Ontario’s cap and trade system needs a closer look

The Province of Ontario recently announced that it will pass into law carbon cap and trade legislation to combat global warming. What will be the cost to you and your family?

Even though the word “tax” is not used, the price of everything will rise significantly once the system begins on January 17, 2017.

The government did not provide a cost per household in its recent budget, or even a goal for carbon reductions. But we do know that household energy costs will rise, as will gas, by an estimated 4.9 cents per litre. Crude math says that if cap and trade raises about $1.9 billion a year for the Ontario government, the cost for each of Ontario’s 4.9 million households is about $387. Others estimate about $400 more annually plus $475 more for gas and heating fuel.

What is “cap and trade?” Simply put, the government caps the amount of carbon that can be emitted by industry. It auctions off permits to polluting companies – this is how the government profits. Companies then trade permits, buying and selling them in a free market based on supply and demand.

Each carbon credit, which some think will start at $18 per tonne, allows a polluter to emit one tonne of carbon. If government reduces the amount of permits issued each year, based on supply and demand, the price will go up – as will the cost to consumers, who ultimately pay for it in goods and services.

Queen’s Park will also be hiring a team of new public servants to auction off carbon permits to 260 major industrial greenhouse gas emitters covered by the program. These include big businesses like the cement, oil, steel, petrochemical, auto, pulp and paper, mining and smelting industries.

However, many industries will be given free permits. This is done to prevent “leakage” – a new jargon word meaning industry leaving Ontario to move to a jurisdiction where there is no cap and trade tax.

This means large polluters (102 in Ontario) would receive free carbon permits to pollute for free, or to sell at a profit. In Europe, where cap and trade has done little to reduce carbon emissions, the result has been industry manipulation and government corruption – governments tend to give free carbon permits to friends and supporters.

But more devastating is that free carbon credits undermine the very purpose of cap and trade – to reduce carbon emissions and global warming through financial incentive.

And what happens to the $1.9 billion dollars that will be paid by industry to buy carbon permits? The Ontario government plans to invest the money into green infrastructure. In effect, the government has created the largest hedge fund in the history of the province. More government employees will be hired to administer the fund. But how will government pick green winners and losers rather than the market place? Will these green fund recipients be audited or even valued for investment purpose and have independent oversight?

Critics point out that a better system is a straightforward carbon tax across the board – as in British Columbia. This means the government taxes carbon, people reduce their use of carbon products such as fossils fuels, and government returns money to the people through reduced income taxes. It is therefore revenue neutral.

Environmentalists and economists praise British Columbia’s carbon tax as both smart economics and good environmental policy. Cap and trade, on the other hand, is noted for not being effective in reducing emissions, and is the system of choice for cash strapped governments.

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