WORKING PAPER
APRIL 2016
25
WP 25 TOWARD A LOW-CARBON ECONOMY: THE COSTS AND BENEFITS OF CAP-AND-TRADE
WP 25
TOWARD A
LOW-CARBON
ECONOMY
The costs and benefits of cap-and-trade
ISBN: 978-1-927065-17-4
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HOW TO CONTACT US
To learn more about the Institute
please visit us at:
www.competeprosper.ca
Should you have any questions or
comments, you may reach us through
the website or at the following address:
The Institute for Competitiveness & Prosperity is an independent not-forprofit organization that deepens public understanding of macro and
microeconomic factors behind Ontario’s economic progress. Research by
the Institute is intended to raise public awareness and stimulate debate
on a range of issues related to competitiveness and prosperity. It is the
aspiration of the Institute to have a significant influence in increasing
Ontario and Canada’s competitiveness, productivity, and capacity for
innovation. We believe this will help ensure continued success in creating
good jobs, increasing prosperity, and building a higher quality of life. We seek
breakthrough findings from our research and propose significant innovations
in public policy to stimulate businesses, governments, and educational
institutions to take action.
The Institute for Competitiveness & Prosperity
105 St. George Street
Suite 9000
Toronto, Ontario M5S 3E6
Telephone 416 946 7300
Fax 416 946 7606
Copyright © April 2016
The Institute for Competitiveness & Prosperity
ISBN: 978-1-927065-17-4
Jamison Steeve
416 946 7585
[email protected]
RESEARCH DIRECTOR
Dorinda So
416 946 5325
[email protected]
POLICY ANALYSTS
Julia Hawthornthwaite (Project Lead)
416 978 7843
[email protected]
The Institute was formerly the research arm of the Task Force on
Competitiveness, Productivity and Economic Progress established in
2001 by the Ontario Premier, and led by Roger L. Martin. The Task Force
completed its work at the end of 2014. The Institute is now advised by
Ontario’s Panel for Economic Growth & Prosperity, led by Tiff Macklem.
Comments on this report are welcome and should be directed to the Institute
for Competitiveness & Prosperity. The Institute is funded by the Government
of Ontario through the Ministry of Economic Development, Employment and
Infrastructure.
EXECUTIVE DIRECTOR
Should you wish to obtain a copy of one
of the previous publications, please visit
www.competeprosper.ca for an electronic
version or contact the Institute for
Competitiveness & Prosperity directly for
a hard copy.
Jonathan Thibault (Project Lead)
416 946 3503
[email protected]
Erica Lavecchia
416 946 5595
[email protected]
Christopher Mack
416 978 7859
[email protected]
DESIGN
Hambly & Woolley Inc.
www.hamblywoolley.com
Illustration: ©2016 Carl Wiens/i2i art
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TOWARD A
LOW-CARBON
ECONOMY
The costs and benefits of cap-and-trade
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EXHIBITS
EXHIBIT 1
EXHIBIT 2
EXHIBIT 3
EXHIBIT 4
EXHIBIT 5
EXHIBIT 6
EXHIBIT 7
EXHIBIT 8
EXHIBIT 9
EXHIBIT 10
EXHIBIT 11
EXHIBIT 12
EXHIBIT 13
EXHIBIT 14
EXHIBIT 15
EXHIBIT 16
2
How cap-and-trade works
Carbon intensity of economy, Ontario and North American peers, 2013
Carbon intensity of electricity generation, Ontario and North American peers, 2013
Emissions and targets, Ontario, 1990-2050
Emissions by sector, Ontario, 1990 & 2013
Allowance price forecast under three scenarios (C$ 2016), Ontario, 2017-2030
Percent of emissions covered by free allowances, Ontario, 2017-2032
Emissions forecast under different scenarios, Ontario, 2000-2030
Impact of Ontario’s cap-and-trade program on global emissions, by region, 2030
GDP growth rate under four scenarios, Ontario, 2015-2030
GDP forecast under four scenarios, Ontario, 2015-2030
Emissions by sector under four scenarios, Ontario, 2030
Goods and services sectoral composition under four scenarios, Ontario, 2030
GDP by sector under four scenarios, Ontario, 2030
Manufacturing sector GDP under four scenarios, Ontario, 2030
Economic prosperity and GHG reductions can exist together
15
19
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22
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27
28
29
30
31
32
33
34
35
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INSTITUTE FOR COMPETITIVENESS & PROSPERITY
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CONTENTS
Foreword & Acknowledgements
4
Executive Summary
8
12
CHAPTER 1: BUILDING THE LOW-CARBON ECONOMY
Cap-and-trade and the low-carbon transition
What is the low-carbon economy?
