If not carbon pricing in Ontario – which works well – then what, Mr. Ford?

Climate and Energy

by Dale Beugin, Don Drummond, Glen Hodgson and Mel Cappe

We’d like to correct the record on some of the myths and misunderstandings surrounding carbon pricing. The economic evidence clearly contradicts some of the recent rhetoric coming from Ontario.

In short: Carbon pricing works. Carbon pricing is cheaper than any other policy option. And getting rid of the well-functioning cap-and-trade system, without an alternative in sight, would be a costly proposition.

Let’s back up. So far, the new Ontario government has indicated that it will be ending the province’s cap-and-trade system. Instead, it suggested it will “come down heavy” on polluters, and has also promised $500-million to fund alternative policies.

Earlier this week, premier-designate Doug Ford incorrectly stated that Ontario’s cap-and-trade system “does nothing for the environment.” A great deal of evidence says otherwise. Carbon pricing – whether a carbon tax or a cap-and-trade system – creates powerful incentives to reduce GHG emissions. Consumers and businesses find ways to avoid paying the carbon price by taking actions to reduce emissions. In Ontario, that means having to spend less money to buy permits for emissions or being able to sell extra ones for cash.

And it’s not just other forms of carbon pricing that work – the cap-and-trade system of which Ontario is still a part, along with California and Quebec, is highly regarded by experts, and is working alongside other climate policies to reduce emissions.

Well then, what about costs? Mr. Ford has framed his shift away from carbon pricing as a way to save Ontario money. Unfortunately, alternative policies will cost more and achieve less.

“Coming down heavy” on polluters (without relying on carbon pricing) implies using more intrusive regulations. That means policies that require specific technologies or impose emissions performance standards, sector-by-sector across the economy. While those regulations might not have a visible carbon price, they will impose costs on businesses. Those businesses will pass on those costs to consumers. And on a per-tonne basis, those costs will be higher than the costs of a carbon price that drives equivalent emission reductions.

Subsidies – perhaps funded by that promised $500-million – are another alternative. But subsidies also tend to be more expensive and less effective than carbon pricing. For one, they require government to identify technologies or actions worthy of public support, something it has never been particularly good at doing. Subsidies also require public spending, which is neither particularly conservative nor particularly practical, given Ontario’s fiscal situation.

The total cost of Mr. Ford’s proposal also includes the costs of ending the current cap-and-trade system. And these costs may be significant.

First, there is the cost of compensating firms for allowances already sold under the cap-and-trade system: Companies purchased these emissions permits from the government at a total value of $2.8-billion. In the absence of a cap-and-trade system, these allocations are worth nothing. The new government has suggested compensation is not required, but the courts may come to a different conclusion.

Second, the proposal also introduces less tangible costs to the economy in the form of regulatory uncertainty. Uncertainty regarding future carbon policies adds costs to businesses by complicating their planning. But the reversal of the system – especially if compensation is uncertain – also undermines trust in government, making investment in the province less appealing. Firms are already facing plenty of uncertainty given the North American free-trade agreement context; introducing more isn’t helpful.

Third, ending cap-and-trade also eliminates a government revenue stream of around $2-billion a year. True, the new government would almost certainly have been disinclined to continue the green subsidies the previous government funded using this revenue. (And we would likely agree with this choice; many of these programs were very costly.) But a conservative government could have used such revenue to fund reductions in personal and corporate income taxes. Absent carbon pricing, no such opportunity exists and any tax cuts must be funded either by deficit financing, or yet-unidentified efficiencies in government spending.

Ending cap-and-trade is a legitimate policy choice for a new government in Ontario. But without an alternative plan, that choice is likely to mean greater economic costs and shirking of climate commitments.

So, to Mr. Ford – and indeed, to other carbon pricing critics in Canada: It’s no longer sufficient to criticize the status quo. It’s time to propose a credible path forward. If not carbon pricing, then what?

This piece was originally published in the Globe and Mail on June 21, 2018

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