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2006 September Report of the Commissioner of the Environment and Sustainable Development

September 2006 Report—Chapter 1

Exhibit 1.12—How does emissions trading work?

emissions chart

Two companies, A and B, each produce 1,000 tonnes of emissions per year. A new government regulation reduces the allowable emissions for a company to 900 tonnes per year. Each company is given 900 credits, one per tonne of emissions allowed by regulation. Compliance options include investing in improvements to their own facilities to reduce emissions or buying credits from other companies.

The cost of compliance is different for every company. Company A has old equipment scheduled for replacement. To meet the regulation, it invests $1,600 in new equipment and reduces its emissions to 800 tonnes per year.

Company B has new equipment that would cost $5,000 to replace. It continues to use its existing equipment and its emissions remain at 1,000 tonnes per year. As Company B holds only 900 credits, it is not in compliance with the new regulation. To balance its emissions with the credits it holds, Company B purchases the 100 excess credits of Company A at a cost of $10 per tonne. In total, Company B only pays $1,000 for compliance. Company A receives money from Company B that helps it to pay for the cost of its new equipment.

Without emissions trading, the net compliance cost for both companies would have been $6,600. With emissions trading, the net compliance cost was only $1,600. Thus emissions trading reduced the overall compliance cost and achieved the environmental target.

Real world costs, and thus potential real world savings, would likely be in the millions of dollars.

Source: Adapted from United Nations Environment Programme's A Guide to Emissions Trading (2002), Pollution Probe's Primer on Emissions Trading (2003), and other sources