Now that Ontario has announced it’s going to put a price on carbon by implementing a cap-and-trade program, there have been a lot of questions and misconceptions about what this actually means for the economy and our environment. In the interests of clearing some of these matters up, here are five things you need to know about cap-and-trade:

 

  • It’s not just about the price.

 

 

With a carbon tax, price is the main feature. The simple rationale is: by making pollution cost more, polluters have an incentive to pollute less. The higher the price, the greater the incentive. But with a cap and trade system, it’s the cap, not the price that matters most. The cap is the upper limit on emissions. It governs how much pollution is permitted.

And there is nothing inherently wrong with low prices in a cap-and-trade system. If the cap is coming down, and reducing emissions at a lower cost than anticipated as in the case of the E.U., what’s wrong with that? Low prices in cap-and-trade systems could be an indication that, despite the constant whining about how expensive it will be to reduce pollution, experience tells us it’s remarkably inexpensive.

 

  • Polluters pay to pollute under the cap, not to go over it.

 

 

There seems to be a common misperception that the price on carbon is only paid when polluters want to go over their cap and emit more than they are allowed to. Not so. Permits are issued for each tonne of carbon dioxide allowed under the cap, and most if not all of these permits are auctioned by the government. A polluter who intends to emit carbon dioxide must buy permits equal to the amount they expect to pollute, meaning they pay for their pollution under the cap.

If they go over their limit, there are additional fines and penalties which must be paid. In Quebec, for example, polluters that go over their limit have to pay three times what it costs to buy the permits.

 

  • It’s not just about industrial emissions.

 

 

When Quebec and California’s cap-and-trade program was first launched, it only covered emissions from industries that emit more than 25,000 tonnes of carbon dioxide per year. But a cap-and-trade system can cover most of the emissions in an economy, including those from transportation and from natural gas used for heating. On January 1, 2015 California and Quebec’s systems expanded to capture emissions from transportation fuels. Quebec and California’s system now covers 85 per cent of emissions in those jurisdictions compared with B.C.’s carbon tax, which gets at 70 per cent of emissions.

Ontario’s program is expected to cover transportation fuels and natural gas at its launch and, like California and Quebec, cover 85 per cent of emissions in the economy.

 

  • Cap and trade is working.

 

 

Detractors of cap-and-trade point to the European Union’s Emissions Trading System (EU ETS), which is the world’s largest carbon market, and say that because prices are so low in that system, it should be considered a failure. But the price of carbon isn’t the measure of whether a cap-and-trade program is working. The measure of success is whether emissions are falling under the cap, and in the case of the EU ETS, they are. Which is clearly a good thing.

 

  • People like it.

 

 

When we heard that Ontario was likely going with a cap-and-trade program, we reached out to our environmental colleagues in Quebec and California and asked them what they thought about the programs in their jurisdictions. Each of them told us that they liked the system and were glad that Ontario would be joining it.

Equiterre, one of Quebec’s leading environmental organizations, welcomed the news Ontario was joining Quebec’s carbon market. Derek Walker at Environmental Defense Fund U.S., said Ontario was “on a tear” with the announcement that it would implement a cap-and-trade system. And recent polling shows that 75 per cent of Canadians support cap-and-trade.

As we’ve said before, we support Ontario’s commitment to cap-and-trade. Meaningful climate action is needed. And we’re pleased to see Ontario stepping up.

However, design matters. And a cap-and-trade program is only part of the climate strategy. In the coming months we’ll be working on the design details and looking at other elements of the strategy. We want to ensure that Ontario’s climate strategy is as effective as possible and it keeps emissions coming down while moving Ontario further toward a prosperous, low-carbon, clean economy.

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