Ontario climate change strategy—a Frankenstein monster

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Appeared in the Toronto Sun, August 27, 2016

A recent opinion column from a scholar at the left-leaning Brookings Institution in the United States observes (based on the vast laboratory that is California) that “cap-and-trade” is a flawed strategy for reducing carbon emissions. Unfortunately, this policy lies at the heart of Ontario’s recently unveiled climate change strategy.

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.

According to the Brookings authors, such schemes are increasingly “complex, subject to manipulation and giveaways, and as an engine for the expansion of government.” In Ontario, the government at Queen’s Park has compounded the confusion by not specifying in detail how the initial tranche of 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.

A second problem with Ontario’s plan is that it will 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.

But there’s more bad news—beyond the problems with its cap-and-trade scheme, other elements of Ontario’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 attach a price to 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.

In brief, Ontario’s climate change plan is a sort of Frankenstein monster, as the government has dug up and stitched together parts of various bad ideas that ought to have been left dead in the ground. It combines a tax-and-spend approach to government finances with an active micro-managerial approach to regulation and subsidies. Like Dr. Frankenstein’s creation, the result is unlovely.

Opinions vary on the urgency of reducing emissions in a comparatively small jurisdiction such as Ontario, in the absence of comprehensive global cooperation, and therefore also vary on the amount of economic pain we should endure to achieve emissions reduction.

Regardless of one’s views on these questions, hopefully all can agree that if a government decides to proceed with an ambitious plan to reduce carbon emissions it ought to do so in the most transparent and least economically damaging manner possible. Sadly, Ontario’s climate plan fails this test miserably.

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