Cap and Trade needs careful design
Mike Schreiner's submission on Ontario's Cap and Trade Program Design Options: EBR Registry Number: 012-5666
I applaud the provincial government for taking action on the climate crisis by putting a price on carbon pollution. This is good news for Ontario’s environment and economy.
The GPO continues to support a simple carbon fee-and-dividend policy as the most effective and fair way to price carbon and reduce GHG pollution. The government’s own draft Cap and Trade Program Design Options document itself confirms the delays and complexity of this system, which only reconfirms our support for fee-and-dividend. Moving forward, the province should consider ways that a fee-and-dividend policy could compliment and support the cap and trade program.
However, we agree that a cap and trade system can be effective in reducing carbon pollution - if it’s designed properly with robust implementation.
I’ve limited my comments to broader policy aspects of the design options, leaving the more technical aspects to cap and trade experts. In addition, I strongly encourage the province to learn from the challenges the European Union experienced in the design and implementation of its cap and trade program.
I urge you to adopt the following seven principles to guide the design of Ontario’s Cap and Trade System:
- Set the cap as upstream as possible, at the source of extraction or importation of GHG pollution;
- Set an annually decreasing cap to meet targets and a strong floor price with predictable increases;
- Include broad coverage of all sectors and sources of GHG pollution, with full auctioning of pollution permits;
- Ensure price protection for low income individuals and households;
- Establish a simple, transparent pricing system that does not include pollution offsets, or limits them to a small proportion of pollution reductions and ensures that they meet high standards;
- Design for revenue neutrality and/or a dedicated fund for revenue to be used to help people reduce their carbon footprint. Cap and trade revenues should not go into general funds;
- Ensure arms’ length, independent management of the cap and trade program, with annual reports on revenues, expenditures, administrative costs and effectiveness in reducing GHG pollution.
Targets, Timing and Caps
I fear that the government’s draft Cap and Trade Program Design Options are not ambitious enough to meet our obligations in avoiding the worst consequences of the climate crisis.
Science is recommending more aggressive targets, and the Paris Climate Summit is recommending a goal of 1.5 degrees. Instead of a target of 80% below 1990 GHG emissions by 2050, I recommend that Ontario establish a target to be carbon neutral by 2050. The carbon cap should be adjusted to reflect this more aggressive target.
I am opposed to delaying the start of Ontario’s cap and trade program any later than January 1, 2017. We cannot afford to drag our feet any longer on climate action.
I am concerned that the Design Options Paper does not propose a cap beyond 2020. This means businesses don’t have the certainty in the cap and carbon price that they need to make medium- and long-term investment decisions. Ontario should provide more clarity in the design of the program by setting a 2025 and 2030 cap, with rates of decline commensurate with the goal of being carbon neutral by 2050.
The province should establish fixed program review dates, and provide more clarity on how changes to the cap and to allowance distribution will be determined beyond the first compliance period.
I applaud the government for broadly covering industry, buildings, transportation, and electricity, but I have concerns that the program does not cover all sectors.
The program should include emissions from agriculture, waste (particularly methane from landfills), and energy-from-waste facilities. If it is not possible to cover them with the cap, then the province needs to develop other legislation and/or regulations to reduce emissions in these sectors.
I am deeply concerned that the current proposal provides free pollution permits to all emitters. This will make the program less efficient and effective. For cap and trade to be effective, it must be designed so that polluters are forced to pay to pollute. Although some free permits are justified in order to avoid leakage, Ontario’s draft designs appear to be far too generous in issuing free permits.
A recent report by the Ecofiscal Commission found that just two per cent of Ontario’s economy is exposed to competitiveness pressures from carbon pricing. It appears that the government is overestimating the leakage risk, and overstating the trade exposure of most emitters.
We must learn from the experience of others: industry exemptions and free permits have weakened the effectiveness of the European Union cap and trade system. Allocating far fewer free permits would send a stronger price signal and create more demand for low-carbon innovation. I encourage the government to re-examine this aspect of the proposal.
Ontario should proceed cautiously with carbon offsets. Although I’m pleased that Ontario proposes to limit carbon offsets to a maximum of eight per cent of an entity’s compliance obligation, the province should develop rigorous transparent protocols and enforcement mechanisms for offsets.
The government needs to clarify its plans for cap and trade revenue, which is not addressed in the proposal. I strongly encourage the province to either design a program that is revenue neutral, or develop a dedicated fund to use revenue to help people reduce their carbon footprint. Cap and trade revenues must not go into general funds.
We strongly encourage the government to move forward with arms’ length, independent management of the cap and trade program, with annual reports on revenues, expenditures, administrative costs and effectiveness in reducing GHG pollution.
Border Carbon Adjustments
Border carbon adjustments are a useful tool to address competitiveness concerns and leakage risks. Since subnational governments like Ontario have limited legal authority to implement border carbon adjustments, I encourage the province to explore these mechanisms with the new federal government. The effective use of border carbon adjustments may eliminate the need to issue any free pollution permits.
While I continue to prefer a fee-and-dividend model of carbon pricing over cap and trade, I do support the government’s efforts to put a price on carbon pollution as an important policy tool to reduce the risks of the climate crisis. I am committed to working with the government and all stakeholders to ensure that Ontario’s cap and trade program is as fair and effective as possible.
Thank you for the opportunity to comment on Ontario’s Cap and Trade Program Design Options Paper.