Ontario’s government is going to be keeping an eye on events on the California State Legislature for the next few weeks, as it considers major revisions to the cap-and-trade system it has used, successfully, to reduce greenhouse gas emissions.
Why? Because one bill currently under discussion could substantially affect Ontario’s own plans. The government here intends to join California’s carbon-trading market next year, as part of its efforts to mitigate climate change. (Quebec has already joined.)
Senate Bill 775 would add some certainty to the market by addressing legal challenges to the new system. But for Ontario’s purposes, the big development is with another provision in the bill, which would substantially affect the price of carbon allowances. The changes would make California’s system far more stringent starting in 2020 — and would raise prices for Ontario’s carbon market, as well.
In a cap-and-trade system, the government sets a maximum limit on allowable greenhouse gas emissions (the cap) while allowing industry to buy and sell the necessary permissions or “allowances” (the trade) in order to keep businesses running legally. If there are more allowances than industry needs, the cost of polluting falls. And if government constrains the supply of allowances the price of polluting rises, giving industry an incentive to clean up its act. The market also sets a floor on the cost of an allowance (i.e. puts a minimum on the price per tonne of carbon emitted) to ensure certain baseline environmental goals are met.
For years, one problem with California’s system has been that there have been too many allowances, keeping the price of its allowances at or near the minimum. SB 775 would solve this problem by prohibiting a transfer of allowances in the next round of auctions, in 2020. (Ontario held its first carbon auction earlier this year; it was conducted with the help of California’s expertise but not via its market.) The bill would also mandate annual increases in the price floor for carbon allowances and require participating jurisdictions (in practice, Ontario and Quebec) to match or exceed California’s measures.
But the abundance of bargain permits in the Golden State had also been part of Ontario’s climate plan: the government had been hoping to meet its climate goals by buying up those low-cost allowances, which would have been cheaper than ones traded within the province.
Numerous observers, including the province’s environmental commissioner, have questioned this strategy, and warned that it could lead to Ontario achieving little by way of reduced emissions.
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Dave Sawyer, a consultant on environmental policy, modelled various potential climate policies for the Ontario government as it was developing its cap-and-trade plan; his work has been cited repeatedly by Minister of Environment and Climate Change Glen Murray to explain the government’s choices. He told TVO.org that SB 775 potentially solves a number of problems with the existing market.
“It’s a badly needed clean-up … Anyone who doesn’t like the California system, and is worried about Ontario linking to California, is worried about the over-abundance of allowances,” Sawyer said on Thursday. “These moves were needed.”
Ontario’s cap-and-trade system is expected to bring in $3.2 billion over the next two years, according to the 2017 budget. Queen’s Park plans to spend the revenue on elements of its climate change action plan, including major transit investments and helping households afford things like electric cars or home renovations to improve energy efficiency.
But Sawyer also acknowledges that SB 775, if it passes, could raise prices for Ontario businesses that need to purchase carbon credits. “You’re certainly going to raise the price signal. That’s my expectation, that you’ll have upward pressure on the price after 2020.”
There is good news for Ontario, or at least Canada: a higher price for carbon allowances will mean greater harmony between Ontario’s carbon price policy and the federal price, set by the Trudeau government. It could also provide increased revenue to the provincial government, in theory (even if budget projections for 2020 and beyond are of dubious value in 2017).
Oh, and it’s also likely to be better environmental policy, and do more good actually wrestling Ontario’s carbon emissions down to the government’s stated targets.
Without cheap California allowances on the market, more of Ontario’s cap-and-trade money is likely to stay in-province, doing the harder and more expensive work of lowering emissions here. There are fewer opportunity for “reductions” in pollution that are simply accounting gimmicks, and better odds that the money spent on allowances will do good work — even if that’s not what the Ontario government originally envisioned.
All of this is conditional on how the SB 775 debate plays out in the state legislature: The bill needs to be passed by both houses of that body and then signed into law by Governor Jerry Brown, and the final legislation may bear little resemblance to the current draft. Minister Murray told reporters at Queen’s Park on Wednesday that he isn’t sweating the progress of SB 775 precisely for that reason: he simply doesn’t expect the final legislation to look much like the current version. “I don’t imagine that you’ll see changes that are problematic for Ontario,” Murray said. “I wouldn’t react to this at this point.”
Sawyer says this isn’t just going to conveniently go away, however: even if SB 775 doesn’t pass, important elements of the bill could be brought back later. If nothing else, any legislation is going to need to deal with the current oversupply of carbon allowances in some way.
Keith Brooks, program manager at Environmental Defence, says Ontario has some leverage in negotiations: under the Western Climate Initiative that links Ontario, Quebec, and California’s markets, the Canadians won’t simply be taking marching orders from Sacramento. But the reality is that California’s sheer size (more than triple Ontario’s GDP) will give it a preponderant role in any changes to the carbon market. “Their market is simply so much larger than ours, so we’re going to be at whatever price California sets,” Brooks told TVO.org. “Ontario needs to keep a close eye on what’s going on there, and so does Quebec.”
None of this will matter, though, if Ontario doesn’t wind up joining California’s market. The bill’s changes wouldn’t take effect until 2020, and Progressive Conservative Leader Patrick Brown has promised to dismantle Ontario’s cap-and-trade system if his party wins a majority in the 2018 provincial election.
Sawyer warns that kind of policy whiplash would be terrible for the economy. The government will have to undo major regulations, and businesses who have already built the cap-and-trade system into their planning are likely to resist that kind of drastic change, and not just because some of them will be recipients of cap-and-trade dividends. The end result would be that after doing all the work of implementing the provincial policy, Ontario businesses would just pay the federal carbon tax instead.
“People can complain all they want,” Sawyer says, “but unless the federal Liberals change their minds, any Ontario government is going to have that threat behind them.”
Photo courtesy of Aidan Wakely-Mulroney and licensed for commercial use under a Creative Commons licence. (See the uncropped version.)
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