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Research Brief Executive Summary

Over the next year, Ontario will design and implement a cap-and-trade system for reducing greenhouse gas emissions. Much public discussion has focused on the effectiveness of cap-and-trade as an overall approach to pricing carbon. While it is possible to debate the inherent advantages and challenges of cap-and-trade compared with other carbon-pricing approaches, the fact is, these differences are small. Effective cap-and-trade systems can, and do, exist. But various problems also exist. In Ontario, as in any other jurisdiction, the success of the cap-and-trade system will hinge on the design details.

Drawing on the Ecofiscal Commission’s April 2015 report, The Way Forward, this brief outlines four fundamental principles of good cap-and-trade design. It offers a practical roadmap and specific recommendations to Ontario as the province moves toward developing its policy. The same principles could be used as a guide by any province considering the introduction of a cap-and-trade system.

A common theme runs through these principles and recommendations: transparency. It is not enough to design a policy that is effective, cost-effective, and fair. It must also be clear, predictable, and immune to political interference. The confidence of Ontarians—everyday consumers and big emitters alike—is critical to the success of the province’s new policy. While the principles outlined in this brief do not address every detail of policy the government will need to consider, they offer the basis for a well-designed cap-and-trade system for Ontario.