Why estimate on impact of carbon tax fell so much

When the federal government announced Tuesday that a carbon tax will be applied next year to four provinces that don’t have their own, it also revealed something else: its estimate of how much carbon pricing will cut emissions has dropped dramatically.

Ottawa now expects that carbon prices across all provinces and territories will reduce greenhouse-gas emissions by 50 to 60 megatonnes in 2022, down from an April 2018 estimate of 80 to 90 megatonnes.

The reason its estimate has dropped so dramatically has a lot to do with Ontario — and a lot to do with emissions reductions in California that Canada can no longer count as its own.

Senior government officials explained during a background briefing Tuesday that Ontario Premier Doug Ford’s decision to scrap the province’s cap-and-trade system soon after his election last summer accounts for most of the difference between the April estimate and the revised calculation.

Under the former Wynne government, Ontario’s cap-and-trade program was linked to markets in Quebec and California in January 2018, meaning Ontario businesses could purchase carbon credits from California companies that had reduced their own emissions. Those emission cuts in California could then be counted toward Ontario’s target.

In fact, Ontario businesses depended heavily on carbon credits from California to meet the province’s stringent emissions cap. A 2016 report from the province’s auditor general calculated that 80 per cent of the emissions reductions required to meet Ontario’s 2020 target would actually take place outside the province — in Quebec and California. The report raised concerns that “funds may be leaving the Ontario economy for no purpose other than to help the government claim it has met a target.”

On Tuesday, federal officials said Ontario had estimated it would cut emissions by 48 megatonnes by 2030, thanks to the cap-andtrade system. With Ford’s decision to scrap the program, however, Ottawa can no longer count those California reductions as part of its total estimate — hence the 30-megatonne drop between April and now. The federal carbon tax, applied to Ontario, won’t come close to making up the difference.

Dale Beugin, executive director of Canada’s Ecofiscal Commission, said it’s legitimate to count California emissions cuts in Canada if they’re part of an international carbon market. “That’s the point of permit trade between jurisdictions,” he said. “You do it where it’s cheap, rather than where it’s expensive. And the market’s working the way it’s supposed to.”

He said Ontario’s emissions targets were ambitious enough that, if the cap-and-trade program hadn’t been linked to California’s, the carbon price in Ontario would have been much higher than is required to meet the federal standard. “It was a deep cap requiring really deep emissions reductions,” he said. “They were relying on lots of imported permits from California and Quebec to meet that cap.”

Beugin said Canada should still look to international carbon markets to meet its own 2030 targets, even though Ontario’s system is now off the table and the federal plan doesn’t include plans for capand-trade. “We need to crank up our policy to get where we have committed to going,” he said. “And international permit trade is and should be one of the tools that they’re looking at.”

Quebec’s cap-and-trade program is still linked to California’s, but it’s unclear how much that contributes to Canada’s overall emissions reduction estimates.