ENGINEERING A CLEANER ECONOMY: THE PROVINCE’S CARBON PRICING PROGRAM AND THE ROLE OF INNOVATION

Back in April, Ontario announced its intention to move forward with a cap-and-trade program that puts a price on carbon and sets a limit on emissions in an effort to reduce the amount of greenhouse gas (GHG) pollution emitted in the province. Ontario will eventually link its cap-and-trade auctions with Québec and California in the Western Climate Initiative – a non-profit organization formed to support the implementation of state and provincial GHG emissions trading programs.

The Ontario Society of Professional Engineers (OSPE) believes that a market-based system, if welldesigned and transparent, can not only drive meaningful climate action by ensuring emissions are reduced, but also accelerate lowcarbon investment and innovation that can help transform Ontario’s economy.

OSPE recently released Engineering a Cleaner Economy: Examining Ontario’s Carbon Pricing Program and the Role of Innovation, a report that describes how carbon pricing works and examines some specific aspects of comparative systems. Below are four important takeaways from the report, which is available on OSPE’s website at www.ospe.on.ca.

CAP-AND-TRADE VS. CARBON TAX

There are two predominant approaches to pricing carbon – cap-and-trade and carbon tax. Under a cap-and-trade program, sometimes referred to as an emissions trading system (ETS), the government sets a limit – the “cap” – on GHG pollution that industry can cumulatively produce and over time the cap is lowered. The cap is divided into units, or allowances, which are equal to one tonne of carbon emissions. Government distributes the allowances through a mix of free units and auctions, thus creating the marketplace that enables the “trade”. Polluters that exceed their allotted allowances must buy extra emissions credits from firms that have reduced their pollution and have remaining allowances to sell. With an ETS, it does not matter which emitters reduce their pollution levels as reduced emissions are realized at the target level by the de-escalating cap. Cap-and-trade is sometimes errantly referred to as a carbon tax, because commercial entities that are faced with rising costs are likely to pass those increases on to consumers. A proper carbon tax is a different system, where the government sets the costs of pollution – the “tax” – that is applied to fossil fuels, encouraging businesses and consumers to reduce their carbon footprint. Both plans have the potential to deliver a long-term decrease in cumulative emissions – an ETS gives predictable, steady reductions in pollution with variable rising costs, while a carbon fee gives predictably rising costs with variable pollution reduction. Both programs reward industries that innovate because the less they pollute, the less they pay.

WILL A CAP-AND-TRADE SYSTEM HINDER ONTARIO’S ECONOMY?

One of the biggest concerns is that an ETS will add to the escalating cost of doing business in Ontario and will put a greater burden on households and families. While these are legitimate concerns, many believe that pricing carbon will ultimately benefit Ontario’s competitive standing by driving industries up the innovation curve and creating opportunities for those specializing in and exporting lowcarbon technologies. Competitiveness considerations are particularly important when determining how Ontario deals with industries that are energy-intensive and unable to raise product prices or recoup compliance due to trans-border competition (i.e. heavy emitters like iron and steel, cement, lime, glass, basic chemicals, and pulp and paper). If an Ontario firm loses market share due to a cost implication of cap-andtrade, there is an economic cost to the policy. There are also concerns related to carbon leakage – costs stemming from climate policies that have a measurable impact on competitiveness, resulting in production and investments moving outside of Ontario together with the associated GHG emissions. In line with California and Québec, Ontario is likely to give free allowances to heavy emitters on a de-escalating basis to allow for retrofitting facilities and adapting to the new system. With respect to helping households, Ontario is likely to introduce initiatives such as electricity bill discounts, and/or legislation that earmarks a certain percentage of auction revenues to programs that help low-income families adjust. Certain firms will likely find themselves initially disadvantaged, but some businesses will also face competitive advantages.

Industries involved in home insulation, heat pumps, geo-exchange drillers and solar panel installation, for example, should see immediate increases in demand for their products and services. Many opportunities will be created for early-adopters of lowcarbon technologies to export knowledge and expertise as an increasing number of sub-national markets introduce carbon constraints. The government must strike a balance between addressing legitimate concerns associated with changing regulatory conditions, without bending to firms that may use competitiveness to advocate for a “business as usual” approach that is not part of Ontario’s climate action plan.

CAP-AND-TRADE AS A DRIVER OF INNOVATION

Cap-and-trade systems will drive low-carbon innovation, and the firms that are the most inventive are likely to be the biggest winners in an ETS. Auction revenues will be a major source of income for Ontario. One estimate suggests the province could generate between $1.5 billion and $2 billion annually by 2020. Revenues will be deposited into the Greenhouse Gas Reduction Account, established in 2009 with the passage of the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading). The legislation provides that revenues will be allocated towards “the costs of research into or the development of or deployment of lower greenhouse gas emitting technologies” as well as “the costs of infrastructure or equipment to reduce greenhouse gas emissions.” Engineers will play a central role in contributing to these advancements, and in turn the future of Ontario’s low carbon economy.

WHERE DOES OSPE STAND?

OSPE will advocate for Ontario to strike a balanced portfolio of research and development, adoption, learning and diffusion to bring low-carbon technologies to marketplace. Society has granted engineers a regulatory and ethical duty to safeguard the environment. A strong engineering voice should actively participate in the cap-andtrade discussion, helping economists and policy makers come up with accurate designs as to what the costs of mitigation will be.