Ontario’s first year of carbon pricing brought in nearly $2 billion, but uncertainty looms over the program’s future as the province faces an election in 2018 that could see its cap-and-trade system replaced with a carbon tax. Ontario Premier Kathleen Wynne poses for a photograph at Queen’s Park, in Toronto on Monday, December 18, 2017. THE CANADIAN PRESS/Nathan Denette

Ontario’s carbon pricing future uncertain between cap and trade and carbon tax

TORONTO — Ontario’s first year of carbon pricing brought in nearly $2 billion, but uncertainty looms over the program’s future as the province faces an election in 2018 that could see its cap-and-trade system replaced with a carbon tax.

The system, launched in 2017, is aimed at lowering greenhouse gas emissions by putting caps on the amount of pollution companies in certain industries can emit. If they exceed those limits they must buy allowances at quarterly auctions or from other companies that come in under their limits.

The cap declines about four per cent each year to 2020, and as it decreases, the government hopes companies have more incentive to cut their emissions.

Ontario made $1.9 billion this year in four cap-and-trade auctions, three of which were sellouts.

But there are concerns that once the province joins the Quebec-California carbon market on Jan. 1, the proceeds from auctions will be lower — at least in the short term — because it will be cheaper for Ontario companies to buy allowances in those jurisdictions. That would also mean that greenhouse gas emissions won’t actually be cut in Ontario, according to the province’s environmental commissioner and auditor general.

The Liberal government, however, has argued that greenhouse gases are emitted into a global atmosphere, so it doesn’t matter in what jurisdiction reductions originate.

What happens with the money the program brings in has been a bone of political contention. The government is putting that revenue toward green projects such as energy efficient improvements at hospitals, smart thermostats for homeowners, and bike lanes, which they hope will further help to reduce greenhouse gas emissions.

The NDP say that green fund is not transparent enough, and the Progressive Conservatives call it a government “cash grab.”

The PCs have promised, if they win the June election, to withdraw from cap and trade and instead implement a carbon tax, with a key difference between the plans being how to spend the revenue. The Tories propose to use it to fund an income tax cut, which they say would make their carbon tax revenue neutral.

But the Liberals say the cap-and-trade system gives certainty in emission reductions at the lowest cost.

“(The PC system) is more expensive on a day-to-day basis and there’s no guarantee it will actually reduce greenhouse gas emissions,” Premier Kathleen Wynne said in a recent interview.

The price of carbon through Ontario’s 2017 auctions was roughly $18 per tonne. By 2022 the government expects that to rise to over $20, though some forecasts peg it higher.

Under the federal government’s carbon tax favoured by the PCs — Ottawa has said provinces must choose between cap and trade and a carbon tax — the price would be $50 a tonne by 2022.

“This is the federal law,” Progressive Conservative Leader Patrick Brown said in an interview. “I believe we should do our part on combating climate change and I don’t think it’s inconsistent to be a Progressive Conservative and care about the environment.”

Though a carbon tax comes with a higher price per tonne at least in the short term, the Tories say it is more predictable than the price under cap and trade, which is dictated by the market and therefore unstable. And their plan is to offset the impact on consumers with income tax cuts.

They also plan a small business tax cut, but businesses currently covered by cap and trade may still end up paying more under a carbon tax.

Those businesses would have an equivalent value of cap-and-trade credits honoured in a carbon tax system, and free credits for companies in sensitive industries — a way to prevent them from moving to jurisdictions without carbon pricing — would continue, the Tories say.

Linking to the joint carbon market — the first auction will take place on Feb. 21 — isn’t expected to substantially drive up costs for consumers, which are currently about 4.3 cents per litre on the price of gasoline and about $80 a year on natural gas home heating. There are also indirect costs that businesses will pass onto consumers.

They would be about $80 to $85 a year with a $20-per-tonne carbon price and about $200 a year for a $50 carbon price, said University of Calgary economics professor Trevor Tombe.

“That’s going to be the case under either a cap and trade or a carbon tax,” said Tombe, who has often written about carbon pricing. “The relevant metric here for household cost is what the price on carbon is, not what specific system was used to implement that price.”

That also means the carbon tax would reduce emissions more than cap and trade because of the higher price, Tombe said.

“It provides an incentive for households, businesses, individuals to change their behaviour,” he said.

An analysis published by EnviroEconomics says the federal carbon price would see more emissions reductions domestically because of its higher price, but cap and trade requires a certain level of reductions and gives more options to achieve them.

To withdraw from the Ontario-Quebec-California cap-and-trade system, a Tory government would have to give one year’s notice, meaning the province would formally pull out in the summer of 2019.

Their plan also earmarks $1.5 billion to continue any contractual obligations under cap and trade, as well as any of the green programs they deem worthy.

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