Can Ontario hit its targets without carbon pricing?

Climate and Energy Pollution

Ontario’s new government plans to dismantle the provincial cap-and-trade system and resist the federal backstop, essentially opposing carbon pricing in all forms. Though he hasn’t provided details, the premier-designate says he will “come down heavy on polluters.” Let’s take his statement seriously. What would a real plan to decarbonize Ontario look like—without a price on carbon?

A plan without a price

Carbon pricing isn’t the only policy that governments can use to reduce emissions. If Ontario rejects both cap and trade and a carbon tax, there are certainly other paths to a low-carbon economy. But let’s first briefly explore what the province is losing by abandoning carbon pricing.

What makes carbon pricing so cost-effective is its indifference to how and when we reduce greenhouse gas emissions. We’ll only reduce emissions if it’s cheaper than paying the carbon price. That means the policy drives lower-cost emissions reductions and doesn’t force expensive ones, whether in a specific sector, specific firm, or using a specific technology.

Hit the mark

Carbon pricing or no, the premier-designate hasn’t given any indication that he wants to abandon Ontario’s targets. Let’s assume he intends to keep them.

Ontario wants its emissions 15% below 1990 levels by 2020, 37% by 2030, and 80% by 2050. In 2015, Ontario’s emissions were 8% below 1990 levels, with increases in transportation and residential building emissions more than offset by reductions in electricity, manufacturing, and industry over the previous 25 years.

Hitting Ontario’s 2030 target means cutting emissions by an additional 31% from 2015 levels, which will require significant policy action across most sectors.

Source: UNFCCC, 2017

What could that policy action look like? If we assume carbon pricing is off the table, Ontario has two main options.

Alternative #1: Subsidies

The first approach would be a mix of subsidies to encourage people and businesses to reduce emissions. In theory, this approach could mean tax credits for industries that meet certain target or rebates for everything from home retrofits to electric vehicles. The latter appears unlikely, given that the new Ontario government just cancelled the Green Ontario Fund, which supported precisely these kinds of programs using revenue from the cap-and-trade system.

Subsidies, however, face several challenges.

First, they require governments to “pick winners” and identify specific technologies or practices, which they’re not always very good at. In contrast, carbon pricing lets the market identify lowest cost opportunities to reduce GHG emissions.

Second, subsidies are vulnerable to “free-ridership” problems. Firms or individuals that take action may have done so even without the subsidy, effectively wasting those public dollars while providing fewer additional emissions reductions.

Third, those public dollars don’t come for free. Subsidies require governments to raise other sources of revenue to fund them. Higher taxes, cuts to services, or deficit financing would be necessary to fund these subsidies, especially at the scale required to meet Ontario’s targets. The $500 million “emissions fund” promised by the premier-designate is likely to be insufficient.

The bottom line is that subsidies tend to be expensive; certainly more expensive than carbon pricing. And given the new government’s stance so far, using them more extensively to meet Ontario’s targets seems unlikely.

Alternative #2: Regulations

The second, broader option to meet Ontario’s targets is regulations, which multiple economic studies have shown are not as cost-effective as carbon pricing. The premier-designate has stated he would “come down heavy on polluters.”

How heavy remains to be seen, but that language certainly seems to imply command-and-control regulations. Regulations could get the job done, but they pose challenges too.

First, not all regulations are created equal. They generally lack (at least some) of the flexibility of carbon pricing. As a result, they generally cost more, though well-designed regulations can come close. At their worst, regulations could require firms to adopt specific technologies or change certain practices. These regulations can be very costly relative to carbon pricing. At their best, regulations would create mechanisms that offer flexibility as to when and how emissions are reduced. At their most flexible, regulations can start to look a lot like carbon pricing.

Ontario could get to its targets and embrace market-based mechanisms by designing stringent but flexible regulations, mandates and performance standards. For example, the province could mandate that auto manufacturers produce a certain number of zero-emissions vehicles or “ZEVs” (a program already up and running in Quebec). If producers can manufacture ZEVs cost-effectively, they get credits for any ZEVs they produce above their quota, which they can sell to firms that can’t meet their quotas as easily. (Our research shows that ZEV mandates are likely a more cost-effective approach than ZEV rebates.)

Ontario could apply flexible regulations like this across all sectors—manufacturing, power generation, transport, agriculture, you name it. It would require significant effort. Between consultation and careful design and implementation, we’re talking years, not months. Work would have to start immediately to get a few well-designed regulations in place before 2020—Ontario’s next big target.

Move quickly

If Ontario really wants to meet its emissions targets without carbon pricing, it can. But it will be expensive. The total cost will depend on the policy mix, so the impact on the government’s finances or the economy as a whole is unclear. What is clear, however, is that the total cost will exceed any plan that features an explicit and slowly rising price on carbon.

Every policy to reduce emissions has a cost (as well as benefits). For regulations and subsidies, these costs are implicit and invisible. But just because you don’t see it doesn’t mean you won’t feel it. Whatever approach Ontario takes, it will ultimately still fall to the taxpayer, even if the impacts are less direct.

In the meantime, Ontario climate policy has a massive cap-and-trade-shaped hole in it. The uncertainty looms large for businesses, municipalities, universities and hospitals that currently hold some $2.8 billion of worthless cap-and-trade permits. Ford has wasted no time dismantling cap-and-trade; he should waste no time finding its replacement.

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