Ontario’s cap and trade program launched in January 2017 and includes a number of rules regarding participation in the carbon market.  The stated purpose of these rules is to protect the "integrity, accountability and transparency of the province’s cap and trade program."[1] The rules are intended to prevent market abuse and include prohibitions against insider trading, tipping, bid coordination, unlawful disclosures, fraud and market manipulation.

Strict enforcement of the market rules will be required to ensure confidence in the market. Issues related to fraudulent activities severely impacted the European Union Emission Trading System between 2008 and 2009[2] and led to an estimated $5 billion in tax losses.[3] In addition, a secure market is a prerequisite to linkage with the Quebec and California carbon markets, and any other regional markets that might emerge.

Market participants should ensure they are familiar with all  rules governing their conduct in the carbon market – both the administrative requirements and the prohibitions related to buying and selling allowances and offset credits. Contravention of the market rules is an offence under the Climate Change Mitigation and Low-carbon Economy Act, 2016 (the “Act”) that could result in the prosecution of organizations participating in the market and individuals acting as their Account Representatives. If convicted, both organizations and individuals are subject to substantial minimum fines.

Actions that could undermine integrity of the carbon market are serious offences under the Act

The Act sets out a number of prohibitions governing all participants (organizations and Account Representatives) in the carbon market.  The prohibitions are similar to those found in securities legislation and are intended to protect the integrity of the market and prevent market abuse. In particular, the Act prohibits:[4]

• Tipping – it is prohibited to inform another person (other than in the necessary course of business) of information that has not generally been disclosed and that could reasonably be expected to have a significant effect on the price or value of an emission allowance or credit.
• Insider trading – it is prohibited for a person to purchase, sell, trade or otherwise deal with emission allowances or credits if the person has knowledge of information that has not been generally disclosed and that could reasonably be expected to have a significant effect on the price or value of an allowance or credit.
• Disclosure – it is prohibited to disclose whether or not a person will be taking part in an auction or any other information related to the person’s participation in an auction including  the person’s identity, bidding strategy, the amount of the person’s bids and the quantity of emission allowances concerned, and the financial information provided to the Director in connection with the auction.[5]
• Bidding strategy – it is prohibited to coordinate the bidding strategies of more than one prospective purchaser in an auction.
• Market manipulation – it is prohibited to engage in (or attempt to engage in) activities that could result in a misleading appearance of trading activity in, or an artificial price for, an emission allowance or credit.[6]
• Fraud - it is prohibited to engage in (or attempt to engage in) activities that could perpetrate a fraud on any person.[7]
• Misleading or untrue statements or information – it is prohibited to make a statement, or provide any information, that is misleading or untrue and would reasonably be expected to have a significant effect on the price or value of an emission allowance or credit.[8]

Most of these prohibitions are “specified offences” under the Act, meaning they carry minimum penalties. Corporations convicted of a specified offence are subject to a minimum fine of $25,000 for a first offence, $50,000 for a second offence, and $100,000 for subsequent offences. The maximum corporate fine for a first offence is $6 million, which rises to $10 million for subsequent offences.

Individuals convicted of a specified offence are subject to a minimum fine of $5,000 for a first offence, $10,000 for a second offence, and $20,000 for subsequent offences. The maximum individual fine for a first offence is $4 million, which rises to $6 million for subsequent offences. Conviction can also result in imprisonment for up to 5 years.

D&O may be liable in some circumstances

If a corporation commits an offence under the Act, every director or officer of the corporation who directed, authorized, assented to, acquiesced in or participated in the offence, or who failed to take reasonable care to prevent the corporation from committing the offence is guilty of an offence, whether or not the corporation has been prosecuted or convicted. This is not one of the “specified offences”, described above and so does not carry a minimum penalty. An equivalent provision in the Environmental Protection Act (“EPA”) imposes a duty on directors and officers to take all reasonable care to prevent the corporation from discharging or causing or permitting the discharge of a contaminant.[9] This provision of the EPA has generally been used where a director or officer made operational decisions related to the non-compliance. The Ministry of the Environment and Climate Change (“MOECC”) may take a similar approach to enforcement under the Act.

Strict enforcement in California

Similar to Ontario’s market rules, California's cap and trade legislation prohibits any trading involving a manipulative device, a corner or an attempt to corner the market, and fraud, attempted fraud, or false or inaccurate reports.[10] As in Ontario, California also prohibits any unauthorized disclosure whether or not an organization will be participating in an auction. The California Air Resources Board (“ARB”) is responsible for enforcing these market rules.

In 2014, shortly after California launched its cap and trade program, the ARB announced that it had resolved four enforcement cases arising from “negligent errors in the bidding process and improper disclosures of bidding information by auction participants”.[11] Several participants were fined for disclosing information to either the public or another third party about their intended participation in an auction. The fines ranged from $25,000 to $75,000 (USD). In explaining the rationale for enforcement action against Southern California Edison (“SCE”) ARB stated that “although none of the conduct appears intended to affect the market or benefit SCE, the Air Resources Board must enforce rules to protect the security of cap-and-trade program auctions.”

Strict enforcement in Ontario?

There is a lot riding on the success of the Ontario cap and trade program. The Liberal government has invested significant political capital in launching the cap and trade program and has made action on climate change a significant part of their platform. Allegations of fraud or market manipulation could undermine the Liberal’s credibility leading to the next provincial election in 2018. Economically, a lack of market confidence could influence the compliance approaches of mandatory participants. California, for example, saw a substantial drop off in participation in the emission allowance auctions in the second half of 2016,[12] apparently due to a lack of confidence that the California cap and trade regime would survive an ongoing legal challenge.[13] Last, but not least, a successful launch of the cap and trade program is essential for Ontario to meet and advance its greenhouse gas emission reduction targets.

These political, economic and environmental pressures will no doubt be felt within the MOECC and could result in a strict approach to enforcement, with little leniency for non-compliance even where the contravention is unintentional and does not benefit the market participant.

Market participants should ensure that they take advantage of the training opportunities provided by the MOECC and ensure they are familiar with the market rules set out in the Act and its Regulations to guard against any inadvertent non-compliance. Failure to do so could result in significant minimum fines, and no one wants to make history as the first to be prosecuted under new, high-profile legislation.