July 09, 2018

Unclutch those pearls, folks: Scrapping cap-and-trade will bring stability, not chaos

Unclutch those pearls, folks: Scrapping cap-and-trade will bring stability, not chaos

Canada's carbon pricing lobby have plenty of frantic reasons why Ontario Premier Doug Ford should abandon his plan to repeal the province's cap-and-trade carbon dioxide emissions trading scheme. Unclutch those pearls, folks. This carbon tax can be scrapped without causing political chaos, financial ruin or environmental devastation. Given international experience, legislating away a price on carbon dioxide shouldn't even be considered a ground-breaking event. (Unless you consider Canadian politicians keeping their word to be a ground-breaking event.)

Premier Ford says his first piece of business when the Ontario legislature reconvenes will be to get rid of cap-and-trade. This won't be a problem. Cap-and-trade was created by legislation and it can be eliminated in precisely the same way. The sooner this happens, the sooner the transition to a more stable and affordable Ontario economy can occur. And given that California and Quebec have already barred Ontario firms from further participation in their joint permit market, Ontario's carbon emissions trading system is essentially dead already.

Many of Ford's critics claim he is naively giving up a lucrative new revenue stream at a time of serious budget deficits. The Wynne Liberal government collected about $2-billion a year from its carbon permit auctions, which it then funneled into a variety of environmental subsidies and other spending. Premier Ford – to his credit – has already announced those “green” corporate subsidies and spending programs will also be cut. As for applying carbon emissions money to the deficit, keeping a new tax for this purpose is a distraction to the necessary business of cutting the size of Ontario bloated government. Plus, having campaigned on a solemn vow to put an end to cap-and-trade, it would be deceitful of Ford to squelch on his deal with voters. Credibility matters. 

As for the effect this will have on the environment, the new Ford government can point to the province's Auditor-General for support. In a recent report, Ontario’s A-G concluded the scheme's environmental impact is basically nil. "It is unlikely the purchase of allowances by Ontario emitters will contribute to additional reductions in emissions" by 2020, her report states. And at a cost of about $300 per household per year in higher costs for gasoline, heating fuel, hydro and other necessities of life.

There are a few unknowns involved with scrapping the cap. This includes the fate of a constitutional challenge regarding the legality of Ottawa's plan to impose a carbon tax 'backstop' on provinces that do not follow federal rules on pricing carbon emissions. Then there is next year's federal election, the outcome of which could make the court question irrelevant if Prime Minister Justin Trudeau finds national voters are no more thrilled with carbon taxes than Ontario voters.  

Once all this is sorted out, compensation may be owed to some businesses with unused emissions permits. Or companies might sue Quebec and California for invalidating their credits. In the meantime, however, Ontario businesses no longer need to buy additional permits, which should please them. In fact, it appears many corporations were already adopting a wait-and-see approach to the future of cap-and-trade even before Ford’s Conservatives won the election. At its most recent cap-and-trade auction, for example, Ontario sold less than half the permits it made available for the year 2021. By comparison, it sold all its 2018 permits. 

Whatever uncertainties remain, however, the experience of Australia offers convincing evidence that getting rid of a carbon tax is a politically-astute move that threatens no harm to the environment.

In 2012, Australian Labor Prime Minister Julia Gillard unveiled a highly-contested national carbon price. Opposition Liberal leader Tony Abbott properly declared it to be "a great big tax on everything" and vowed to turn the 2013 federal election into a referendum on the policy. In an effort to stave off electoral defeat, the ruling Labor government hastily switched leaders and announced a plan to replace Gillard's tax with an "emissions trading system" not unlike Ontario's cap-and-trade program. The hope was that a carbon trading system would be less objectionable to the electorate. Voters didn’t buy it.