Cap and Trade: what is it all about, anyway?

And just how will higher Ontario gas prices slow down climate change?

QUEEN’S PARK—The cost of carbon has become a 21st century fixation due in large part to growing global concern about the impact of human induced climate change. The Ontario government’s answer to the carbon issue has been to introduce a cap and trade program in concert with the province of Quebec and the state of California. The move has been accompanied by a great deal of controversy—particularly from business groups who say their competitive positions are already reeling from the impact of Ontario’s high electricity rates.

Ontario is the fourth province to initiate some sort of carbon pricing system, following Quebec, Alberta and British Columbia. With the introduction of Ontario’s plan, over 75 percent of Canadians will live in a province with some kind of carbon pricing plan.

According to a December 21 statement from the Ministry of Environment and Climate Change, cap and trade is best suited for the province’s economy. “Third-party economic experts have confirmed that our plan is both the most cost effective and best at reducing emissions compared to carbon pricing alternatives,” reads the statement.

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The Official Opposition under Ontario Progressive leader Patrick Brown disagrees, stating that “as of January 1 this new cap-and-trade cash grab will increase home heating costs by as much as $13.54 a month and increase the price of gas at the pump by 4.3 cents a litre. Everything, from groceries to clothing, will become more expensive as a result of this new scheme.”

Mr. Brown went on to claim that “this cash grab will cost Ontario families and businesses roughly $2 billion each year, for the Wynne Liberals to spend on whatever scandal or pet project they dream up next.” Mr. Brown alleges that the provincial Liberals will keep the cash generated by the program as a “slush fund.”

“We all know climate change is a fact and is happening,” said Algoma-Manitoulin MPP Mike Mantha, going on to note that dealing with carbon emissions is “important to protect our children.” But he went on to say it was also very important to ensure that measures not “impact people with cumbersome bills to pay.”

Mr. Mantha pointed out that in Northern Ontario, residents have no choice but to put fuel in their vehicles due to the lack of public transit and other alternatives in order to access health care, recreational and employment opportunities.

He noted that the most likely beneficiaries of the carbon revenues would be transit and other transportation programs that benefit southern Ontario communities disproportionately. “We have to ensure that there will be benefits for Northern Ontario as well, not just southern Ontario.” Otherwise, he noted, for Northern residents the carbon trading program would simply be another cash transfer out of the North for the benefit of the south. “It would just be a tax grab,” he said. “We need to see that money being transferred into programs to help people with their home heating. What is done with the revenue needs to be transparent and it needs to be accessible and affordable.”

Mr. Brown went on to claim that “this cash grab will cost Ontario families and businesses roughly $2 billion each year, for the Wynne Liberals to spend on whatever scandal or pet project they dream up next.”

Other critics, including Mr. Brown, have claimed that both Quebec and California will see larger reductions in their carbon emissions in their joint plan, thereby ensuring that Ontario consumers will end up subsidizing California and Quebec. Mr. Brown has suggested that he will repeal the cap and trade program if his government is elected in 2018, but has also suggested that there will also be a carbon plan of some kind to replace it.

So what are carbon pricing, cap and trade and carbon taxes?

Carbon pricing revolves around the concept of charging polluters for their greenhouse gas emissions. The means to doing this can take the form of regulation, direct taxes or a cap and trade system such as the one being introduced by the Ontario government. The purposes remain essentially the same, basically make the cost of pollution help to cover some of the costs of climate change and, hopefully, to encourage a decrease in future emissions.

Cap and trade is a system where a government limits the amount a given industry can pollute. Then, if the industry reduces its pollution below that “cap,” companies can sell, ie. “trade,” the unused parts of their allotment. The caps can vary very widely by industry (Quebec’s aluminum industry is often cited as an example of that because a cap on that industry has been determined to place them at too much of a disadvantage), but if a company exceeds the allotment amount, they can buy more carbon credits from the government or buy them from a company that didn’t use all of its emissions allowance—thus a cap and trade “market” for carbon credits.

Canada and the US both currently have cap and trade systems in place for harmful emissions such as sulphur and nitrous oxides—pollutants that also have hugely negative impacts on the atmosphere.

Carbon taxes, on the other hand, such as those the Canadian federal government has announced it will impose on those provinces that do not bring in their own carbon pricing programs, operate on a set price per tonne for carbon.

The federal government announced that it would impose a carbon tax on provinces without their own carbon pricing plan and that it would take effect in 2018. That tax would be set at $10 a tonne initially, but rise to $50 a tonne by 2022. A tonne is 1,000 kilograms.

British Columbia is well ahead of the carbon curve, having implemented a “revenue-neutral” carbon tax in 2008. Revenue neutral suggests that anything that emits carbon, from gasoline to industries, pays more in taxes, but anything the province takes in, it gives back through other tax cuts or rebates. The purpose of a carbon tax is generally put forward as an attempt to change behaviour, not raise revenue—as is a cap and trade program. But there are revenue-generating carbon taxes that do both. Some estimates suggest BC’s taxes have reduced fossil fuel use by over 17 percent since their introduction in 2008, but other studies have called those findings into question—so the jury can be said to remain out on the impact of straight carbon taxes.

“We always support initiatives to reduce carbon emissions,” said Algoma-Manitoulin-Kapuskasing MP Carol Hughes. “But what the Liberals are introducing is the same as those put forward by the Conservatives.” Ms. Hughes notes that the Liberal stance during the election was that they would do better. She gave the example that the proposed carbon tax regime would increase the cost of gasoline by as little as four cents a litre.

“Is that enough to curb use? I don’t think so,” she said, “but will it impose a hardship on those who can least afford it? Positively.”

Ms. Hughes said that the need to tackle climate change was clear. “But this won’t do it. There are steps that we can take, alternative energy for one thing.” Whichever steps are taken, she notes, it is important to protect those most vulnerable in society from its impact.

The federal government has in fact indicated that the proposed national carbon tax will be designed in such a way as to not put vulnerable industries at risk from the imposition of onerous competitive disadvantages.

Twenty chambers of commerce around the province requested a delay in the launch of the program, warning that the effort to combat climate change would cost homeowners more and put stress on businesses already staggered by high electricity costs and citing the potential impact on future investment in the province.

Estimates on the impact for households is expected to come in at around $13 a month from higher heating and gasoline costs.