Ontario’s Climate Change Action Plan shows little faith in cap-and-trade

Ontario’s Climate Change Action Plan shows little faith in cap-and-trade

The over $7 billion in spending under the leaked Climate Change Action Plan is a laundry list of initiatives designed to move the province toward a low-carbon economy – a goal the government has been touting since its announcement last April. The plan is a patchwork of carbon reducing initiatives and regulations that directly interfere with cap-and-trade. The climate policies proposed in the plan are a serious impediment to its success and demonstrate the government's little faith in the program. 

Cap-and-trade is designed to apply to a broad range of the provincial economy sending a price signal to producers, consumers, investors, and innovators that the low-carbon transition is afoot. As the market determines the carbon price, the cost of carbon-intensive goods and services in Ontario will rise. As a result, consumption of these goods and services fall. Carbon pricing targets the lowest cost abatement opportunities making it the most efficient way to reduce carbon emissions.

In Toward a low-carbon economy: the costs and benefits of cap-and-trade, the Institute identifies three criteria that complementary policies (i.e., climate policies that are used to reduce greenhouse gas emissions in addition to carbon pricing policies) must meet in order to work effectively with cap-and-trade. 

Any complementary policies introduced should do just that – complement - not add layers to the incoming cap-and-trade program.

Complementary policies should:

  • solve a market failure
  • lock in low-carbon infrastructure and capital
  • cover emissions from uncapped sectors

If a policy fails to meet at least one of these criteria, it is likely reducing emissions at a high implicit carbon price. In other words, additional emissions reduction policies increase the implicit price far above the market price of carbon and decrease the efficiency of the carbon pricing scheme. 

The Climate Action Plan proposes $100 million for a renewable energy content requirement and a 5 percent reduction in fuel intensity for transportations fuels. Both regulations are unnecessary. A carbon price under cap-and-trade will already make gasoline more expensive causing consumers and producers to shift demand away from carbon intensive energy toward low-carbon energy. If the government wants to speed up this process, it need only tighten the stringency of the economy-wide cap to raise the market carbon price.

Instead of directing money towards electric vehicle rebates (EV), the funds should be used to lock in low-carbon infrastructure like EV charging stations and more efficient buildings.

The Institute supports some initiatives in Ontario’s Climate Change Action Plan because they meet the three complementary policy criteria.

Solving market-failures

Spending $235 million on research and development (R&D) is one such area where government intervention is necessary regardless of the cap-and-trade program. The incoming carbon price will not create stronger incentives for R&D than those that already exist, and there is reason to support these investments because of their positive social spill-over effects.

Incentivizing home and small business owners to undergo building retrofits is a positive complementary policy. Since consumers do not always have perfect information about the paybacks associated with making energy retrofits, yet it is in their best interest to do so, support from the government to kick start these behaviours is favourable.

Locking-in low-carbon infrastructure

Ontario’s plan to ramp up electric vehicle (EV) infrastructure in condo buildings and apartments will help tackle range anxiety for drivers. Collaborating with Ontario’s neighbouring jurisdictions to create a network of charging stations can further increase drivers’ security.

Covering emissions from uncapped sectors

Ontario plans to divert waste from landfill sites and funding for developing carbon storage programs in agriculture. This is necessary since these two sectors sit outside the economy-wide carbon pricing policy and so are not directly targeted by the cap-and-trade program. 

Time to make it right

It is good news that the draft Climate Change Action Plan was leaked to the public ahead of schedule – key stakeholders now have a chance to react in time before the final version is sent to print. This is indeed a draft and lacks details that would make it complete of an action plan. Details lack on what would back-fill the province’s energy demand during a natural gas phase out and on financial assistance for households. If the government is listening, they’ll find sound advice from those who want cap-and-trade to succeed and even from those who don’t. 

Ontario needs to embrace the carbon policy it chose. Cap-and-trade is an economy-wide signal and should be treated as such. The government must end the constant stream of overlapping policies and regulations that will impede its success. 

To read more about the impact cap-and-trade will have on Ontario’s gross domestic product and global greenhouse gas emissions, read our 25th Working Paper, Toward a low-carbon economy: the costs and benefits of cap-and-trade.

Photo Credit: Tick-Tock, Getty Images​

Category: Economic Progress, Environment, Infrastructure, Productivity, Public Policy