Handcuffed to a gorilla
On cli mate change policy, Ontario is about to shackle itself to California. And as with those old j ailhouse chain- gang films, the province will soon find itself a prisoner to the whims and designs of a much larger and more powerful partner. Ontario residents could — once again — end up paying more for energy than anticipated.
California and Quebec are already linked together through the Western Climate Initiative ( WCI), a system that sees carbon dioxide emission permits traded across the border. Next year, Ontario plans to join this group, integrating its existing cap- and- trade program with the other two jurisdictions. As the name implies, however, the two eastern Canadian provinces will be junior partners to the group’s dominant West Coast, American member.
California’s economy is the biggest in the U. S. and, on i ts own, ranks as the sixth richest in the world. It also accounts for two- thirds of all emissions within the WCI. Sheer size makes it inevitable the state will dominate the other two provinces on matters of price and policy.
Ontario already admits as much: “The floor price is expected to be set by California throughout the 2018–2028 period,” says a recent forecast for the Ontario Energy Board on provincial carbon prices over the next decade. California’s price will be the WCI price.
To date, California’s control over the cost of Canadian carbon has been presented as a clear advantage to Ontario and Quebec consumers. A large surplus of emissions permits in California created for political reasons means the WCI’s current cost of around $ 18 per tonne of carbon dioxide emissions is relatively low compared to other planned schemes ( all figures in Canadian dollars.)
Recall that starting next year, the Trudeau government is ordering all provinces to impose a $ 10- per - tonne carbon tax, rising by $ 10 per tonne per year until it hits $ 50 in 2022. Ontario and Quebec claim to be exempt from this requirement because of their membership in the WCI, to their obvious benefit. According to the Ontario Energy Board forecast, the Ontario price for carbon dioxide emissions permits in 2022 under the WCI will be around $22 per tonne. That’s less than half what the rest of the country is supposed to be paying via the national carbon tax plan. Tying themselves to California in order to feast on cheap and plentiful emissions permits appears to be a good move for both provinces. But will it last forever?
Ontario and Quebec face some significant risks in linking their carbon policies so tightly to California. Because California is the price setter, the provinces will find themselves at the mercy of U. S. inflation and exchange rates. At current prices, this doesn’t appear to be a major concern, but as the great California permit surplus slowly dissipates over the next few years, it may grow more significant.
There is also the risk the federal government will not allow a huge gap in carbon prices to exist between provinces, regardless of membership in the WCI. If Ontario and Quebec have a carbon price substantially below the $ 50- per- tonne national tax rate, it will inevitably create friction between the provinces, and major headaches for Ottawa.
But the biggest peril faced by Ontario and Quebec is U. S. politics. Besides being the price setter in the WCI, California also styles itself as a sort of unofficial opposition to the presidency of Donald Trump. Ontario and Quebec could be swept along in this crusade. For example, California has set itself the very aggressive goal of reducing greenhouse gas emissions to 40-per-cent below 1990 levels by 2030. While this creates maximum distance between the Golden State and the Trump White House, it also exceeds the targets of both Ontario and Quebec. This gap reinforces California’s dominance in setting WCI policy and suggests emissions permit prices will rise more over the long run than they would if Ontario and Quebec were on their own.
Further evidence of the pitfalls involved in ceding control over policy to a government in another country can be seen in the changes California recently made to its emissions-trading system, moves with direct consequences for the WCI.
To win l egislative approval for extending his climate change plan, California Gov. Jerry Brown recently made several concessions to his political opponents. In exchange for reducing the available supply of excess emissions permits — and hence pushing up the price over the long term — he offered substantial tax breaks to farmers and other state businesses.
According to Californiacarbon.info, a carbon-market analysis firm, this political logrolling is forecast to raise average permit prices by about $ 10 per tonne. Yet the trade- offs that made the deal possible offer no benefits to Canadian farmers or businesses. It is an entirely one- sided affair: Californians get the goodies, Ontario and Quebec pay a rising bill.
By 2025, when the state’s permit surplus is expected to largely disappear, Brown’s changes could push WCI permit prices above $ 70 a tonne — significantly higher than the maximum price Ottawa is demanding through its national carbon tax. The lesson from all this: The WCI carbon price will ultimately reflect California’s plans and objectives, whether they match Canadian goals or not.
By manacling themselves to the WCI, Ontario and Quebec have essentially put California in charge of their provinces’ carbon- pricing policies. Let’s hope this ends better than most chain-gang movies.