What if Ontario scrapped cap-and-trade for a carbon tax?

Opinion: Why a rising carbon tax that follows the federal benchmark rules and is fully revenue-neutral may be the best option for Ontario—and Canada

Ontario Premier Kathleen Wynne listens to questions from the media during an announcement which outlined a cap and trade deal with Quebec aimed at curbing green house emissions, in Toronto on Monday, April 13 2015. (Chris Young/CP)

Ontario Premier Kathleen Wynne listens to questions from the media during an announcement which outlined a cap and trade deal with Quebec aimed at curbing green house emissions, in Toronto on Monday, April 13 2015. (Chris Young/CP)

Mark Cameron is the executive director of Canadians for Clean Prosperity.

Starting in 2018, every Canadian province will be required to implement carbon pricing—either with a carbon tax or a cap-and-trade system—or face the federal government imposing a “backstop” carbon tax following federal benchmark rules. While every province except Saskatchewan has indicated that they will bring in carbon pricing, there are still big differences in how provincial carbon pricing will work. While British Columbia and Alberta have instituted carbon taxes, Ontario and Quebec opted for cap-and-trade systems, linking them to California’s Western Climate Initiative.

Ontario’s PC Leader, Patrick Brown, has said that he wants to keep carbon pricing, but has criticized Ontario’s system in part because of this outflow of dollars to California. He has indicated that he prefers a revenue-neutral carbon tax. In the Ontario PC Party’s recently completed policy process, 87.5 per cent of party members voted to “dismantle cap and trade, withdraw from the Western Climate Initiative (WCI), and to return 100 per cent of revenues from Trudeau’s federal carbon pricing benchmark to taxpayers.”

With an election coming in 2018, it’s worth looking at what would happen if, instead of its current cap-and-trade system with Quebec and California, Ontario brought in a carbon tax based on the federal benchmark instead.

The difference between Ontario and Quebec’s systems makes it difficult to compare the results expected from carbon pricing across the country. For example, while Ontario and Quebec have committed to higher emissions reductions targets than other provinces, most of those reduced emissions will come from buying credits from California, not actual emissions reductions within Ontario and Quebec. But the federal rules apply a tax similar to British Columbia’s—a straight cost per tonne of carbon dioxide emitted from fossil fuels. They also include output-based allocations—essentially a rebate based on low-emissions performance—to large industries to protect their international competitiveness. (Like British Columbia, Ontario may also want to exempt marked fuel for farm vehicles from the tax as well.) Canadians for Clean Prosperity commissioned EnviroEconomics, the same firm that calculated the projected price and emissions reductions from Ontario’s cap-and-trade system, to compare the results under the two systems. (While the data cited below are from EnviroEconomics, the policy recommendations are solely the responsibility of Canadians for Clean Prosperity.)

In short, the findings revealed that implementing a straight carbon tax in Ontario, following the federal benchmark, would result in both a higher carbon price and more carbon revenues than under cap and trade—but it would also achieve significantly more emissions reductions.

If Ontario implemented the federal rules, the carbon tax would start at $10 in 2018 and increase to $50 by 2022. After taking account of the output-based allocations for large emitters, this would generate $5.1 billion per year in revenue by 2022. This is a significant amount of money to take out of the Ontario economy, primarily in the form of higher prices for gasoline and natural gas. But the government could easily prevent consumers from being hit by these price increases by refunding all carbon tax revenues as tax cuts or rebates. That $5.1 billion in revenues could be refunded to households by sending every individual in Ontario a rebate of $400 to $500 per year, or it could allow the government to cut provincial income taxes by 10 to 15 per cent or cut the Harmonized Sales Tax rate by 1 or 1.5 per cent—or some combination of these measures.

Ontario would cut its emissions far more under the federal benchmark tax than under cap-and-trade. It is estimated that the current cap-and-trade system would reduce Ontario’s domestic emissions by about 5 megatonnes per year by 2022. A straight carbon tax at $50 per tonne would reduce emissions by over 11 megatonnes. Over the five-year period, a carbon tax would achieve 29 megatonnes more in Ontario emissions reductions than the current cap and trade system. The Wynne government would argue that their current climate plan will achieve additional reductions in Ontario through the sale of offsets or through government programs that will reduce emissions. But when it comes to Ontario emissions reductions achieved by the carbon price itself, there is no question that a straight carbon tax rising to $50 will have more impact.

A carbon tax that rose to $50 per tonne would mean a bit more at the pump—about 10 cents per litre—or on your home heating bill. But the Ontario government could entirely offset that price increase by sending the money back to households as tax reductions or rebates. And the result would be nearly double the reductions in Ontario’s emissions than we could expect under cap-and-trade.

Ontario’s next election could then feature two very different approaches to carbon pricing—a cap-and-trade system that is more complex and depends on purchasing credits from California to reduce emissions, or a straight carbon tax, 100-per-cent refunded to consumers and businesses, that will reduce more emissions at home. In our view, a rising carbon tax that follows the federal benchmark rules and is fully revenue-neutral is the best option for Ontario, and Canada, to get on track to meet our emissions goals.



What if Ontario scrapped cap-and-trade for a carbon tax?

  1. Of course a revenue neutral carbon tax is superior to cap-and-trade. The former is transparent, the latter is not. The former is not subject to jiggery-pokery, the latter is. The former is efficiently implementable and does not require much bureaucracy, not true of the latter. The former can be sold as not being a net out-of-pocket cost to taxpayers, not so with the latter. And, according to the article, the former would actually reduce emissions in the province *far* more than the latter.

    Any rational government that considered the issue objectively would have no choice but to conclude that cap-and-trade is a not good solution for efficiently and effectively reducing carbon emissions. Yet here we are.

  2. Hard to take this too seriously: a collection of PR flacks and political back-room boys working off of a model from -a group working out of a private residence. BTW: models are not data – a model with little data and many assumptions is of limited value. In any case, the debate over whether carbon tax or carbon trading is a better way of pricing GHG emissions is only a small temporary side show to the issues of GHG reduction and renewable energy: the point is to eliminate emissions, in which case carbon pricing in whatever form would have no effect. It’s even clear from real data that there’s a gross technical problem: reporting of emissions never comes close to actual totals with some major sources such as fugitive gasses and flaring being ignored. It seems like a con: claim to be an environmental interest group when in reality being only focused on the going price of pollution.

  3. Only the nutty left wingers in Ontario and Quebec would pay money to California rather than to actually reduce carbon emissions, which is what Ontario’s and Quebec’s cap-n-trade plans amount too…free money for Jerry Brown.

    • Absolutely correct. But think about how insane a revenue neutral carbon tax is! The idea of adding taxes to the consumption of fossil fuels is to get people to change their behavior and use less fossil fuel. But why would anyone change their behavior is they are just going to get the tax back in some form. Finally, if you visit most of Europe and see the proliferation of small, fuel efficient vehicles there, the gasoline or diesel taxes there are well over $1.00/litre whereas in Canada they are about 40 cents. So at least a 60 cent/litre difference. That 60 cents equates to a carbon tax of about $250. Don’t hold your breath to see any change in behavior here even when Trudeau imposes a $50 carbon tax. Just a collection of more tax $ to fritter away.

  4. It’s called “Rearranging the deck chairs on the Titanic”