What scrapping cap and trade will mean for Ontario

ANALYSIS: The Progressive Conservatives have promised to dismantle the pollution-pricing system — but doing that won’t be easy or cheap, writes Tim Alamenciak
By Tim Alamenciak - Published on June 12, 2018
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If the carbon market were shut down, the business owners who bought permits would likely demand compensation. (Stephen C. Host/CP)

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Doug Ford was unwavering on the campaign trail: he will “scrap” cap and trade, and oppose any effort by the federal government to implement a carbon tax. But while that idea might’ve played well during the election, dismantling the carbon market is not going to be easy.

The carbon market is a multi-national pollution pricing system that involves Ontario, Quebec, and California. Companies are able to purchase allowances, or permits, that offset the pollution they expect to emit over a given period. If a company emits less than the expected amount, they can sell their allowances to other companies that emitted more.

The carbon market has issued billions of dollars in allowances. If it were unilaterally shut down, the business owners who bought those allowances (also known as permits) would likely demand compensation.

Moreover, Ontario has received about $2.8 billion in revenues from the market — funds it has allocated to Liberal climate policies. Much of that money has already been spent on helping people buy electric cars and renovate their homes, and on building new transit infrastructure.

The Progressive Conservative platform under former leader Patrick Brown recognized that cancelling cap and trade would be difficult and proposed switching to the federal carbon-pricing backstop (the feds rolled out a carbon tax that will apply in provinces that don’t put their own price on pollution). It also recognized the need to help businesses deal with the change: “In transitioning away from cap-and-trade and into a carbon pricing system, the government of Ontario should ensure that businesses are kept whole for credits purchased in good faith prior to the transition.”

Under Ford, the Tories are proposing no such measures. Ford said on the campaign trail that he would join the legal challenge, launched by Saskatchewan premier Scott Moe, against the carbon tax. At any rate, says Dale Beugin, executive director of Canada’s Ecofiscal Commission, the party has “been pretty clear that they will end the system. Whether the calculus changes when they start to encounter the fact that people like the system and that it’s a pain to get rid of — maybe.”

How does Ontario get out?

Getting out of the agreement itself should be straightforward — Ontario simply has to provide a year’s notice to the other parties and to change some legislation. The trouble is with all the permits that are still out there. It all has to do with something called a compliance period; basically, pollution emitted will be counted from 2017 to 2020, and companies can use their allowances for those emissions. Pulling out in the middle of the period throws the market off and may result in a market flooded with cheap allowances.

“There’s talk that California and Quebec might bring legal action if [Ford] tries to get out in the middle of a compliance period, because they’re all intertwined in each other’s markets. If you just leave the permits there in cap and trade, you are creating a surplus,” says Keith Brooks, programs director at Environmental Defence. “That causes prices to go down, and targets for California and Quebec are no longer relevant.”

Business owners in Ontario will want to get some value from the permits that they’ve purchased. It’s not clear how that will happen. The government could offer to buy them back, although that could cost billions of dollars. Ontario business owners could also try to sell their permits to business owners in California and Quebec.

But that’s where things get complicated: Beugin says a flood of permits would increase the cap — that is, the maximum amount of pollution allowed in a particular province or state — and devalue all the permits in the system. “It busts the cap for Quebec and California,” he says. “Suddenly that cap isn’t binding.”

If this were to happen, says Sarah Petrevan, senior policy adviser with Clean Energy Canada, business owners would be left “holding allowances that are now not worth anything. They can’t trade them in — there’s no market. It’s like holding stocks in something, then all of a sudden, they’re worthless the next day. There would be a lot of companies in Ontario that might have questions for the government about the value — or lack thereof — of the allowances they might hold.”

How will the PCs proceed?

The Tories have a few options for scrapping cap and trade. The smoothest path is to wait until 2020 — the end of the compliance period — to shut down the program formally.

The linked cap-and-trade market is unlike anything the province has built before. Shutting it down won’t be quick or cheap.

“The other way would be to embrace another carbon-pricing policy. You could shift to something like the federal backstop that has a permit-trading function for big emitters,” says Beugin. “That would be tricky but possible — but way easier than just drawing a line in the sand.”

What will Ontarians lose?

On the other side of the cap-and-trade equation are the programs funded by revenue from the market. More than $2 billion from carbon auctions has flowed into the province’s emissions-reduction programs.

These include the electric vehicle incentive program, which provides subsidies of up to $14,000 toward the purchase of a new electric car; and the GreenON fund, which provides rebates for home technologies such as efficient windows, heat pumps, and smart thermostats. If these programs end with the dismantling of the cap-and-trade system, that could affect businesses such as Ecobee, an Ontario-based smart-thermostat start-up whose customers currently qualify for a $100 rebate on purchases.

“I don’t think the conservatives have said it outright, but reading between the lines, I see those programs on the chopping block,” Beugin says. “But they also were even in the Patrick Brown era of carbon pricing.”

Beugin notes that changes in government often herald the end of such programs. But the shutdown of Ontario’s cap-and-trade market is entirely new territory.

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