Prime Minister Trudeau received considerable media attention earlier this week in his appearances at the UN Climate Change Conference in Paris.

But beyond the photo-ops starring our telegenic PM, the question still remains as to what exactly Canada is bringing to the table in Paris?

The context

The purpose of the Paris UN conference is to somehow reach an agreement covering the post-2020 period that would require participating countries to set carbon-reduction targets that, while not legally binding on individual countries, will be considered “moral” obligations.

What then is Canada proposing to contribute to the fight against global warming?

On the international front, Trudeau has already announced that Canada will contribute $2.65 billion over five years to help developing countries reduce their reliance on fossil fuels, doubling Canada’s current contribution. And in Paris he also reaffirmed a campaign pledge to invest $300 million in research and development on clean technology.

But the far trickier issue is how to reach the domestic emissions targets already established here at home.

Trudeau has committed to reducing Canada’s carbon emissions by 30 per cent from 2005 levels by 2030. That’s the same target set by the Conservatives, the difference being that the Liberals regard it as “a floor, not a ceiling.” Most importantly, within 90 days of Paris he plans to host a meeting with the premiers to firm up the specific carbon-pricing policies and investments that will be required to make good on that pledge.

The real world of climate change policy

In reality, there are only three policies that can make a difference on the climate change file:

A steadily increasing carbon tax;

Participation in a cap and trade system with a declining hard emissions cap (with tradable permits): or

Increasingly tough regulations on emission-causing technologies and fuels.

The truth of the matter is that despite Trudeau’s high profile Paris claim that “Canada is back”, almost all the heavy lifting in these three areas is being done at the provincial level – and that is not likely to substantially change in the future.

Premiers have put – or are in the process of putting – in place an array of mechanisms to reduce emissions: Quebec and Ontario are embracing cap and trade, British Columbia has a revenue-neutral carbon tax, Alberta has a (non-revenue neutral) carbon tax and an emissions cap, and several provinces are phasing out coal-fired electricity.

But beneath the surface, provincial efforts are encountering considerable push back from corporate emitters. And if the provinces are not able to stand up to pressure from these influential business groups, progress in meeting even the modest Harper targets will be minimal.

In other words, as always in matters of public policy, the devil is in the details. And the political fight over the proposed details of Ontario’s Cap and Trade program makes it clear just how difficult it will be for Canada to make any real progress in meeting its climate change targets.

Ontario’s proposed cap and trade design features

In mid-November, Ontario released a discussion paper detailing proposed options for its cap and trade program design. As of early 2017, Ontario will be joining the Western Climate Initiative (WCI) carbon trading market in which Quebec and California are already active participants.

According to the paper, industrial and institutional sources that produce at least 25,000 tonnes of greenhouse gas emissions a year would be able to purchase carbon allowances that they can hold or trade with others if they come in under their own cap in any year. Transportation fuels would be included as well.

On the plus side, many of the program design features detailed in the discussion paper are broadly consistent with best practice for an effective carbon trading system.

These “best practice” design features include:

Coverage is fairly comprehensive. In a cap-and-trade program, coverage refers to the greenhouse gases, sectors and entities included as part of the carbon market. Both Quebec’s and California’s programs cover approximately 85 per cent of emissions in their jurisdictions. Quebec and California’s programs cover emissions from electricity generation and industrial facilities and, as of January 2015, the programs expanded their coverage to include fuels, including gasoline, diesel, and natural gas. The Ontario proposals appear to be broadly in line with the two jurisdictions.

is fairly comprehensive. In a cap-and-trade program, coverage refers to the greenhouse gases, sectors and entities included as part of the carbon market. Both Quebec’s and California’s programs cover approximately 85 per cent of emissions in their jurisdictions. Quebec and California’s programs cover emissions from electricity generation and industrial facilities and, as of January 2015, the programs expanded their coverage to include fuels, including gasoline, diesel, and natural gas. The Ontario proposals appear to be broadly in line with the two jurisdictions. The cap will be reduced even in the first compliance period as well as in subsequent compliance periods. The 2017 cap would decline by 3.7% per year to enable Ontario to achieve its 2020 target. This is also broadly consistent with the Quebec and California approach. Quebec’s cap is scheduled to decline between 3.2 and 3.7 per cent a year between 2015 and 2020, while California’s is set to decline 3.1 to 3.5 per cent.

Where Ontario appears to be coming up short is in its proposed approach to distributing emissions allowances. Essentially, rather than auctioning off allowances to emitters, Ontario is proposing to distribute allowances to all industrial and institutional sectors free of charge in the first compliance period (2017-2020).

What’s wrong with this approach? Well, as the government itself notes in its discussion paper, auctioning (i.e. making emitters pay for) emission allowances ensures that allowances go to their highest-value use and generates revenues that can be recycled in complementary initiatives such as energy efficiency and public transit to achieve further emissions reductions.

Why then is Ontario proposing to give away permits to industrial and institutional emitters in the first compliance period?

The ostensible reason is to help Ontario business stay competitive during the transition to the new cap and trade program. However, a new report released by the Ecofiscal Commission, Provincial Carbon Pricing and Competitiveness Pressures: Guidelines for Business and Policymakers, suggests that these competitiveness concerns are over-stated, since only a very small proportion of Ontario industry faces competitiveness pressures that would present a real risk of leakage. According to the Commission, even at a carbon price of $30/tonne – almost double that of the Western Climate Initiative – only 2% of Ontario’s GDP would come from sectors facing significant competitiveness pressures.

A close look at how the proposed exemptions play out on the ground in Toronto, makes it clear that maintaining competitiveness isn’t really behind the blanket exemptions.

In the Toronto context, for example, there is little rationale for giving free allowances to the nine local industrial/institutional emissions sources that would be directly covered by the cap and trade program since facilities such as Enwave, Portlands Energy Centre, York University and University of Toronto are at little risk of re-locating or losing business to “competitors”.

Of course, there are a handful of sectors (steel, cement, smelting, etc.) that could face genuine competitive pressures as a result of increased costs related to Ontario’s new cap and trade program. Any free permits should be specifically targeted at these sectors, allocated based on clear and compelling evidence and time-bound over a reasonable transition period.

There is also an equity issue involved in exempting so many large corporate emitters in the first compliance period.

According to the Economic and Fiscal update released by the Ontario government last week:

“A preliminary estimate (for cap and trade revenues) is $1.3 billion in 2017/18, and includes a partial fiscal impact in 2016/17. The preliminary estimate is based on a cap-and-trade program design that is currently being discussed with stakeholders. The actual proceeds generated will depend on the final design adopted by regulation.”

The obvious question is that if all covered institutional and industrial emitters are exempted from having to buy emissions allowances under their allocated cap, where is the $1.3 billion in 2017/18 in government revenue going to come from?

While the Ontario Economic Outlook isn’t explicit on this, it’s a good guess that if the province’s large industrial and institutional emitters are getting a free ride in the first compliance period, it’s Ontario’s drivers and homeowners (heating) that will be paying the lion’s share of the $1 billion plus each year.

Still time to get it right

Ontario can and should do better. The cap and trade proposal has been posted for a 30-day public review and comment period; comments can be submitted via the government’s Environmental Registry by December 15.

If Canada is to truly “be back” on the climate change file as our Prime Minister proclaims, the provinces – especially our larger provinces – are going to have to take a more aggressive approach to pricing carbon than they have to date.

And what that means is that with the exception of a small number of corporations in highly vulnerable sectors of the economy, large corporate and institutional emitters will have to pay their fair share from the git go.

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