Doug Ford has cancelled Ontario’s cap and trade program and in addition to abandoning Ontario’s fight against climate change, it is going to cost the Ontario treasury a lot.

Cancellation of the cap and trade program coincides with a warning by the world’s leading climate scientists that there are only a dozen years for global warming to be kept to a maximum of 1.5C, beyond which even half a degree will significantly worsen the risks of drought, floods, extreme heat and poverty for hundreds of millions of people.

The authors of the landmark report by the UN Intergovernmental Panel on Climate Change (IPCC) say urgent and unprecedented changes are needed to reach the target, which they say is affordable and feasible although it lies at the most ambitious end of the Paris agreement pledge to keep temperature increases between 1.5C and 2C.

The budget impact of cancelling Ontario’s cap and trade program.

In a report released earlier this week, Ontario’s Financial Accountability Officer (FAO) estimated that the Province’s annual budget balance will worsen by a total of $3.0 billion between the 2018 and 2021 fiscal years due to the cancellation. For the fiscal year 2018-19, the Province’s budget balance is expected to deteriorate by $841 million, followed by a drop of $615 million in 2019-20, $771 million in 2020-21 and $787 million in 2021-22.

Overall, the Province’s budget balance worsens because the loss of cap and trade revenue from ending the auction of emission allowances (the core feature of cap and trade) is greater than the savings achieved from cancelling greenhouse gas (GHG) emission reduction related programs. According to the FAO, the difference occurs for two reasons. First, a number of the cancelled spending programs funded infrastructure projects that will not provide immediate savings to the Province’s budget balance. Second, not all of the GHG reducing programs have been cancelled by the Province. The remaining programs account for about $500 million (or 25%) of planned cap and trade funded program spending in 2018-19.

Background

Ontario’s cap and trade program began on January 1, 2017 and was the centre-piece of Ontario’s plan to achieve its greenhouse gas (GHG) emission reduction targets.

The cap and trade program raised revenue for the Province through the auction of something called “emissions allowances”, which gave emitters the right to emit GHGs. The Province used the auction revenue to fund initiatives aimed at reducing GHG emissions.

In July 2018, the Ford government cancelled the cap and trade program ending the auction of emission allowances and prohibiting all trading in allowances.

The Province also introduced Bill 4, the Cap and Trade Cancellation Act, 2018. If passed, Bill 4 would repeal the Climate Change Mitigation and Low-carbon Economy Act, 2016 (Climate Change Act) officially ending the cap and trade program, retire and cancel all existing cap and trade allowances and credits, provide compensation for some participants in the cap and trade program, and immunize the Province from civil liability.

Comparing Cap and Trade and the federal carbon tax

However, under the federal Pan-Canadian Framework on Clean Growth and Climate Change, all provinces and territories are required to have carbon pricing in place by 2018.

Jurisdictions that do not have a carbon pricing system in place will become subject to the federal carbon tax. By ending the cap and trade program, Ontario will become subject to the federal carbon pricing beginning in 2019.

The Ford government has vowed to fight the federal right to impose a carbon tax on Ontario in court but it is not clear what the Province’s legal argument would be and what the chances of a provincial legal win are.

Impact on individuals

Carbon pricing (through a cap and trade program or the federal carbon tax) mainly impacts households by increasing heating and transportation fuel costs.

The FAO estimates that a typical Ontario household would pay additional costs of $264 in 2019 under the cancelled cap and trade program, rising to $312 by 2022. Under the federal backstop program, a typical Ontario household would pay additional costs of $258 in 2019, rising to $648 in 2022.

So far from reducing costs for average Ontarians, the Ford government’s decision to withdraw from the cap and trade program will likely hit Ontarians right in the pocketbook.

Impact on business

The Ford government is claiming that cancelling cap and trade will be good for business. However, the facts suggest otherwise.

Both the cancelled cap and trade program and the federal carbon tax that will take its place, offer transitional support to businesses in emission intensive and trade exposed industries. The cancelled cap and trade program offered free emission allowances to eligible participants that would have declined over time with the emissions cap. The federal carbon tax will allow large industrial emitters to only pay the carbon levy on emissions above a set limit. The federal thresholds are still under development. However, the federal government has indicated that the stringency of the standards will increase over time. This means that business may also suffer financially from the Ford government’s decision to withdraw from the cap and trade program.

Ontario’s plan to cancel the cap-and-trade market will also make losers out of companies that followed the rules set out by the former Liberal government, say experts.

Speaking at a legislative committee on Oct. 15 examining Bill 4 , witnesses pointed to a problem in the province’s plan to cancel cap-and-trade: It tilts the playing field in favour of companies that didn’t buy enough credits to cover their emissions, while hurting companies that did. Essentially companies that paid for carbon credits between Jan. 1 and July 3 won’t be compensated, because they were required to buy into the market. At the same time, companies that hadn’t yet bought enough credits won’t be forced to buy any more.

Witnesses at the committee also took issue with the compensation framework laid out by the government.

Ontario only plans to compensate companies that bought credits, but weren’t able to pass the costs on to consumers, or companies that bought credits for the compliance period between July 3, 2018, and Dec. 31, 2020.

A failure to adequately and fairly compensate this group of companies would likely open the door for legal action a number of witnesses testified.

Conclusion

At the same time that the U.N issued a stern warning that there are only a dozen years for global warming to be kept to a maximum of 1.5C, beyond which even half a degree will significantly worsen the risks of drought, floods, extreme heat and poverty for hundreds of millions of people world wide, Ontario cancelled its cap and trade program designed to be the centre-piece of its fight against global warming.

However, under the federal Pan-Canadian Framework on Clean Growth and Climate Change, all provinces and territories are required to have carbon pricing in place by 2018.

Jurisdictions that do not have a carbon pricing system in place will become subject to a federal carbon tax on Jan. 1, 2019.

Ontario’s Financial Accountability Officer (FAO) estimated that the Province’s annual budget balance will worsen by a total of $3.0 billion between the 2018 and 2021 fiscal years due to the cancellation.

According to the FAO, the new federal carbon tax will also likely end up hitting individual Ontarians’ pocketbooks harder than cap and trade. Long-term, Ontario business are also likely to be hit harder under a federal carbon tax than under cap and trade.

Ontario’s cancellation of its cap and trade program was marketed by the ultimately victorious Ford campaign as a tax cut for business and average Ontarians. It is likely to turn out to be anything but.

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