Five things to know about cap-and-trade

Ontario Premier Kathleen Wynne has announced the province is joining Quebec and California in a cap-and-trade system to reduce greenhouse gas emissions.

Here are five things to know about the legislation:

1. What is cap-and-trade?

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.

• Kathleen Wynne discusses Ontario's cap-and-trade system

2. Why California?

Quebec and California have 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.

Other jurisdictions, the province says, have seen gains from similar systems. In British Columbia, five years after a carbon price was first implemented, fossil fuel use had decreased by 17 per cent and the economy remained strong, according to the Ministry of the Environment and Climate Change.

3. What are 'free permits'?

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.

4. Can companies profit under cap-and-trade?

Yes.

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.

5. A small part of cap-and-trade.

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.