Carbon pricing is essential for the low-carbon transition
Optimal design addresses economic concerns
13
14
15
17
18
CHAPTER 2: ONTARIO’S CAPACITY FOR DECARBONIZATION
Ontario is well-positioned to decarbonize
Ontario’s emissions reduction targets are ambitious
Cap-and-trade is Ontario’s next step to reduce emissions
19
21
23
24
CHAPTER 3: THE IMPACT OF CAP-AND-TRADE
Modelling the impacts of cap-and-trade
Cap-and-trade reduces GHG emissions
Cap-and-trade’s effect on the economy depends on its design
Cap-and-trade reduces emissions across all covered sectors
25
28
30
32
36
CHAPTER 4: THE TRANSITION AHEAD
Not all carbon policies are compatible with cap-and-trade
Complementary policies address market-failures and reduce emissions
Sweden and California demonstrate possibilities for Ontario’s future
37
37
39
42
CHAPTER 5: RECOMMENDATIONS
End Notes
46
Previous Publications
48
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FOREWORD & ACKNOWLEDGEMENTS
How can Ontario carve its
low-carbon future?
MOST political discussions are teeming with a sense of immediacy. What can be done by
government today to make life better for citizens today? Driven by an insatiable media cycle and
a demanding public, our public institutions attempt to respond to the needs and voices of the
voting public. Yet, there are moments, when the debate turns to issues that impact tomorrow as
well. Our elected officials are then asked to balance the costs of a policy today with the benefits
that will accrue long after they are out of public office.
Jamison Steeve
Executive Director
Institute for
Competitiveness & Prosperity
In our 25th Working Paper, Toward a low-carbon economy: The costs and benefits of cap-andtrade, the Institute for Competiveness & Prosperity looks at such an issue. With a strong
analysis of the costs and benefits of the looming cap-and-trade system emerging in Ontario, the
Institute attempts to outline the economic growth that will result, along with the impacts and
opportunities to be seen in the various sectors of Ontario’s economy.
Ontario has made the decision to move toward building a low-carbon economy. This means
an economy with low-carbon intensity, or low emissions per unit of gross domestic product.
This does not mean that our economy will produce nothing but wind turbines and solar
panels. It means Ontario will have to find ways to generate economic growth while producing
fewer greenhouse gas emissions. The hope is that this will lead to increased adoption of lowcarbon technologies, changes in energy consumption, and the building of modern, resilient
infrastructure.
At the heart of the move to the low-carbon economy is the price signal the government is
sending through the adoption of a cap-and-trade system. This Paper recognizes that carbon
pricing is essential, but does not do an analysis of a carbon tax versus cap-and-trade. Rather, the
Institute calls on the government to design the emerging system with competitiveness concerns
in mind in an attempt to balance the economic concerns of today with the emissions and growth
concerns of tomorrow.
In the end, we find that, without a doubt, Ontario’s cap-and-trade system will have a negative
impact on the GDP projections for the province. However, if designed with care, the growth
impact will be minor, the GHG reductions will be significant, and the possibility of future
economic prosperity can rise.
4
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Ontario will have to find ways to generate
economic growth while producing fewer
greenhouse gas emissions.
The Institute strongly recommends that Ontario pursue a cap-and-trade system that links our
market with other cap-and-trade markets as soon as possible. This is one policy area where a
‘made in Ontario’ solution will have a dramatic negative impact. Furthermore, the province
should move to maintain support for at-risk industries in the short and medium term to reduce
‘carbon leakage,’ or the flight of industry from Ontario to other jurisdictions that have yet to
put a price on carbon. Other recommendations include a greater allocation of cap-and-trade
revenues towards businesses, a refocusing of the province’s industrial policies to take the new
carbon pricing regime into account, greater encouragement for electric vehicle adoption, and a
modification of existing energy programs for home owners.
Like many of these debates, the hyperbole is on high. The immediate costs of such a policy are
often overstated and the long-term benefits are often oversold. However, with a mind to the
present and an eye to the future, Ontario can hold on to many of the economic gains it has
enjoyed, build a strong economy for future generations, and play its part in reducing global
greenhouse gas emissions.
As always, the Institute for Competitiveness & Prosperity is grateful for the funding support from
the Ontario Ministry of Economic Development, Employment and Infrastructure. We would also
like to thank our friends at the Ivey Foundation and the Metcalf Foundation for their financial
and intellectual support. We look forward to sharing and discussing our final work and findings
with all Ontarians. All comments and suggestions for improvement are welcome.
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ONTARIO IN
2030
An optimally designed cap-andtrade system reduces global
emissions by 61Mt in 2030.
Ontario’s economy fares well
under cap-and-trade. Gross
domestic product and
greenhouse gas emissions
decouple as the economy
decarbonizes, and the province
maintains robust economic
growth but at a slightly reduced
rate. Linking and supporting
at-risk industries are effective
at alleviating most of the
competitiveness concerns
associated with the program.
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Trends in the economy
predict modest growth in the
manufacturing sector and
significant growth in the
service sector. A flexible
cap-and-trade system does
not alter this course. The
ideal system does not have
a significant impact on
the industries in which
the majority of Ontarians
are employed. Low-carbon
service sectors, the sectors in
which Ontario is competitive,
continue to prosper.
ONTARIO IS
AIMING TO
LEAD, RATHER
THAN FOLLOW,
ON CLIMATE
CHANGE
POLICY.
