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Response to Ontario Climate Change Discussion Paper: Putting a Price on Carbon

March 27, 2015

Kathy Hering
Senior Policy Analyst
Ministry of the Environment and Climate Change
Climate Change and Environmental Policy Division
Air Policy and Climate Change Branch
77 Wellesley Street West
Floor 10
Toronto Ontario

Re: EBR Posting 012-3452 Ontario Climate Change Discussion Paper

Dear Ms. Hering,

Please find the following response to this posting. I am strongly in support of the development of a provincial climate change adaptation strategy and the modification of land-use planning policies to address climate change mitigation and adaptation. However, have focussed my detailed comments on the questions related to putting a price on carbon as follows:

Putting a Price on Carbon

This spring Ontario will confirm the market mechanism or mechanisms that will be used to price carbon in Ontario. Some of the goals of carbon pricing include:
o ensuring greenhouse gas emissions reduction certainty;
o supporting and encouraging innovation in industry;
o improving human, social, financial, produced and natural capital productivity; and to
o supporting households and business transition to the low carbon economy.
• Given the above, what market mechanism or mechanisms will best achieve these goals for Ontario?
• For those industries already facing challenges today due to changing economic conditions or technological advances in other jurisdictions, what carbon pricing market mechanism or mechanisms would be most beneficial?
• What design considerations should be taken into account?


Two major policy approaches to carbon pricing are under currently under consideration for GHG emission reductions in Ontario. These are:

• A carbon tax similar to that adopted in British Columbia and a number of European jurisdictions including Denmark, Finland, Ireland, the Netherlands, Norway, Sweden, Switzerland, and the UK.

• The creation of a carbon market for carbon emission permits, sometimes referred to as a cap and trade system. An Ontario cap and trade system could potentially be linked to the systems that Quebec and California have now established, flowing from the work of the Western Climate Initiative. Ontario was an early participant in the WCI and had committed to participate in the emission trading system established through the initiative by the end of 2012.

It is important to consider that the two options may not be mutually exclusive. They may be used in combination to address different aspects of Ontario’s GHG emissions.
Growth in Ontario’s GHG emissions is now dominated by the transportation sector, (ECO 2014, figure 10), particularly passenger transportation. Emissions related to goods movement by road in southern Ontario, particularly in the 401 corridor have also increased substantially (ECO 2014, Appendix 1).

The growth in passenger transportation related emissions has been driven by a combination of factors, including increasing number of passenger vehicles, shifts in passenger vehicle fleets towards heavier and less fuel efficient vehicles, and increases in the distances driver for commuting purposes, particularly in the Greater Golden Horseshoe Region. Urban form has been widely identified as a major factor in determining passenger transportation patterns, particularly automobile use vs. transit and other less carbon intensive transportation modes.

In contrast, Ontario’s industrial (sometimes referred to as “large final emitter’) and electricity related emissions have fallen substantially (ECO 2014, Figure 10) since 1990. These reductions have been the result of the phase-out of coal-fired electricity generation and the wider economic restructuring occurring in the province. The shift in economic activity from relatively energy intensive manufacturing and resource processing activities to knowledge and service based sectors has been a central aspect of the latter process.

In terms of economic theory a carbon tax and a cap and trade system are potentially equally cost-effective policy instruments for achieving GHG emission reductions, encouraging innovation, improving productivity and supporting a transition to a low-carbon economy. However, practical experience in other jurisdictions over the past two decades suggests that the implementation of carbon tax systems is relatively straightforward. Cap and trade systems have proven to be much more complex to successfully design and administer.

There has been a tendency for participating jurisdictions to over-allocate initial GHG emission allowances in setting up emission trading systems, leading to collapses of the ‘market’ price of carbon. Such outcomes have been observed, for example, through several iterations of the European Union’s trading system (The Economist, 2013). The complexity of cap and trade systems may also offer opportunities for ‘flexibility’ and the non-transparent accommodation of specific interests through the design of the market. Moreover, cap and trade systems tend to be focussed on large industrial sources of GHGs, as opposed to emissions throughout the economy as a whole. It is very difficult to address diffuse and distributed sources, like transportation and building-related emissions, through a cap and trade systems. Although transportation and building fossil fuel importers might be captured through a cap and trade system at the point of import or primary distribution, there is little precedent for such an approach.

Carbon taxes, on the other hand, have been demonstrated to be administratively feasible, relatively straightforward to design and potentially economy-wide in their impact (Anderson 2010; BC Ministry of Finance 2014). They are particularly effective in addressing emissions from relatively diffuse sources like transportation and buildings. The principal disadvantage of carbon taxes is their relative visibility to consumers. However, there is strong evidence, through the experience of BC and other jurisdictions that have implemented carbon taxes, that consumers may accept such taxes if they are accompanied by offsetting reductions in income and payroll taxes, or the revenues are dedicated to specific types of investment, like public transit or climate change adaptation or some combination of tax reductions and investments. In fact, the potential to generate new revenues and provide greater overall jurisdictional fiscal flexibility may be an important advantage of a carbon tax based approach.

Cap and trade systems may offer some potential to generate revenues through auctions of carbon emission permits. However, faced with strong opposition to the auction option among industrial emitters, most jurisdictions pursing cap and trade systems have chosen to allocate rather than auction permits

These considerations suggests best approach for Ontario would be to adopt a carbon tax, applied at the point of final sale, based on the carbon content of transportation and heating fuels. The existing provincial fuel excise tax system could easily be adapted to such an application. The revenues generated by the tax could be employed to provide combination of tax relief, along with low-carbon transportation investments, investments in climate change adaptation and the mitigation of adverse impacts on low-income consumers.

Large industrial emitters might be exempted from a carbon tax on their fuel inputs, if their emissions are addressed through a cap and trade system. This is a potentially appealing option if Ontario’s system could be linked to Quebec’s as part of an arrangement to access hydro-electric power from Quebec at less cost than the proposed refurbishment of nuclear reactors in Ontario (Winfield and Pineau, 2014). Such access could assist in maintaining the relatively low-carbon nature of the Ontario electricity system at lower cost. Access to storage and grid balancing services could also facilitate the further expansion of the role of low carbon but intermittent renewable energy sources in Ontario, like wind and solar. This would expand their capacity to displace more carbon intense electricity sources, particularly natural-gas fired generation.

I would be pleased to any questions you have regarding my views on this matter.

Yours sincerely,

Mark S. Winfield, Ph.D.
Associate Professor
Co-Chair, Sustainable Energy Initiative
Coordinator, MES/JD Program
Faculty of Environmental Studies
York University
Toronto, Ontario
Tel: 416-736-2100 Ext 21078/cell 416-434-8130

Anderson, M.S., 2010. “Europe’s experience with carbon-energy taxation,” S.A.P.I.E.N.S., 3.2 | 2010 : Vol.3 / n°2.
BC Ministry of Finance, 2014, “Carbon Tax Review,” Balanced Budget 2014.
The Economist, 2013, “Carbon trading: ETS, RIP?” The Economist, April 20.
Environmental Commission of Ontario (ECO) 2014, Looking for Leadership: The Cost of Climate Inaction Toronto: ECO.
Winfield, M., and Pineau, P.O. 2014, "The next step for Ontario’s energy mix," The Ottawa Citizen, June 23.