Ontario's price on carbon

The Ontario government’s rejection of a carbon price is a mistake. And if you also think it is a mistake, there is a way to voice your opinion through a public consultation about climate policy in Ontario, which can be found here (until Oct. 11). And I hope you voice support for keeping a market-based solution.

Pollution has damaging and costly consequences. It shouldn’t be free. Imposing a fee for emitting GHGs creates an incentive to shift behaviour towards cleaner choices and motivates industry to create technologies that reduce emissions and improve energy efficiency. Nobody wants to pay more for anything. But moving to lower-GHG emissions now will be less of a burden in the long run. Climate change will have increasingly costly effects unless we curb GHG emissions now. And unless we do our part in Ontario, it will be hard to convince anyone else in the world do theirs.

So far, Canada’s efforts to meet its emissions reduction targets have not been successful, as seen in the figure below:

Figure 1: Canadian GHG emissions, as reported to the United Nations. The drop in emissions in 2007-2008 coincides with the Great Recession. Data can be found at: http://di.unfccc.int/detailed_data_by_party

Earlier in 2018, a poll showed that 74% of Canadians think action on climate change should be a public policy priority [1]. But the same poll showed many Canadians felt they didn’t understand the idea of a carbon price. It’s true that, in the end, it doesn’t matter how we reduce GHG emissions. But relying on regulation alone, as the Ford government proposes, hasn’t worked in the past. It has been too tempting to make regulations weak so that few industries and people complain. The status quo is the easy option, but it doesn’t fix the climate change problem. Carbon pricing policies are worth pursuing because they offer a credible path to reducing emissions and meeting our international commitments.

Carbon pricing is an economic principle that has been studied and endorsed by economists for decades. However, it cannot predict exactly how much emission reductions can be induced by a specific incentive.  Economists use computer modeling that rely on anticipated economic growth and anticipated climate costs to determine an ideal carbon price and ideal rate of increase over time that minimizes short and long-term economic burden. If the price is set too low, the market will not shift competitiveness towards lower-emission choices. If initially set too high, individuals and companies will not have sufficient time to adapt in a cost-efficient manner.

Economists have differing ideas about the rate at which the carbon price should increase over time. Some would increase the carbon price nearly exponentially. Others would proceed modestly, allowing emission-heavy infrastructure to be replaced to align with natural replacement cycles – significantly reducing the cost of transitioning to new low-emission technologies.  

Using market mechanisms to reduce pollution has been successfully done in the past – for instance, to reduce the use of leaded gasoline, eliminate ozone-depleting CFCs, and to reduce acid rain-causing SO2 emissions [3].

It’s important to note that cap and trade (C&T) is not the same as a carbon tax. Both put a price on GHG emissions but are distinct mechanisms. A carbon tax is a fee added to any product that releases GHGs into the atmosphere, such as burning fossil fuels for electricity. It is a conceptually simple policy and can be difficult to evade. However, exceptions can be granted. The application of the federal carbon tax, for example, will be reduced for specific industries sensitive to competition from other jurisdictions (e.g., steel) [2]. On the other hand, C&T creates a market for buying and selling emission permits. The government supplies a limited number of permits. The number of permits is the ‘cap’ – the maximum overall amount of emissions. Companies that emit GHGs must purchase permits to do so. Since buying permits is a cost to the business, there is a motivation to reduce emissions so fewer permits are needed.

Economists argue that the carbon market approach enables the cheapest and most efficient emissions reductions. If one company finds a way to reduce its emissions relatively cheaply, it can sell emission permits to another company that hasn’t found a way to reduce its emissions. Innovation that leads to lower-emissions becomes a way to generate revenue and a competitive advantage. A carbon market doesn’t care who reduces emissions, only that the overall emissions decline. The larger the market, the more options there are for finding emissions reductions. For Ontario, the market was connected to Quebec and California, representing a total economy that would have been among the largest in the world.

A carbon price doesn’t have to be a financial burden. The intention of the policy is to motivate changes in behaviour towards low-emission choices like energy efficient homes, cars, and more local goods that don’t require transport across long distances. Making such changes enables businesses and individuals to minimize added costs. The revenue generated by the carbon price, whether collected through a C&T system or a carbon tax, can be used in a variety of ways. In BC, the revenue is refunded directly to taxpayers. It could also be used to reduce other forms of taxation. In the old Ontario cap & trade system, the revenue could only be used to help companies and individuals transition to lower-emissions, e.g., by rebating renovations and energy-efficient vehicles.

Above all businesses need predictability from government policy. If there is a cost imposed by government policy, corporate and industry sectors are best served by predictable market mechanisms so they can plan accordingly. Frequent changes to the cost of polluting makes it impossible for businesses to plan for their medium-and-long-term success. This is exactly the situation in Ontario. With the sudden cancellation of C&T, businesses were left with permits that are now effectively worthless (though likely to be refunded by the government), and uncertainty about whether a federal carbon tax will be imposed.

There is still time for the public to voice its support for carbon pricing in Ontario. The public consultation on ending cap and trade is open until October 11. I urge everyone who wants to see Ontario contribute its part to the global climate challenge to submit their comments. Personally, I don’t care if Ontario continues its C&T system or accepts the federal carbon tax. But I do want Ontario to do something credible on climate change. Doing nothing is the most costly option of all.

[1] Perceptions of carbon pricing in Canada. Abacus Data poll. Summary available at: https://ecofiscal.ca/wp-content/uploads/2018/04/Ecosfiscal_Polling_February2018_FINAL_RELEASE.pdf

[2] Ottawa eases carbon tax thresholds to help Canada’s big industries compete. National Post. 1 August 2018. Available at: https://business.financialpost.com/commodities/energy/citing-competitiveness-pressures-feds-ease-carbon-tax-thresholds

[3] Stavins, R. N.: What can we learn from the grand policy experiment? Lessons from SO2 allowance trading. The Journal of Economic Perspectives, 12(3), pp.69-88, www.jstor.org/stable/pdf/2647033, 1998.

Dan Weaver (PhD Candidate, University of Toronto) is studying climate change, ozone depletion, and the Arctic atmosphere. He collects his research data at the Polar Environment Atmospheric Research Laboratory (PEARL). As an educator, Mr. Weaver has taught in classrooms, contributed to textbooks, and created educational programs for organizations such as Science Rendezvous. He gives regular public talks to connect University research with the public and is an Ontario College of Teachers certified teacher.