First Published in the Toronto Star March 3, 2016
by Jason MacLean
The Ontario government has unveiled its long-awaited cap-and-trade regime. Meanwhile, the federal government is in the early days of establishing its pan-Canadian climate strategy featuring a minimum national carbon price of $15 per tonne. Will these policies help Canada meet its commitments under the Paris climate change agreement to reduce greenhouse gas (GHG) emissions and limit global warming to 1.5 degrees Celsius above pre-industrial levels?
Ontario joins Quebec and California in the Western Climate Initiative (WCI), a carbon market for tradeable emission allowances. Like the European Union Emissions Trading System, the WCI places a cap on the amount of carbon that can be emitted into the atmosphere and facilitates the trading of pollution allowances. The cap is reduced over time and, in theory, the cost of carbon allowances rises.
While it is easy to get lost in the weeds of cap-and-trade policy, it is important to focus on the regime’s overall objective: to rapidly reduce GHG emissions. Two considerations are crucial.
First, the price must be right. The highest carbon price in Canada is B.C.’s $30 per tonne carbon tax. But bear in mind that B.C.’s tax does not apply economy-wide. B.C. carved exemptions for industries with high emissions intensity and exposure to trade competition (e.g., oil and gas). The same goes for Alberta’s tax expected in 2018 and Quebec’s carbon market allowance price of $15 per tonne.
Worse still, $30 per tonne – let alone $15 – is a woefully insufficient market signal. Canadian energy economist Mark Jaccard analyzed B.C.’s tax and found that $30 per tonne adds 7 cents per litre to the price of gasoline, just one-sixth of the increase likely required to shift car and truck buyers’ preferences to electric models.
This is hardly surprising given peer-reviewed estimates of the true cost of carbon. Jaccard estimates that carbon must rise to $160 per tonne by 2030 to meet the previous federal government’s target of reducing GHGs by 30% from 2005 levels by 2030. On another model, one accounting for GHGs’ adverse impact on country-level economic growth, the true cost of carbon is US$220 per tonne.
The second consideration is governments’ use of cap-and-trade revenue: who gets the cash, and how will it be spent? While some prefer revenue neutrality, whereby revenue generated by auctioning allowances is used to reduce taxes, these revenues must be reinvested wisely in building the green, low-carbon infrastructure we are going to need in 2030. This means prudential and accountable investments in low carbon electricity production, green transit strategies, low-carbon building standards, and research and development to spur innovation.
By these standards, Ontario’s cap-and-trade regime is off to a shaky start.
Right off the bat Ontario has issued free allowances to 102 large GHG emitters (14% of Ontario’s businesses). These emitters will be allowed to pollute at current levels until 2020. While the province insists these handouts are “transitional,” it has not made any commitment other than to revisit the issue in 2020. Instead, the government must aggressively phase-out free pollution allowances lest it artificially suppress the true cost of carbon.
Nor has Ontario committed to a ratcheting mechanism capable of progressively lowering the cap on GHGs and raising the price of pollution allowances. Ontario’s regime will only raise the price of gas by 4.3 cents per litre. Given that Quebec’s allowance cost under the WCI is not expected to reach $30 per tonne before 2025, it is difficult to imagine Ontario’s regime performing any better anytime soon.
The same goes for the federal government’s proposed national floor of $15 per tonne. It is simply too low, early days or not.
Finally, Ontario’s plan to allocate revenues to a green investment account raises the same concerns – regulatory capture, inefficient subsidies, and resulting higher electricity costs for consumers – associated with the province’s Green Energy Act. The province must establish a transparent, flexible, and fully accountable reinvestment framework for a green public infrastructure.
There is no point in complaining that Ontario should have adopted a carbon tax instead of cap-and-trade. The challenge now is to press the province to improve its policy and hold it accountable for its GHG reduction targets.
Jason MacLean teaches Environmental Law at Lakehead University