Cap and trade is coming and nobody knows anything

ANALYSIS: Ontario is about to join California and Quebec in a cap-and-trade system to fight climate change — but the government hasn’t answered several important questions in any detail
By John Michael McGrath - Published on November 25, 2016
a smoke stack at sunset with birds flying by it
Ontario’s new cap-and-trade system kicks off on January 1, 2017, but watchdog officers at Queen’s Park can’t say much about how — or if — it will work. (Charlie Riedel, AP)

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The centrepiece of the Liberal government’s ongoing efforts to reduce greenhouse gas emissions comes into effect January 1 — but the watchdog officers at Queen’s Park can’t say much about how (or whether) the cap-and-trade system will work.

Ontario will join California and Quebec in auctioning off rights to emit carbon dioxide. Those rights — allowances, in the industry argot — will be sold off in smaller volumes as time goes on, increasing their cost and (hopefully) increasing the rewards for businesses that reduce their emissions. The common market, run by California’s air resources board, will eventually let companies trade carbon rights in either province or in California.

But in two reports this week, both the environmental commissioner and the financial accountability officer raised important questions about the system’s design, and about what the government will do with the money it raises.

In her report, released on Tuesday, Environmental Commissioner Dianne Saxe waxed optimistic about the government’s efforts to control climate change. However, she noted that there were several unanswered questions about the plan. For instance, what will Ontario do if the California market ceases to exist over legal challenges in that state? That worst-case scenario isn’t something Saxe expects, but it’s something she says the government needs a contingency plan for.

But even setting that aside, there’s still the question of whether the plan will actually reduce emissions: in order to prevent heavy polluters from shutting down plants in Ontario, the government will initially give them many allowances as a transitional measure, free of charge. Moreover, according to Saxe’s report, cheaply had allowances from California mean it’s possible the system won’t reduce Ontario emissions until at least until 2020.

Saxe did praise the government for its “good-faith effort” at designing a cap-and-trade system. She merely suggested that it will require substantial reforms in order to work.

The other big question, raised by both oversight officers: What, exactly, is the government planning to spend its cap-and-trade revenues on? After all, they project the auctions will bring in up to $1.9 billion a year, or $9 billion in the first five years.

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The Financial Accountability Office didn’t provide a full evaluation of the cap-and-trade system, instead dealing in generalities in its report, issued Wednesday. In short: if the government spends cap and trade revenues on things it had already committed to (even if those things have climate change-fighting merits) it could end up reducing the reported deficit. But the plan is supposed to fight climate change, not help balance the budget.

Conservative finance critic Vic Fedeli said the FAO’s report shows that the Liberals will reduce the deficit “artificially” in the run-up to the 2018 election, only to go back into deficit after winning — or leave their successors to clean up the mess. The government points to various spending schemes as win-wins for both the environment and for its infrastructure-building plans. For example, its $13.5 billion investment in GO regional express rail (RER) is intended to encourage people to use their cars less (good for fighting climate change) and modernize the province’s infrastructure (good for business and transit commuters.).

The problem is that GO RER was also the kind of investment the government was going to fund through new taxes brought in with the 2014 budget. That was the document the Liberals presented in May of that year and then won an election over, with the promise that “dedicated revenue sources” would go toward regional transit and other infrastructure projects across the province.

For arcane constitutional reasons the revenues from cap and trade can’t go straight to the government’s general revenues account: they have to be accounted for carefully. But the taxes announced in 2014 can be spent on whatever the government likes. So if GO RER is the model for spending cap-and-trade revenues, what’s the province doing with those tax dollars?

The government, naturally, says such concerns are unfounded: it’s spending so much money on improving infrastructure that no one revenue stream is going to account for everything — not the 2014 taxes, nor the cap-and-trade revenue, nor the two combined. Simple accounting like the above, the government argues, risks being merely simplistic.

If tracking infrastructure money were the only concern, it might be dismissed. But Peter Tabuns, the NDP’s environment and climate change critic, has claimed the government will use the money from cap-and-trade to follow through on its promise to give Ontarians relief on their hydro billssomething Saxe said will have zero impact on climate protection.

It would, however, be politically costly — and thus difficult — to backtrack on that hydro relief. This concerns the financial accountability officer as well: if cap-and-trade money is committed to something that’s hard to stop and an auction fails to raise enough money to pay for it, the government would have to step in to fill the deficit. (Although California’s latest auction went well, it followed two alarming failures that caused some to question the viability of the market.)

Of course, the allowance auctions could be successful, and the government’s revenues could wind up in line with projections. And even if the auctions are unsuccessful, the government could fairly claim their spending plan, with its multiple revenue streams and priorities that can be shifted based on how much money they raise, gives the province flexibility in meeting its commitments.

But Ontario voters are still left with a system that kicks off in just over a month about which two officers of the legislature can’t answer fundamental questions. It opens the Liberals up to accusations of exactly the sort of trickery they used to rail against when they were in opposition — that the government could hide a budget hole through accounting gimmicks, a problem to be discovered by their successors after election day.

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