Ontario’s climate action plan undermines case for cap and trade

Proponents of carbon taxes and cap and trade schemes often defend their position on the grounds that simply attaching a “price” to carbon is the most economically efficient way to reduce Greenhouse Gas Emissions (GHGs).  They argue it is less economically damaging to simply price pollution and let the market decide how emissions can be most cheaply reduced compared to a regulatory approach mandating specific emissions reductions.

And this argument is correct - in an economics textbook at least. In the real world, introducing a carbon pricing plan does not eliminate an apparently insatiable desire of governments to micromanage the economy in the name of environmental protection. 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 command-and-control style regulations that would come atop the government’s recently announced cap-and-trade scheme. This combination would leave Ontario’s economy even more over-regulated and over-taxed.

Ontario’s government recently defended its new cap-and-trade plan by noting there is a “broad consensus that carbon pricing is the best tool for reducing greenhouse gas emissions.” This is, again, in theory correct. But the reason carbon pricing is theoretically the best way to reduce emissions is that it should allow governments to eliminate the distortive regulations and subsidies they might otherwise use to reduce emissions.

But that’s not happening in Ontario. Instead, as the reporting on the government’s Climate Change Action Plan makes clear, Premier Wynne’s government is committed to adding another layer of regulation and subsidies on top of the new cap and trade plan.

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. The plan is also reported to call for new lower-carbon fuel standards for transportation fuels. In addition to its new subsidies and regulations, the plan apparently sets specific targets for transforming the province’s automobile fleet to the point that 12 percent of all vehicles sold in 2025 will be electric vehicles.

These rules, subsidies, and specific 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 fuss over what percentage of cars are fueled by electricity. Those sorts of details are meant to be sorted out by price signals and the market.

But Ontario’s government is apparently unwilling to abide by the central economic theory behind carbon pricing and seems determined to press ahead with intrusive economic interventions. Ontario will wind up with higher taxes and more regulation and more distortive subsidies, a dangerous combination for the provincial economy.

In theory, replacing most environmental regulations aimed at reducing greenhouse gases with an economy-wide carbon tax could make the economy more efficient. In reality, governments have proven unwilling to stop meddling in the economy after introducing carbon pricing and continue to enact new rules dictating what goods and services the economy should produce and how it ought to produce them. That’s what’s happening in Ontario, and the economic outcomes aren’t likely to be pretty.