Greening Ontario’s economy through cap and trade is an achievable reality
In 2016, the Institute analyzed Ontario’s proposed plan for a cap and trade system and made key economic recommendations for the implementation of a complementary carbon reduction system: it must solve an externality, lock in low-carbon infrastructure and capital, and cover emissions from uncapped sectors. Two years later, with cap and trade in full swing, which milestones has Ontario achieved and where does progress still need to be made?
A breath of fresh air: Ontario mitigates carbon emissions
When it comes to greenhouse gas (GHG) emissions, Ontario has historically had the highest emissions per $1 million of economic activity among its peer jurisdictions, only recently dipping below British Columbia (Exhibit 1). In terms of magnitude, Ontario has the second highest total emissions at 166 million tonnes, eclipsed only by Alberta. However, this may change soon as Ontario has reduced emissions per $1 million of GDP by nearly 50 percent since 1990 whereas Alberta has only decreased theirs by 31 percent, largely in part due to the phase out of coal in 2014.
The Liberal government of Ontario has decided to tackle the pollution issue by implementing a cap-and-trade program. Firms can only emit a predetermined amount of pollution into Ontario’s skies every year, decided by permits that have their price determined in an open auction. Emitters that are not subject to cap and trade such as small firms, farms, and landfills can earn “offset credits” by mitigating emissions which can then be sold, creating a financial incentive for their voluntary participation in the cap-and-trade program.
Cap and trade begins in Ontario
The province’s objective in using cap and trade in favour of other options such as a carbon tax is to guarantee a reduction in emissions in line with provincial and national goals. To that end, for 2017, the province set the cap on GHGs to just over 143 million tonnes of CO2 equivalents, 14 percent under 2015 emissions and 21 percent below 1990 levels, thereby already surpassing the 2020 goal of 15 percent.
Ontario has made $2.5 billion in permit revenues since March 2017. In January 2018, following the recommendations made in Toward a low-carbon economy: the costs and benefits of cap-and-trade, the province joined California and Québec in a cap-and-trade market and held their first joint auction a month later. All proceeds will be invested by law into the Green Investment Fund for programs that will reduce greenhouse gas emissions. Subsequent auctions are planned for May, August, and November of this year. These investments include: $64 million to reduce emissions in hospitals, $377 million to establish and fund the Green Ontario Fund, $657 million on social housing improvements, $200 million for public schools, $100 million for green municipality initiatives, $93 million for cycling upgrades, and $25 million for a low carbon innovation fund.
Funded by permit auction proceeds, the Green Ontario Fund is investing up to $300 million into energy saving projects for households and small businesses. The goal of the fund is to further reduce carbon emissions at the household and small business level where cap and trade does not take effect but is nevertheless a major source of pollution. The Institute recommends that funding be directed towards energy intensive, trade exposed (EITE) industries in order to offset some of the costs of carbon pricing. This will keep at-risk firms competitive during the early years of the cap-and-trade program as they adjust business models and manufacturing processes to a greener economy.
The province has also taken the Institute’s advice of supporting EITE industries during the first years of cap and trade via allocated permits. All emitters except electricity and fuel distributors are eligible to receive free permits. This support will ensure that at-risk industries remain competitive in Ontario and disincentivize carbon leakage. As of the writing of this blog post, the province is currently updating the Methodology For The Distribution of Ontario Emission Allowances Free Of Charge but has already determined that the amount of free permits will not be held constant every year. The rationale behind this is to support at-risk companies and to encourage firms to begin mitigating on their own. Therefore, whereas the Institute recommended that EITE industries be supplied with 100 percent of necessary permits during the first four years of cap and trade, the province has opted to decrease the amount of free permits by 4.57 percent every year until 2020.
Locking in green infrastructure
To date, Ontario has spent $20 million constructing a network of electrical vehicle charging stations around the province. An additional $5 million in funding was recently announced for workplaces to construct charging stations. The EVCO (Electric Vehicle Chargers Ontario) program is an excellent initiative to lock in low carbon infrastructure. A network of charging stations will reduce range anxiety for drivers as well as provide a physical sign that Ontario’s economy is becoming greener. An expanded network of charging stations will encourage businesses and individuals to adopt electric vehicles as they become more commonplace around the province.
The election results could change the province’s ambitions
The New Democrats’ stance on climate change aligns more closely to the Liberals than the Conservatives and supports cap and trade. Under Andrea Horwath, cap and trade will most likely remain but spending of the revenues will change. Their proposal includes increasing the transparency of how funds are spent and spending 25 percent of revenues from permit sales on disenfranchised communities in northern and rural Ontario.
Should Doug Ford form the government in June, it would mean the complete abolishment of the cap-and-trade system. In such a case, the joint agreement with Québec and California would likely be formally repealed, a process that could take up to one year. This would not leave Ontario without any carbon action plan since in 2019 the federal government will mandate that every province follow a national carbon tax plan, another carbon strategy which Ford vows to fight against. Despite being vehemently against any form of carbon pricing, the Conservative leadership does not deny climate change and plans on addressing the issue in his platform.
The federal plan calls for a minimum carbon price set a $10/tonne in 2018 which will then progressively rise by $10 each year until $50/tonne in 2022, with the ultimate goal of reducing emissions to 30 percent below 2005 levels by 2030. The proceeds of the carbon tax will be given back to each province. If Ontario decides to keep its cap-and-trade plan, it will be exempt from a national carbon tax so long as the 2030 goal is met with increasingly stringent annual caps until 2022. Should a new government refuse to comply, however, Ontario stands to lose nearly $3 billion revenue in 2019 alone, increasing to $7 billion in 2022 at 2017 emission levels.
Currently, a major impediments to Ontario’s climate strategy is the lack of public knowledge surrounding cap and trade. According to a survey by Abacus Data, 30 percent of Ontarians are unaware that the province even has carbon pricing. Meanwhile, another poll from Forum Research discovered that half of respondents say the province should do more to limit climate change with only a quarter saying there is enough action. With a cap-and-trade system in place, the price of carbon becomes hidden and thus the public is less likely to know about it let alone support it. In addition to public support, businesses must also be aware of their risk level of carbon leakage, applying for permits, and taking advantage of the Green Ontario Fund if applicable.
Canada is moving forward on emission mitigation and 80 percent of Canadians are already living in jurisdictions where there is some form of emission reduction either through a tax or cap and trade. No matter who forms the provincial government in June, it will be important for Ontario to continue to reduce carbon emissions while at the same time allowing for economic growth. Ontarians will breathe a little easier when the direction of the province on this file is settled.
Written by Weseem Ahmed
Photo credit: DrAfter123, iStockphoto