Toward a low-carbon economy: The costs and benefits of cap-and-trade

Released April 2016

In its 25th Working Paper, the Institute models the impact of Ontario's cap-and-trade program on economic growth and greenhouse gas emissions. According to macroeconomic modelling under four scenarios, Ontario should link with the Western Climate Initiative (WCI) as soon as possible and provide support to its carbon intensive at-risk industries. In doing so, the province will achieve the greatest reductions in emissions while maintaining economic growth and competitiveness. The four scenarios examined in this paper are:

  • Business-as-usual: the province does not introduce cap-and-trade;
  • No flexibility: Ontario does not link its cap-and-trade system with the WCI and no support is provided to at-risk industries;
  • Link: Ontario links its cap-and-trade system with the WCI market in 2021, but no support is provided to at-risk industries;
  • Link & support: Ontario links its cap-and-trade system with the WCI market in 2021 and the province supports at-risk industries.

The best case scenario for the environment and economy is for Ontario to link with other cap-and-trade markets and provide support to at-risk industries in the short term.

Supporting Ontario’s emissions-intensive and trade-exposed industries (i.e. cement, steel) is essential to keeping firm activity and associated emissions in the province. If emissions simply relocate to other regions, the policy will not be successful in the global fight against climate change.

Supporting at-risk industries also has economic benefits. Under cap-and-trade with linking and support provided, Ontario’s growth rate will only be reduced to 2.05 percent from its projected annual average growth rate of 2.08 percent until 2030. Ontario is worse off under the no flexibility scenario since the average annual growth rate is reduced to 1.90 percent.

Cap-and-trade is essential to reducing Ontario’s emissions. Without the policy, emissions rise to 183Mt by 2030 and the province misses its 2030 target.

Topics: Economic policy, growth, and strategy, Government investment and innovation, Business growth and innovation