What happens if Ontario makes good on plan to scrap cap and trade?

With the election of Doug Ford as Ontario’s next Premier, the carbon market is in danger. The Quebec government plans to turn on the charm in order to keep its neighbour in the game. But what will happen if Ontario’s new Conservative government follows through with its intention to withdraw from the cap-and-trade system?

Between 1990 and 2015, Quebec and Ontario reduced their greenhouse gas (GHG) emissions by just 9%, and California increased theirs by 0.7%. None of the three jurisdictions is on course to meet its reduction goals of between 37% and 40% by 2030 and 80% by 2050.

The principle behind a carbon market is simple: companies either reduce their GHG emissions or purchase emission credits at the market price. As the total emission ceiling (or cap) is lowered, emission credits become scarcer and their price goes up, which encourages companies to innovate.

In theory, the mechanism makes sense. It’s in practice that things go awry.

Since certain sectors (agriculture and waste management) are excluded from the cap-and-trade scheme, others will have to do more. In Quebec, this is the equivalent of raising the reduction targets to 45% by 2030 and to 96% by 2050 for the sectors subject to cap-and-trade. On top of this, companies subject to international competition receive free emission credits.

Even the government knows it won’t work

Yet the main studies that have looked into the matter predict that the price of carbon in the cap-and-trade scheme will be between $30 and $100 per tonne in 2030, which will not be sufficient for people to change their behaviour. They will continue to emit almost as much, merely paying a little more than they do today for the right to do so.

A Quebec Finance Department assessment estimates, for example, that an increase in the carbon price to $93 in 2030 (it is currently around $20) would achieve only one-fifth of the desired reduction. Concretely, a litre of gasoline would cost around 20 cents more than today—annoying, but not enough to get you to sell your car.

A second consequence of the current evolution of the carbon price is that the money used to buy the required emission credits will go… to California.

It’s a simple matter of logic: If the price of carbon stays low, it’s because there’s a significant surplus of credits, and if Quebec and Ontario need to purchase more emission credits, it is necessarily California, a much bigger market, that will have some to sell.

The Auditor General of Ontario believes this is a likely scenario. She forecasts capital flight of $470 million from Ontario to California in 2020, and $2.2 billion in 2030. Quebec will probably be in the same situation, spending billions of dollars to maintain a clear conscience, without reducing emissions in Canada.

And if the price were higher?

Is the solution then to increase the price of emissions by imposing a very high tax on carbon if the market price is too low? This would not work any better.

If the price of carbon is higher than what companies in Quebec, Ontario, and California are able to pay, they have the option of displacing their activities toward places where emissions are less severely limited. Those that can’t do this will reduce their activities, or simply shut their doors. In this case, it is jobs that will disappear.

For a mechanism like the carbon market to succeed in reducing GHG emissions, carbon taxation cannot be limited to three jurisdictions that account for only a small portion of the North American economy. This is not the way forward in the short or medium term, and it raises questions about the pertinence of taking part in the carbon market.

If the goal is to address the problems caused by climate change, then the governments of Quebec and Ontario should take a global approach. The current, local approach leads to a choice between bad and worse. It’s not by sending capital or jobs abroad that Quebec and Ontario are going to reduce GHG emissions.

Germain Belzile is a Senior Associate Researcher at the MEI and the co-author of “The Carbon Market: Chasing Away Jobs and Capital without Reducing GHGs.” The views reflected in this op-ed are his own.

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