design principles for Ontario's cap-and-trade system | Ecofiscal

Way Forward for Ontario: Design Principles for Ontario’s New Cap-and-Trade System

The Way Forward for Ontario: Design Principles for Ontario’s New Cap-and-Trade System - Ecofiscal Commission - June 2015. La voie à suivre pour l’Ontario : Principes d’élaboration du nouveau système ontarien de plafonnement et d’échange
Climate and Energy

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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.

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1 comment

  1. Phil A

    “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.”

    Not sure how you guys can continue to say the difference between say a carbon tax and Cap n Trade are small? They are not. There are big differences, particularly in the way both pricing mechanisms actually control and reduce emissions.

    Cap N Trade actually controls emissions by setting an actual cap. It directly allows governments to set and hit carbon emission targets. The trading of allowances is secondary. Being able to directly set emissions and reducing them with the cap is a huge advantage over a carbon tax.

    A carbon tax does not directly control emissions. It does not let governments set emission targets and exactly hit them. At best it is a put a tax or a price on a carbon product and hope for the best on carbon emissions. Whether you reduce any emissions entirely depends on the price elasticity of the carbon product you are putting a price on. In addition, a carbon tax’s effectiveness is entirely held hostage to the volatility of the underlying price of the carbon commodity (oil, natural gas or coal) the carbon tax is put on. With the price of oil dropping from $100 to $50 a carbon tax on oil related products is currently not likely very effective.

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