Low-income households must be considered in Ontario’s climate plan

Low-income households must be considered in Ontario’s climate plan

Ontario is moving forward with a cap-and-trade (C&T) policy to reduce greenhouse gas emissions but has provided little indication of how it will assist low-income households in the transition to a low-carbon economy.

The primary purpose of carbon pricing is to incentivize emission reductions at the lowest possible cost. However, these policies can also generate significant government revenue. According to Ontario’s estimates, C&T will generate up to $1.9 billion of revenue each year. How these funds are distributed is no small matter.

Ontario's cap and trade legislation, Climate Change Mitigation and Low-carbon Economy Act (2016) was officially passed on May 18, 2016. The Act clearly stipulates the areas where the government can spend the revenue from the program. In particular, aside from program administration, the funds must contribute to additional emissions reductions. In the absence of the province’s yet-to-be-released Climate Change Action Plan, this requirement raises three important questions, which we address in turn. 

Question: How will Ontario’s households be affected?

Carbon pricing mechanisms, including Ontario’s C&T approach, are considered inherently regressive – they disproportionately affect low-income households. This is because a carbon price often leads businesses to raise their own prices, particularly on carbon-intensive products such as gasoline. Since lower-income households spend a larger proportion of their income on carbon intensive goods, their financial burden is greater. In Ontario gasoline prices alone are expected to rise 4.3 cents a litre next year as a result of the program.

Question: What can Ontario learn from other jurisdictions?

Ontario’s peers have taken a variety of approaches to assist low-income households in conjunction with their carbon pricing programs.

Alberta’s carbon tax includes rebates for low- and middle-income households. Families with a net income of less than $95,000 could receive up to $420 in 2017, and up to $630 in 2018. British Columbia also redistributes income as part of its revenue-neutral carbon pricing plan. The government has reduced personal income tax rates for the two lowest income brackets by 5 percent, and introduced a low-income climate action tax credit. The province also used revenue to reduce the corporate tax rate from 12 to 11 percent – the lowest of any province.

California requires 25 percent of its Greenhouse Gas Reduction Fund to be allocated toward projects that benefit disadvantaged communities. The state also shares carbon allowance revenue directly with households though an electricity bill credit.

Question: How should the government proceed?

Ontario should closely examine the redistributive effects of its upcoming C&T policy and act accordingly. To date, very little information has been provided as to how the government will assist Ontario’s vulnerable communities in the transition to a low-carbon economy. The requirement to use program revenues only for activities that contribute to emissions reductions appears very limiting in the context of helping households adjust to changing prices. 

In their Climate Change Action Plan, set to be released before the house rises on June 9, 2016, the government must clearly communicate the anticipated impact of the policy as well as how marginal groups will be assisted. There are ways to address household fairness in carbon pricing policies, but it remains unclear whether the province can achieve this given the restrictions in its new legislation.

Photo Credit: adrian825, Getty Images

Category: Environment, Households, Income, Income inequality, Public Policy, Taxation