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Real Talk on Competitiveness and Cap-and-Trade: Expert Panel Recap

Cap-and-trade in Ontario
Jun 4, 2015
Climate and Energy

On Wednesday, Canada’s Ecofiscal Commission and the Martin Prosperity Institute co-hosted a panel discussion at the Rotman School of Management. The Subject: The Competitiveness Question—Business opportunities and challenges in a cap-and-trade environment. What happens when you ask cap-and-trade experts from California, Massachusetts and Quebec to discuss Ontario’s upcoming cap-and-trade system? You get an intelligent and thoughtful non-partisan conversation and encouragement for the process. The following blog, highlights some of Chris Ragan’s remarks. You can also watch the whole event, including the keynote by Dominic Barton, the panel discussion, and opening and closing remarks by Rotman Dean Tiff Macklem and Martin Prosperity Institute Executive Director Jamison Steeve.

Tonight’s topic is business competitiveness in the context of new policy aimed at balancing both environmental and economic objectives. What better place to have this conversation than here at Rotman—where so many of tomorrow’s CEOs and entrepreneurs will get their start.

The questions we will address tonight are the ones that will shape the world they enter as business leaders, and will influence the wisdom of the decisions they make. What does it take to make wise decisions? One requirement is perspective – or more accurately, perspectives.

We’re bringing quite a few of those together tonight—from California and Massachusetts, from one of the largest Canadian carbon permit sellers in Quebec, and from some Ontarians who are likely to become major permit buyers once Ontario develops its cap-and-trade system. You will hear much more from our panelists in a little bit.

The Way Forward for Ontario

The Way Forward for Ontario - Design Principles for Ontario’s New Cap-and-Trade System - June 2015It is clear that Ontario’s carbon-pricing decision is in line with an expanding global trend. We are not at the front of the pack when it comes to pricing carbon, nor when it comes to choosing the specific approach of cap-and-trade. I don’t say that to diminish Ontario’s vision on this file. But rather to point out the province’s tremendous advantage in having a number of real-life examples to draw on as it fleshes out the details of its own policy. And there is an opportunity here for Ontario to demonstrate significant global leadership—not by being the first, but by being the first to get the policy details right, straight out of the gate. This morning, Canada’s Ecofiscal Commission released a new paper—The Way Forward for Ontario. It outlines four core principles of good cap-and-trade design and specific recommendations for the province on how to incorporate those principles. The underlying premise is this: cap-and-trade policies can be designed well. There are unquestionably some challenges to be faced, but experience in other jurisdictions shows this to be entirely feasible. And Ontario’s success will depend on how well it designs that system for its specific needs, priorities, and circumstances.

Cap-and-trade 101

Very quickly, to provide some context for our four key principles and recommendations, here’s a little “cap-and-trade 101”.

1. Set the cap to start driving reductions now

The key component is, of course, the cap—the limit set on total emissions, which also equals the total number of allowances issued. With their allowances in hand, firms are then able to sell the unused allowances to other firms that are having a harder time complying. This trade creates a carbon market, in which a market price for allowances is a natural outcome. In a cap-and-trade system, that price is really the flip side of the cap — the lower the cap is set, the higher will be the price. This price is what creates the incentive to reduce emissions, whether that’s by changing practices, or upgrading technology, or investing in innovation. The strength of this incentive is naturally tied directly to the level of the carbon price. The higher is the price, the more profitable it becomes to reduce your emissions. Here is a bit of a spoiler alert: our paper does not suggest what Ontario’s cap should be. But wherever Ontario starts, it should be at a place that begins to drive real emissions reductions now. So, with Ontario’s current emissions of roughly 165 megatonnes per year, the cap should be at least a little below that level. More important than where Ontario starts with the cap is that it reduces that cap gradually, and predictably, over time. The rising carbon price will then drive incentives for more innovation and more emissions reductions, but it will do so in a way that enables a smooth transition for businesses and for our economy overall. So, that is our 1st principle: set the cap to start driving reductions now, but build in a steady and predictable decline in the cap to drive further emissions reductions over time.

