Climate Solutions Group

Environmental Commissioner of Ontario sheds a positive light on Cap and Trade

ECO_Cap and Trade

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Feb 2018

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Cap and trade is working remarkably well, according to the Environmental Commission of Ontario (ECO). ECO, the province’s environmental watchdog, released the 283-page 2017 GHG Progress Report on January 30th which provides a non-partisan review of the Ontario government’s progress and policy approach for reducing GHG emissions.

The ECO’s findings are an important resource for the province as the debate around carbon pricing policy continues towards the upcoming election. The Ontario PC party has proposed to dismantle the cap and trade program if elected and implement the federal carbon tax in its place. The ECO addresses these issues directly.

Cap and Trade a Success

The first year of cap and trade is described as operating smooth and remarkably well by the ECO. “Few of the concerns raised beforehand have come to pass” and the system design that Ontario chose compares well to other systems elsewhere. For example, opponents of cap and trade tend to point out that the complexity of cap and trade makes it vulnerable to of fraud or improper behaviour. There were no accounts of this happening in Ontario.

The ECO points out that the regulated market participants (emitters) have gradually learned how the system works and are developing compliance strategies. These strategies can be developed if companies have long term predictability of carbon policy. The cap decline rate of 2.9% per year from 2020 to 2030 provides this predictability for market participants. Most jurisdictions around the world have chosen to use a cap and trade program for this reason.

Another advantage of cap and trade specific to Ontario that is highlighted is the ability for emitters to use the linked secondary carbon markets to raise capital to update their equipment. This is enabled partly because of the Ontario’s long holding period for allowances.

A Policy Switch as a “Policy Lurch”

The ECO highlights the potential negative outcomes of a carbon policy switch. A policy switch to the Federal Carbon Tax alternative, as proposed by the PC Party, is described as a “policy lurch” that erodes confidence and cost effectiveness. Furthermore, the ECO identifies that carbon taxes have higher costs over all, and result in lower total GHG reductions.

A policy switch would degrade the long-term predictability that is a key concern for regulated companies that need to plan long term investments.

Constructuve Criticism

While generally supportive of cap and trade, the ECO also provides constructive criticism of the program. The issue of oversupply of allowances is raised as an key issue that must be addressed with Ontario’s Western Climate Initiative (WCI) partners – California and Quebec.

Because carbon emissions have dropped in Ontario and the WCI jurisdictions at faster rates than predicted, emission allowance prices are expected to remain lower for longer. This may also mean that the flow of money from Ontario to California to purchase emission allowances may be reduced. The key takeaway that the ECO points to is that the linkage with California provides lower costs for Ontario citizens and keeps industry in Ontario competitive.

Attention on Carbon Offsets

Offsets are described positively as “powerful tools”. Key points include the fact that investment and jobs can flow to rural communities through offset projects, and that offsets can help keep the cost of emission reductions down for capped emitters while reducing capital outflow to California.

Despite the potential for offsets, the ECO suggests that the Ontario government needs to improve the clarity of the offset program and ensure that offsets are real, additional, permanent and verifiable emission reductions.

Criticism is focused on the following offset protocols: mine methane capture & destruction, conservation cropping, grassland projects, and forest management and afforestation and reforestation. The ECO highlights some issues with these protocols and suggests how the Ontario government can improve their stringency.

Conclusion

The key takeaway of the report is that cap and trade is creating the conditions for emission reductions to occur reliably and cost effectively. The first year of cap and trade has been a success for Ontario and is a well-designed policy that can help Ontario move towards a low-carbon economy.

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