Fraser Forum

Carbon pricing, plus more regulation, equals bad news for Ontario’s economy

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An economics textbook will tell you that carbon pricing (through a carbon tax or a cap and trade scheme) is the most efficient way to reduce Greenhouse Gas Emissions (GHG). The principle at work is that is less economically damaging to simply put a price on carbon and let the market decide how emissions can be most cheaply reduced instead of enacting regulations mandating specific emissions reductions.

And it is true that replacing most environmental regulations aimed at reducing greenhouse gases with an economy-wide revenue neutral carbon tax could make the economy more efficient.

The problem is that the real world is different from an economics textbook. In the real world, introducing a carbon pricing plan does not eliminate an apparently insatiable desire of governments to micromanage the economy. Instead of carbon pricing replacing regulations, what we see is governments adding additional subsidies and regulations at the same time.

This is exactly what seems to be happening in Ontario. Recent news stories report Ontario is preparing to unveil a sweeping Climate Change Action Plan, which would move Ontario’s energy markets further in the direction of central planning.

The plan is reported to include a new slate of subsidies and regulations that would come atop the government’s recently announced cap-and-trade scheme.

As a result, Ontario will wind up with higher taxes and more regulation and more distortive subsidies, a dangerous combination for the provincial economy.

Here are just a few examples. The climate change plan is reported to include $285 million in subsidies to encourage people to buy electric cars. Reports suggest these subsidies could be as large as $14, 000 per vehicle. The plan also reportedly calls for new lower-carbon standards for transportation fuels.

Further, the plan apparently sets specific targets for transforming the province’s automobile fleet to the point that 12 per cent of all vehicles sold in 2025 will be electric vehicles.

These rules, subsidies, and targets represent precisely the type of economic micromanagement that carbon pricing is meant to eliminate the need for. The whole concept of emissions pricing is that after setting the appropriate market price for carbon, there’s no need for central planners to worry about what percentage of cars are fueled by electricity. Those sorts of details are meant to be sorted out by price signals and the market.

A revenue neutral carbon tax or cap and trade scheme that actually replaced distortive environmental regulations and subsidies, while creating room to reduce other economically harmful taxes, could theoretically produce a net benefit for Ontario. But that is not what’s happening. Instead, the government is enacting additional new rules dictating what goods and services the economy should produce and how it ought to produce them, while also putting a new price on carbon on top of it all. The combination of higher taxes and more regulation is bad news for Ontario’s economy.

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