Ontario’s first cap-and-trade auction is done, and the world didn’t end

ANALYSIS: The Liberal cap-and-trade plan seems to have come through its first test intact. The government is relieved, the New Democrats are being gracious, and the Tories may need new talking points
By John Michael McGrath - Published on Apr 04, 2017
Environment and Climate Change Minister Glen Murray says the cap-and-trade auction money will allow the government to advance its climate change action plan. (John Michael McGrath/TVO)



Moments of non-partisan goodwill are rare enough at Queen’s Park that they deserve to be noted. On Monday, Environment and Climate Change Minister Glen Murray got a handshake and congratulations from his NDP critic Peter Tabuns after Murray announced the results of the province’s first auction of carbon allowances. (The Tories released a statement that was substantially less generous; more on that shortly.) It was gracious, even if the Liberals and New Democrats were back to savaging each other in Question Period the next day.

And it was also, arguably, well-earned. Murray presided over the implementation of a cap-and-trade system for greenhouse gases in which any number of things could have gone wrong on day one, and didn’t. The province sold all of the 2017 allowances offered in this first round, and took in a cool $472 million. The Liberals had built conservative assumptions into their budget last year and this auction brought in almost exactly what they predicted: Ontario has benefited in part from getting to see Quebec and California launch their cap-and-trade systems, and has been able to structure its own market accordingly. The only real hitch was that the money is late: it was originally supposed to be in the government’s accounts for the 2016 fiscal year.

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A quick refresher: a cap-and-trade system forces any large polluter to buy an “allowance” for every tonne of emissions it produces, thereby putting a price on greenhouse gas emissions. Industry can buy permits (from the government or from other companies who have spares), or they can make investments to reduce their pollution outright (thereby reducing the number of allowances they need). The total number of available allowances will be slowly reduced over time, driving up the price of carbon emissions and increasing the incentive to improve energy efficiency.

Murray was understandably happy with the results Monday, saying that the money will let the government move forward with parts of its climate change action plan (proceeds from the auction have been earmarked for this specifically), while in the same breath saying the cash isn’t actually the point: success will be judged based on how much cap-and-trade reduces pollution, not how much it swells the government’s coffers.

He also acknowledged that not all auctions will be as successful the first. That much is a given: California and Quebec’s carbon market has whipsawed from two failures in a row last year to a seeming success in November, with 80 per cent of allowances sold. Then, before anyone could breathe easier, the most recent auction was another disappointment. Defenders of the system say the wild swings are due to continuing legal uncertainty in California about the future of the carbon market. Ontario is very likely to see a similar roller coaster as its process unfolds. (The next auction is slated for July.) But the Liberal plan for cap-and-trade money has plenty of wiggle room, too. They can adjust their expenditures as the money from carbon auctions ebbs and flows: for example, the plan calls for the government to spend between $10 million and $20 million to get dirtier, older cars off the road. Where the actual spending falls in that range will depend on the future success of the auctions.

Monday’s news was, in short, an important success for a government that hasn’t had a lot of solid wins lately. Tabuns didn’t give the government any unqualified praise — he rightly said there’s still not enough transparency about how the proceeds are being spent — but the New Democrats haven’t spun dire tales about climate action destroying the economy, either.

The same can’t be said for everyone. The Tories released a statement reiterating their criticisms of cap-and-trade, with leader Patrick Brown calling it “nothing but a $2 billion a year tax grab that makes Ontario less competitive.”

Brown also criticized the coming link with California and Quebec’s markets (scheduled for 2018), saying it will send Ontario money “to one of the richest jurisdictions on Earth for emission reductions there, which means failing to cut emissions here at home. This does not make sense.”

It’s true that there’s some concern about tying our market to California's and Quebec's, and what that will mean for Ontario. Environmental Commissioner of Ontario, Dianne Saxe (no fire-breathing Tory) said in her report last year that California has so many cheap allowances available — the state’s economy is huge and their GHG reduction target is less ambitious than ours — that Ontario could “meet” its 2020 target without actually reducing pollution here.

That’s a potential bug in the system, but it’s hardly a doomsday scenario. The government says, reasonably enough, that the atmosphere doesn’t care whether CO2 comes from Sarnia or San Diego, and if California allowances wind up being cheaper than Ontario's, that won't detract from the environmental goals. If a dollar can buy one tonne of GHG reductions in Ontario, in other words, but two tonnes in California, then it's better for the planet if an Ontario company buys two tonnes of allowances for the same dollar in California. Ideally companies would be spending their money on reductions here, but if they aren’t, well, guess which government just raised hundreds of millions of dollars to spend on green infrastructure in Ontario?

Cap-and-trade is here, and it’s neither nirvana nor the apocalypse. It’s actually something far more prosaic: a somewhat arcane government program that is incrementally raising government revenues and contributing to an effort all parties in the legislature nominally support — fighting climate change. It has and will continue to have problems at the margins, but it doesn’t look like a disaster.

The Tories remain committed to dismantling the system if and when they win the 2018 election, and replacing cap-and-trade with a carbon tax (or, potentially, replacing it with nothing and letting Ottawa’s carbon tax take effect in Ontario). That will be easier to do if cap-and-trade looks like an obvious failure, and there may yet be a failed auction in the future. But nothing in Monday’s results gave the Tories the talking points they were looking for.

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