Agreeing to price carbon is only the first step

Ontario making move at a pivotal time,

Ontario Premier Kathleen Wynne’s announcement about a cap-and-trade system comes at a good time. This year is a turning point in the global effort on climate change. International negotiations have picked up momentum since 2012, and a global climate agreement is expected to be sealed at the end of this year in Paris.

Public debates on cap-and-trade in Canada focus exclusively on the promise and challenges of a carbon-pricing system to achieve one particular result: reduction of overall emissions. How successful Ontario’s cap-and-trade system will be depends on its design. This focus, however, overshadows the bigger picture questions.

There is a tendency to think about climate action strictly as a function of implementing one policy (e.g. cap-and-trade, a levy on carbon, etc.) to achieve a particular mitigation result (limiting emissions). This is a straightforward and highly intuitive way of thinking. The problem is it implies a carbon-pricing policy might be a sufficient condition for climate action, when in fact it is a necessary condition.

Limiting emissions through a pricing mechanism is a building block of a comprehensive climate policy architecture. What it achieves is more than limiting emissions.

A well designed pricing mechanism creates the conditions to build what comes next. And what comes next is where the action is.

To illustrate, let’s turn our gaze to the other side of the Atlantic. The European Union implemented a cap-and-trade system (EU-ETS) about 10 years ago. There have been challenges, but the know-how gained could give Ontario a chance for a smoother start.

What’s more interesting is everything else that is being done. With climate negotiations coming to Paris in December, there is a dramatic increase in activity on a pan-European scale. Academic conferences, business-initiated events, ministerial conventions and public-private conversations are taking place. The focus is on what the next steps should be.

Issues that are being discussed include, but aren’t limited to:

Aligning investment and financial instruments with low carbon targets.

Making green investment instruments and green bonds more effective, and therefore more mainstream.

Understanding the role of the insurance industry in assessment of, and response to, climate risks.

Regulating the finance sector to promote strong and inclusive growth that supports investments in low carbon infrastructure.

These are public debates at an advanced level: they are what could be called posterior issues. They can be contemplated after a pricing system is put in place. A policy of cap-and-trade provides the institutional grid. The secondary policies and initiatives are the drivers of change.

In short, with Ontario joining a cap-and-trade system with Quebec and California, a new terrain opens up for linking the efforts from both sides of the Atlantic as the international effort on climate moves on to its next level.

Incessantly debating the merits and challenges of cap-and-trade keeps the community of researchers, policy-makers, think-tanks and non-governmental actors from moving onto the next stage. It hijacks the imagination on what it takes to develop a comprehensive plan of climate action.

It is pivotal to move on to these other policies and initiatives to facilitate a smooth transition to a climate-ready basic structure, increasing our ambition while maintaining a robust rate of growth.

This is no time for hair-splitting comparisons and contrasts between cap-and-trade and a tax on carbon. Even less productive are quibbles about whether or not cap-and-trade should be called a tax.

Wynne’s announcement is a milestone. The interesting work will start now.