Cap and trade law passes in Ontario, carbon pricing set to begin

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Ontario took a major step toward reducing its carbon emissions when lawmakers passed the government’s cap and trade legislation today, a key component of its climate change strategy. According to the government, “every dollar” of the money raised from the cap and trade program, which could be as much as $1.9 billion, will be invested in green projects and initiatives that reduce greenhouse gas emissions. A Greenhouse Gas Reduction Account will be created, from which various incentives and programs will be funded. The first money is expected to flow into the Greenhouse Gas Reduction Account in March 2017. When linked up with similar programs in California and Quebec, the government says Ontario will be part of the biggest carbon trade market in North America.

While cap and trade has the support of environmentalists and many businesses, at least in theory, opponents often refer to it as a “tax on everything.” The Ontario Chamber of Commerce supports cap and trade in principle, but it has urged the government to delay implementing the plan until further study of economic impacts on business can be done. Allan O’Dette, the chamber’s president and CEO, said the business community wants to better understand any “unintended consequences” that might arise from the plan, or “at least” see a cost-benefit analysis.

There is little doubt as to the general effectiveness of cap and trade in reducing emissions. The first cap and trade was implemented during the administration of US president George H W Bush. Part of the 1990 Clean Air Act, it was conceived to help solve the problem of “acid rain,” which was killing lakes in New England and in southern Ontario and Quebec. A cap on nitrogen oxide and sulfur dioxide emissions gases resulted in a 3-million-tonne drop in emissions in the first year.

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Source: Government of Ontario

The prominent US non-profit environmental advocacy group, the Environmental Defence Fund, states unequivocally that cap and trade is “the most environmentally and economically sensible” approach to controlling greenhouse gas emissions. The cap effectively limits pollution while the trade creates a market for carbon allowances—the amount in tonnes that each entity is legally allowed to emit. The economic incentive for companies to emit less than their allowances permit will drive companies to innovate and pay less as they pollute less, is the theory.

Carbon pricing has many advantages. It reduces greenhouse gas emissions as businesses and households incorporate the cost of emitting carbon into their decisions, encouraging companies and consumers to move away from fossil fuels and towards cleaner and more efficient ways of doing business. Emitters will actively choose to reduce emissions when doing so is cheaper than paying the carbon price. This improves economic efficiency and inspires economic benefits. As emitters are motivated to lower their carbon footprint, carbon pricing can spur clean technology research and development, as well as growth in the clean technology sector.

The Ontario government’s version will set the economy-wide limit on how many tonnes of greenhouse gas pollution businesses, institutions or households can emit in the first year set at 142 megatonnes. That limit will then drop each year, reaching 125 megatonnes by 2020. The carbon price, the price on each tonne of carbon emissions, is to be $18. Companies that exceed their carbon allowances must purchase more allowances, which are auctioned by the government. Companies that do not use all of their allowances can sell them. Carbon credits can be traded on several exchanges, including the NASDAQ OMC Commodities Europe.

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The government promises that the cap and trade program will not cause electricity rates to rise because Ontario’s electricity supply is “largely carbon free” since coal-fired power generation was ended. Consumers can expect to see the price of gasoline to go up by an estimated 4.3 cents per litre in 2017. Likewise, the cost of natural gas for average households is also estimated to increase by $5 per month. The government says it will invest proceeds from the cap and trade program to help consumers use less energy and save money.

A Green Investment Fund of $325 million, which the government is calling a “down payment” on the cap and trade program, will invest in clean technologies, energy retrofits for consumers and social housing, electric vehicles infrastructure, and other energy-saving programs. The clean tech initiative will provide $74 million to support entrepreneurs in developing new “leading-edge” emissions-reducing technologies and to encourage big industry to adopt them. A separate program, Green Smart, will have $25 million to help small and medium-sized businesses become more energy efficient.

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