In February, Ontario released the details of its planned cap-and-trade program. The program will launch in January 2017, eventually linking with Quebec and California’s systems in 2018. In the first year of operation, it is expected to raise $1.9 billion per year, given that allocations are being provided for free to large industrial emitters, thus forgoing additional revenue.

The Ontario government has said the money will be spent on things like public transit, clean technology, energy efficiency programs for homes and businesses, and initiatives to limit emissions. Indeed, the province has argued that the Ontario carbon price is a “regulatory charge,” and so the revenue must be used to support initiatives that reduce emissions; constraints under constitutional law remain an open question. Specific plans for how funds will be used are still being decided. The Ecofiscal Commission’s recent report, Choose Wisely, describes the variety of options available for recycling carbon pricing revenues and outlines some of the trade-offs they present.

How should Ontario recycle its carbon pricing revenue?

The report provides a discussion of how the different revenue recycling options compare for Ontario. Ultimately, the decision of how to spend Ontario’s carbon pricing revenues will (rightly) be a political one, shaped by the province’s specific circumstances and priorities. But knowing the pros and cons of the different options can help Ontario to make a wise choice.

Transfers to households

Because so much of Ontario’s electricity already comes from low-carbon sources, its carbon price is not expected to hit household budgets as hard as it might in other places. The Commission finds that less than 12% of Ontario’s carbon pricing revenue would be needed to ensure lower-income households aren’t unfairly burdened. So only a small share of revenues would need to go back to households to make the policy fair.

Income tax cuts

Ontario’s personal and corporate income taxes are already low compared to other provinces. Reducing them further would certainly help to reduce their distorting effect on the economy, but the benefit might be modest compared to some other options.

Clean-technology investments

Ontario has an ambitious target of limiting emissions by 37% by 2030 compared to 1990 levels. Achieving this will require an aggressive tightening of Ontario’s emissions gap, or the purchase of offsets from Quebec or California. Investing in clean technology could help to lower the cost of emissions reductions in Ontario. It could also potentially help the province develop a comparative advantage in fast-growing clean-tech. Still, public investment in specific technologies also comes with risk, as illustrated by experience in Quebec. Governance and implementation details are critical.

Infrastructure investments

Ontario has made infrastructure investment a priority, and plans to spend $130 billion on construction and repair between 2015 and 2030. And infrastructure—such as transit or electricity grids—could also enable more emissions reductions in response to the carbon price.

Reduction of public debt

Ontario has the second-highest debt ratio of all the provinces. Using carbon pricing revenues to pay down debt would help limit the debt burden faced by future generations

Transitional support to industry

Ontario’s steel, chemicals, petrochemicals, fertilizer, and refining sectors will face competitiveness pressures from a carbon price. But these sectors make up less than 2% of the province’s economy, and therefore support to them will not require a large portion of carbon pricing revenues. To start, Ontario’s system will provide allocations for free to all large industrial emitters, rather than to a targeted subset of emission-intensive and trade-exposed sectors.

Ontario will need to decide

The government has already set out its priorities in broad strokes, but in the coming months it will need to determine exactly what mix of options it plans to use, and how spending will be broken down. Each approach will offer its own advantages and disadvantages. Ontario will need to choose wisely.

Event: Recycling Cap-and-Trade Revenues in Ontario
Our expert panel discuss the the trade-offs of different revenue recycling options, including how to address household fairness and business competitiveness in Ontario.
Live Monday, April 11 at noon EDT.
Register for the panel