Ontario cap-and-trade—a cash grab with little environmental benefit

Ontario’s cap-and-trade system took effect on January 1, with Ontario households expected to pay an additional $156 annually. The cap-and-trade system essentially amounts to a tax on companies that emit greenhouse gases in an effort to reduce emissions. It’s expected to drive the price of gasoline up about 4.3 cents per litre and increase the cost of home heating by up to $6.70 a month.

The Ontario government maintains that the money raised will be used to reduce emissions or help business and consumers adapt.

When it comes to taxes, the rule of thumb is that if you want less of anything, tax it. A tax on emission-causing activity in theory should reduce the offending activity. Economists generally support the concept of a carbon tax as an efficient policy for emission control if it’s used in place of regulatory measures and if it’s enacted as a revenue neutral scheme. Ontario’s approach really does none of this and in the end represents what can only be termed as another revenue grab.

First, the new program is a complicated regulatory cap-and-trade system that will set a cap on allowable emissions for businesses and then use a system of trading for carbon credits to cover emissions if the cap is exceeded. The costs of the system on firms will be passed onto consumers in a manner equivalent to a tax. Moreover, the system will need to be policed by government to ensure compliance. This will become yet another resource-consuming regulatory burden in a province notorious for raising the transaction costs of doing business via government red tape.

Second, the Ontario government expects to bring in $1.9 billion a year in new revenue as a result of cap-and-trade. This is not being fully offset by revenue decreases from provincial sales or income taxation or other rebates and therefore represents a net increase in Ontario’s tax burden. Businesses in Ontario are already arguing that the onset of this plan should be delayed given the cost impacts on both homeowners and businesses and the potential impact on future business investment in Ontario.

Moreover, these revenues are not going into a dedicated fund but into general revenues. If the government was truly committed to using these revenues to deal with climate change, the revenues would be automatically placed into a separate fund and kept there until needed to fund only environmental activities.

Finally, it remains that there are already substantial taxes on carbon—most notably gasoline. In Ontario, there’s a federal excise tax of 10 cents per litre, a 13 per cent HST, and a 14.7 cent per litre provincial fuel tax as well as the new 4.3 cents per litre effective January 1. All together, these taxes already account for approximately 35 per cent of the pump price. Yet, the dependence of automobiles as a convenient transportation source means that gasoline demand is inelastic—that is, not very sensitive to price.  

To substantially reduce gasoline consumption and greenhouse gas emissions via gasoline taxes would result in even more punitively high tax rates well in excess of the benefits from such emission reductions. Even Ontario’s auditor general has weighed in on the issue arguing that the financial consequences for Ontarians of the proposed cap-and-trade system could be greater than expected and will not significantly lower emissions in the province.

In the end, one can only conclude that the current Ontario government approach to emission reduction does not do much to reduce emissions and effectively amounts to another tax.