Fraser Forum

What exactly is ‘cap-and-trade’ in Ontario?

Printer-friendly version

The “cap-and-trade” strategy for reducing carbon emissions lies at the heart of Ontario’s recently unveiled climate change strategy, although many Ontarians likely don’t know what it is or its potential negative effects.

Cap-and-trade establishes limits on greenhouse gas emissions (the cap). Businesses that can’t afford to reduce emissions are able to trade for credits with those who can.

The government at Queen’s Park has not specified in detail how the initial tranche of cap-and-trade permits will be allocated. Historically, emission credits have been allocated politically, giving governments vast powers to favour industries and activities they like, and punish those they don’t.

The plan will also take even more money away from already heavily-taxed consumers and businesses. Indeed, much of the proceeds from the cap-and-trade scheme will fuel more government spending—the last thing Ontario’s economy needs.

Optimally designed “carbon pricing” policies use the resulting revenues to reduce, dollar-for-dollar, economically harmful taxes such as personal and corporate income taxes. And the carbon price replaces, not augments, other carbon regulations. Ontario won’t give all the revenue back to taxpayers, but will instead fund pet projects including initiatives to “support cycling and walking.” Indeed, Ontario’s climate change strategy is just another example of the tax-and-spend approach that has undermined the province’s economy for years.

Additionally, beyond Ontario’s cap-and-trade scheme, other elements of the provincial government’s climate strategy are unnecessarily complex and economically harmful.

For example, most experts on all sides of the climate debate agree that the best way to at least theoretically reduce emissions is to simply price emissions and then allow individuals and businesses to respond to the price (a cost) of emissions by making reductions wherever it’s least expensive to do so.

Ontario’s plan ignores this consensus advice by interfering in the decision-making of individuals and private companies through a host of regulations and targeted subsidies that favour producers of specific products. For example, the government plans to subsidize electric vehicles up to $14,000 per car.

In theory, carbon pricing allows governments to eliminate targeted subsidies. But the myriad of energy regulations and targeted subsidies in Ontario (which are de facto carbon emission regulations) are not scheduled for repeal. Instead of replacing harmful regulations, cap-and-trade is simply being layered on top with new regulations and subsidies to boot.

Blog Category: 

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.