Cap-and-trade not enough to fight climate change
In the coming weeks, Ontario will finalize a new law and a regulation that will guide the province’s approach to climate action for decades to come. Carbon pricing through cap-and-trade is just one part of that plan. Which is good, because carbon pricing alone is not sufficient to cut carbon emissions to the extent required.
A key feature of Ontario’s approach is to use revenues from cap-and-trade to fund actions to further reduce carbon pollution, which is a good idea — if the province chooses those actions wisely and learns from the experiences of other jurisdictions about what not to do. British Columbia’s example shows that a price on carbon alone is not enough to sufficiently cut emissions. At $30 per tonne, B.C. has the highest carbon price in North America. Yet, B.C. is not on track to meet its carbon reduction targets. Rather, emissions in B.C. are rising. Why? Because the price is too low and because the province’s revenue neutral system leaves no money to fund complementary programs to reduce emissions.
To rely solely on pricing, economic models say that the price of carbon needs to be $100 to $200 per tonne to achieve significant emissions reductions. And that kind of price isn’t on the table. So, a combination of carbon pricing plus complementary actions is needed. In contrast to B.C., Ontario is taking a more comprehensive approach to fighting climate change in its Climate Change Mitigation and Low-carbon Economy Act, which is working its way through Queen’s Park. But the Act needs strengthening if it’s going to be effective.
First, the good news. The act enshrines Ontario’s emission reduction targets in law. And the targets are solid, calling for a 37-per-cent reduction of emissions by 2030 and an 80-per-cent reduction by 2050. The act puts a limit on carbon pollution — the “cap” in cap-and-trade — and says the limit will decline steadily, which will help the province reach its targets.
The legislation puts a price on carbon of about $18 per tonne across most of the emissions in the Ontario economy. It’s not as high as B.C.’s price, and at less than five cents per litre of gasoline, it’s unlikely to have much of an impact on people’s behaviour. To those who complain that things will cost a little more under carbon pricing, the reality is that, if anything, the price is too low. But it’s a good start and the price should rise as the emission cap comes down.
The act also commits Ontario to spending carbon-pricing revenues on cutting carbon emissions, which is the right course of action if the province is to reach its emissions reduction targets. Through the auction of permits under the cap-and-trade program, the government expects to raise about $2 billion each year, which it promised to reinvest in a variety of initiatives that will reduce emissions. This revenue is absolutely crucial to fight climate change by allowing the province to invest in the things we need more of, like more renewable energy, more energy efficiency, and pollution-free transportation options.
Ontario’s Climate Change Mitigation and Low-carbon Economy Act is on the right track but, the act will only be effective if cap-and-trade revenues are used for new initiatives that will significantly reduce carbon emissions. To ensure this is what happens, the rules around the use of revenue need to be tightened up before the new law is finalized. The current proposal says the money needs to be reinvested in climate action, but as written, it’s possible for the funds to be misspent on projects with dubious environmental benefits, or on projects already committed to by the government.
Quebec offers a cautionary tale on the use of capand-trade revenue. Quebec’s auditor general has criticized the management of Quebec’s green fund, where the cap-and-trade revenues are deposited. Monies from that account were used to fund an oil pipeline and to fix one of Air Canada’s planes. The surest way to undermine confidence in cap-and-trade would be for Ontario to follow suit.
The good news is that there’s still time to strengthen the act. And the really good news is that Ontario is taking a comprehensive approach to fighting climate change, which is what’s needed.