterly auctions so far has been $18.08, $18.72, and $18.56 per tonne.
  • Participating companies can also purchase and use offset credits to meet up to eight per cent of their emission allowance requirements.
  • Offset credits will be created by projects outside Ontario that reduce or remove one tonne of greenhouse gas emissions, such as tree planting or capturing and destroying methane gas, and those credits can then be sold to Ontario cap-and-trade participants.
  • Companies can also get some early reduction credits for work already done to reduce emissions.
  • Cap-and-trade proceeds are directed to a Greenhouse Gas Reduction Account to fund green projects such as home and business retrofits.