2. Make emissions reductions cost-effective

Our 2nd principle is really about making those emissions reductions cost-effective. And that means casting as broad a net as possible over the many different sources of emissions – including large industrial emitters, buildings, small businesses, and households. The more widely the net is cast, the better the policy will capture the low-cost opportunities for emissions reduction. So what does that involve? Primarily, it means having no exemptions. When certain sectors or firms are exempted from the policy, it not only makes emissions reductions more expensive for the rest of us, it can really undermine the credibility of the system. If that guy isn’t covered, why should I be covered? Is he more important than I am? Do you like him better? This is not the kind of conversation we want to encourage between industry and government—it doesn’t serve the public interest. So cast the policy net as widely as possible. Now, some of you might point out that there are real competitiveness concerns here. This policy won’t affect everyone equally, and some sectors are going to face a distinct disadvantage. This is very true, and very important. But only for a fairly narrow share of Ontario’s industries—those that are both especially emissions intensive and trade exposed.

3. Aim to sell the majority of allowances through an auction

How do we deal with these select situations? This connects to our 3rd principle on the allocation of carbon allowances, or permits. The Ontario government has a choice to make. It can give allowances away to emitters for free, or it can sell them in an open and competitive auction. The problem with giving allowances away for free is that you’re basically handing out something with enormous monetary value. Not only do you invite a long line of supplicants, and all the problems associated with that, but you also forgo a significant stream of revenue. For Ontario that revenue could be a couple of billion dollars per year, and rising gradually over time. There are numerous perspectives on how the government can or should use that revenue to achieve further economic benefits—an important topic that we’re saving for another paper (stay tuned!). But forgoing that opportunity all together is to miss an important part of the economic benefit of carbon pricing.

So our clear recommendation to Ontario: aim to sell the majority of allowances and do it in the most fair and transparent way, through an auction. But there is a caveat here, and it comes back to the challenge of competitiveness and those emissions-intensive, trade-exposed sectors. There may be a reasonable case for giving some small share of permits away for free as a way to ease the transition for that narrow set of industries most significantly impacted by policy. The operative word here is transition. Not only does government need to do its due diligence to determine which sectors are truly impacted but it also needs to work with those sectors to create effective and credible transition plans.

4. Harmonize and bring others into the fold

Finally, our 4th principle comes back to the fact that Ontario is not starting from scratch. It is joining an existing cap-and-trade system. And in joining that system there are certain decisions that Ontario will not make independently. For example, how best to monitor and report emissions reductions, and how best to enforce them. Through this harmonization there is a substantial opportunity to reinforce a template for cross-jurisdictional and international carbon pricing.

It is no small thing for Ontario, the most populated province in Canada, to add its weight to the Western Climate Initiative. And as a substantial new member of that system, Ontario can and should play an active role bringing others into the fold. This is a chance to make huge strides on the path to broad, harmonized carbon pricing—demonstrating what is possible at a moment when the world is ready for solutions.

And now onto the Panel

So I will end now on that optimistic note. But this conversation is really just getting started. The recommendations I’ve just outlined represent the views of the Ecofiscal Commission. But I hope they also offer a useful framework for the discussion we’re about to have with individuals who come to the table with some unique and important experience, both from a policy perspective and a business perspective.

Please join me in welcoming to the stage our panel:

  • Ken Kimmel is currently the President of the Union of Concerned Scientists and is a former Massachusetts Environment Commissioner and former Chair of the multi-state Regional Greenhouse Gas Initiative.
  • Guy Drouin is the President and CEO, Biothermica – the first Quebec company to sell carbon credits in the Quebec-California market.
  • Michael Gibbs is the Assistant Executive Officer of the California Air Resources Board, the agency responsible for designing and overseeing California’s cap-and-trade system.
  • Faith Goodman is a Climate Change Consultant for the Oil and Gas industry with deep experience in Canada’s energy sector.

Let’s get started by each of you offering a 1-2 minute explanation of the unique perspective that you bring to this discussion.

PANEL Q&A

Q1: What is the single-most important design element of a cap-and-trade system for maintaining a healthy business environment?

Q2: What successes or failures from other cap and trade policies should Ontario learn from, as it puts this policy in place?

Q3: How can businesses best prepare both to harness the opportunities and to mitigate the risks of operating within a cap and trade system?

AUDIENCE Q&A

Jamison Steeve for Closing Remarks

Unfortunately that is all we have time for this evening. This has been a truly fascinating discussion and, I hope, informative and relevant as well.

I want to offer my thanks to our speakers, who came from far and wide to be here tonight. I want to thank all of you for your thoughtful questions and for being a part of this conversation.

And finally, a huge thank you to the Martin Prosperity Institute for hosting us in this fantastic space. Their team truly did an excellent job. And now it is my pleasure to introduce the captain of that team – Mr. Jamison Steeve, Executive Director of the Institute and definitely one of the smartest (and nicest) guys I know. Take it away, Jamison.

Watch the Webcast

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