Taking Stock and Looking Forward

Key Findings from Ontario’s Environmental Markets Report

The big environmental story coming out of Ontario this year is the government’s decision to introduce a cap-and-trade system in the province. This province-wide environmental market will cap greenhouse gas (GHG) emissions, indirectly putting a price on carbon emissions and sending a signal for business to use cleaner energy and processes.

But this is by no means the province’s only environmental market. Sustainable Prosperity’s report on Ontario’s Environmental Markets reveals that there are more than 20 environmental markets already active in the province, each with varying volume of trades, number and type of participants, environmental objective, geographic location, and stage of development.

While these environmental markets are unique, they have one thing in common; like the recently announced cap-and-trade system, they can deliver necessary environmental outcomes at a lower price and with greater flexibility than traditional regulatory approaches.

Let’s begin by explaining what we mean by environmental market. Different organizations use the term to mean slightly different things, and there is no agreed-upon definition, but here at SP we define it as any market in which the transactions taking place are aimed at either improving or maintaining environmental quality, or minimizing environmental degradation.

Why do environmental markets matter? Simply put, they create a monetary value where none previously existed. Environmental markets help buyers and sellers see the full cost of using our environment and the full benefits of preserving it. By putting a price on pollution and environmental degradation, companies have an incentive to reduce pollution levels, while companies and individuals that implement environmental stewardship practices are compensated for their actions.

Here are some of the main findings from this report:

• Looking at a market’s size and limited geographic scope doesn’t always tell the full story:
Many of the markets studied — particularly water and biodiversity markets —were small and based on local watersheds. Unlike carbon emissions, which are identical regardless of where they are emitted, water and biodiversity markets are usually designed to restore the health of a particular watershed or mitigate habitat destruction of specific species. For this reason, the market might not make sense outside of this limited geographic area. Similarly, the volume of trades for a particular market doesn’t always have to be large to be considered successful. For example, the South Nation River Phosphorous Trading program has reported a $0 value for the past few years, despite the fact this market has been recognized as a successful example of a North American water quality trading market. Contrary to the market being considered ineffective or weak, the $0 value simply reflects the fact that there has been no net increase of phosphorus in the watershed, and therefore there has been no need to offset pollution discharges. The market is actually working!

• Payment programs have the potential to become more than that:
A less-sophisticated form of environmental market, a payment program is more simply structured than an environmental market like cap-and-trade. In this case, a government or another institution may compensate farmers or landowners who adopt management practices that would have a positive environmental impact or reduce environmental degradation (14 out of the 20 markets in Ontario are considered payment programs).

These programs are usually time-limited, meaning funding is only available for a few years or until it is exhausted. As a result of these short-term price signals, the programs are limited in their ability to encourage the creation of a more developed market environmental protection. However, there is the potential to transform some of these payment programs into more sophisticated environmental markets. Program administrators could link payment recipients to potential credit purchasers — like wastewater treatment plants, real estate developers and manufacturing plants — wanting or needing (in the case of a compliance regime) to offset their environmental footprint.

• There is a need to build a stronger knowledge base:
There is still need to better understand how, when and where environmental markets can be used – this is particularly true for water and biodiversity markets. A strong knowledge base could support continuous improvement of environmental markets’ policies, guidelines and structures. Sustainable Prosperity supports research on this regard; focusing mostly on the policy and economic aspects of environmental markets.

• More legislation is good:
The development — and passing — of legislation to enable and encourage environmental markets is crucial to their expansion in Ontario. By creating province-wide policies and guidelines that allow water-quality trading, there would be growth of these markets and provide guidance on when and where these markets could be considered. Ontario’s and Quebec’s announcement to create a common set of rules to allow the purchase of carbon offsets as a form of compliance under the cap-and-trade system would boost the carbon offset market in Ontario. Right now this market is small as it is entirely voluntary.

• Building momentum for the expansion of environmental markets:
Ontario’s projected economic and population growth, coupled with the effects of climate change and invasive species, can put a great burden on the province’s environment. The use of environmental markets could help internalize the cost of pollution and the benefits of environmental protection into the decision-making process of policy makers, project developers and private landowners. The big move on Ontario carbon markets (the newly announced cap-and-trade) could set the stage for the additional use of environmental markets. Their implementation can help Ontario get ahead of the curve by seizing the opportunities of a low-carbon economy early on.

For more detailed insights the Ontario’s Environmental Markets report looks at the markets in three environmental areas; air and carbon, water and biodiversity.