Ontario cap-and-trade—high cost, little environmental benefit

Recently, the Windsor region’s Chamber of Commerce joined other forces across Ontario to demand the province kill its cap-and-trade program due to concerns over the program’s potentially devastating economic impact.

Indeed, there are many pitfalls with the program that raise serious questions about its costs versus benefits.

The Ontario government launched its cap-and-trade system in January 2017, with an emission cap of roughly 142 megatons for 2017, a corresponding number of allowances, followed by the first quarterly auction for some of those emission allowances in March. Under the Ontario plan, the emission cap will decline over time, mandating emission reductions to reach 15 per cent below 1990 levels by 2020.

Crucially, this program is expected to impose large direct and indirect costs on households and businesses while only producing small emission reductions in the province. Based on the Ontario auditor general annual report in 2016, cap-and-trade will cost consumers and businesses an estimated $8 billion from 2017 to 2020.

Several factors contribute to the high cost of Ontario’s cap-and-trade program. First and foremost, it’s not structured in a way that minimizes economic costs, as it’s been layered on top of many pre-existing regulations intended to curb greenhouse gas emissions. Based on basic economic theory, the introduction of a cap-and-trade program (or any other carbon-pricing system) must replace, and not be added to, any existing regulations to achieve the optimal balance between emission reduction and economic growth.

However, over the past decade, Ontario has implemented many regulations to reduce emissions including the Green Energy Act to eliminate coal-fired plants, the feed-in-tariff program, lightbulb standards, household and business efficiency standards, vehicle efficiency standards. Adding cap-and-trade to these existing regulations amplifies regulatory distortions and damages the economy.

Secondly, the cap-and-trade program is not revenue neutral, meaning that the money collected from selling allowances at auctions will not return to the public in the form of tax cuts. Indeed, cutting personal and/or business income tax rates would partially offset the negative economic impact of cap-and-trade, spurring investment and economic growth.

However, instead of returning the money to taxpayers, the government has chosen to subsidize its favourite green technologies and projects via its Green Fund. Subsidizing green projects may be politically popular but remains fundamentally misguided from a policy perspective. The logic behind carbon pricing is to let the market play its role by identifying and implementing the cheapest greenhouse gas reduction options. By subsidizing wind, solar or any other alternative energies, the government undercuts the key justification of the policy.

Lastly, despite imposing huge costs to Ontarian households and businesses, the cap-and-trade program is expected to only minimally reduce emissions in the province. In fact, Ontario’s auditor general estimated that, under the current plan, Ontario would only reduce emissions by 20 per cent of its target by 2020.

The main reason that the emissions reductions are expected to be small stems from the fact that Ontario will soon join the California and Quebec cap-and-trade programs. This shared system allows emitters to trade allowances across jurisdictions, so many Ontarian emitters will simply buy more permits than are issued by Ontario’s government, often at lower rates, frustrating emission-reduction efforts in Ontario.

Ontarians are right to be concerned about Ontario's cap-and-trade program, which violates the fundamental tenets of economics, making it inefficient, expensive and largely devoid of environmental benefits.