The consultation period for Ontario’s climate change strategy is in the homestretch (comments due March 29) and the issue of carbon pricing remains front and centre.
This spring, Ontario will confirm whether it will follow in Quebec’s and California’s footsteps and institute a cap and trade system, or whether it will adopt a carbon tax à la British Columbia.
Arguably more important, though, is how Ontario designs whatever system it does adopt. A well-designed carbon tax system is far preferable to a poorly designed cap and trade system – and vice versa. As we’ve said before, the devil is in the details.
So let’s take a look at a couple of important principles that should inform the design of Ontario’s carbon pricing system – whatever form it ultimately takes.
Principle #1: Effective
The chief goal of Ontario’s carbon pricing system should be to constrain our greenhouse gas emissions. There are two aspects to this: breadth and price.
Make it broad. First, the price needs to apply as broadly as possible throughout the economy. It should cover major emissions sources such as industry, buildings, and transportation. Transportation fuels and natural gas are the two largest urban emissions sources, so it’s critical that they be subject to carbon pricing. When Quebec and California recently included these key fuels, they more than doubled their system’s coverage which now includes about 85% of total emissions. BC’s carbon tax currently covers 70% of the province’s emissions.
Price it right. In addition to broad coverage, the carbon price needs to be high enough to compel both industry and individuals to change their behaviour and bring about the desired emissions reductions. There’s debate over the elasticity of carbon prices (i.e., how responsive demand is to price), but generally speaking, higher prices tend to result in lower demand for fossil fuels.
At $30/tonne, BC’s carbon tax is among the higher priced regimes in North America (although carbon prices are much higher elsewhere, with Sweden topping the charts at US$168/tonne). Quebec’s most recent auction of allowances yielded a carbon price of $15/tonne. If Ontario joins Quebec as part of the Western Climate Initiative, there may be little scope for influencing the price beyond the level that has been set by participating jurisdictions.
Principle #2: Beneficial
A second principle is that any revenues generated from the carbon pricing system should maximize societal benefits.
There are, of course, differing views as to what this means in practice.
Some prefer BC’s approach of returning revenues through tax cuts to other areas, such as income and corporate taxes. (In fact, BC’s tax cuts have actually exceeded carbon tax revenues, making it “revenue negative.”) The revenues could also be returned to the public in the form of a per-capita dividend.
Others support reinvesting the money in low-carbon solutions. This provides a “double carbon dividend” by (1) directly changing behaviour and (2) investing in projects that further accelerate emissions reductions throughout the economy. California is actually required by law to invest cap and trade revenues in GHG-reducing projects like clean transportation, clean energy and waste diversion.
Many jurisdictions allocate free allowances to industry sectors to ease concerns over competitiveness; however, this practice can undermine revenue-generating potential. Careful policy design is needed to protect vulnerable sectors while achieving the program’s wider environmental and economic benefits.
Ontario definitely has a revenue problem that could sorely benefit from increased income. At the same time, there remain big funding gaps to cover Ontario’s infrastructure needs, including investments in low-carbon transit alternatives. Given that transportation represents 40% of Toronto’s emissions profile, there are definite synergies to be gained from reallocating as much revenue as possible to funding this critical infrastructure gap.
Regardless of the carbon pricing system Ontario adopts, it should effectively constrain emissions across the economy and generate substantial revenues that benefit the province’s businesses and citizens.
Over the next few weeks we’ll take a closer look at other important principles that need to be considered in the shaping of Ontario’s carbon pricing policy.