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EXECUTIVE SUMMARY
TOWARD A
LOW-CARBON
ECONOMY
T
he Government of Ontario has expressed
a desire to lead, rather than follow, on
climate change policy. Trends indicate that
its current policies to reduce greenhouse
gas emissions will fall short of the deep reductions
needed to meet its targets. Now that the world has
signed the Paris Agreement to take action on climate
change, Ontario must do its part.
8
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THE province will formalize its desire to lead by implementing a cap-and-trade
program in 2017. This policy will send a price signal to consumers, producers,
investors, and innovators, beginning the transition to a low-carbon economy.
Ontario is well-positioned to undergo this transformation. It already boasts a
low-carbon electricity sector and has a competitive advantage in the service
sector. This, however, is a double-edged sword. Since Ontario has already
achieved its low-cost emissions reduction opportunities, there lies ahead an
uphill battle to achieve additional abatement. Moreover, there is warranted
concern over the impact cap-and-trade will have on Ontario’s economic growth
and competitiveness.
To understand what the province can do to alleviate these concerns,
the Institute commissioned macroeconomic modelling and examined
four scenarios:
1. Business-as-usual
2. Cap-and-trade
3. Cap-and-trade (linked)
4. Cap-and-trade (linked, with support for at-risk industries)
To achieve the best outcomes for the province, Ontario must link with the
Western Climate Initiative’s market as soon as possible and provide support to
its emissions-intensive and trade-exposed industries in the short to medium
term. This design achieves the greatest number of global emissions reductions
while mitigating adverse effects on the province’s competitiveness. Ontario’s
economy is better off under this scenario, growing at an average annual rate of
2.05 percent.
If these flexibility mechanisms are not provided, there will be severe
consequences for Ontario’s economy. Gross domestic product in 2030 will
be $16 billion lower, and global emissions will be higher. The policy will
neither achieve its desired impact nor provide a positive economic future for
the province.
Ontario is on a path toward building a low-carbon economy and must find
ambitious and innovative ways to get there. By implementing a cap-and-trade
system and looking to other low-carbon jurisdictions for emissions reduction
policies, Ontario can decouple its economic growth from greenhouse gas
emissions. Dedication, optimism, and ingenuity are now needed to make the
low-carbon future a reality.
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ONTARIO’S CHALLENGES
Cap-and-trade will reduce
emissions, but can erode
competitiveness and hinder the
province’s economic growth
Ontario must optimally design
its cap-and-trade system in
order to address climate change
while maintaining growth and
competitiveness
With Ontario’s current
climate policies, GHG emissions
are projected to rise
RECOMMENDATIONS
Link with the
Western Climate
Initiative cap-andtrade market as soon
as possible
Maintain support for
at-risk industries in
the short to medium
term
Allow offsets in the
agricultural and
waste sectors
Allocate a greater
percentage of capand-trade’s revenues
toward businesses
Inform the business
community about
cap-and-trade
details early
Educate the public
about cap-and-trade
Conduct a review of
existing emissions
reduction policies
Refocus the
province’s industrial
policies
Encourage electric
vehicle adoption
Modify the ‘Helping
Homeowners Save
Energy’ program
10
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HIGHLIGHTS OF THE ANALYSIS
BY
2020
Ontario’s
emissions
in 2020
WITHOUT
cap-and-trade:
177
MEGATONNES
Ontario’s
emissions
in 2020
WITH
cap-and-trade:
Ontario’s
emissions
in 2030
WITHOUT
cap-and-trade:
DESIGN
MATTERS
MEGATONNES
120
166
BETWEEN
BY
2030
157
Improving the
design of the
cap-and-trade
program increases
Ontario’s 2030
GDP by $16 billion
Cap-and-trade
REDUCES
GLOBAL GHG
emissions by
between
183
MEGATONNES
$16B
40
61
AND
MEGATONNES
Ontario’s
emissions
in 2030
WITH
cap-and-trade:
AND
MEGATONNES
+2.08%
+2.05%
TO
+1.90%
Cap-and-trade reduces
Ontario’s average annual
GDP growth rate from
2.08 percent to between
1.90 and 2.05 percent
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CHAPTER 1
BUILDING THE
LOW-CARBON
ECONOMY
O
ntario has committed to taking bold action
on climate change. As a cornerstone of its
strategy, it will implement a cap-and-trade
program in 2017. The government
hopes this policy will initiate the transition to a
low-carbon economy as well as contribute to
the global fight against climate change. In order
to achieve either of these goals, competitiveness
concerns must be addressed.
12
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Cap-and-trade and the low-carbon transition
The transition to a sustainable world is upon us, and the conversation about the
low-carbon economy has never been more pressing. In 2015, Canada and the
parties to the United Nations Framework Convention on Climate Change
(UNFCCC) signed an agreement to limit global temperature rise to less than
1.5 to 2 degrees Celsius.1 Ontario had a strong presence at the conference and
promoted its recent commitment to implement a cap-and-trade (C&T) program.
Given the relevance of C&T in Ontario, the Institute was compelled to dive
into the potential impacts of the policy. This Working Paper seeks to forecast
the effects C&T will have on Ontario’s competitiveness, economic growth,
and greenhouse gas (GHG) emissions between now and 2030. It also examines
Ontario’s role in reducing global GHG emissions through the program.
The Institute has chosen to focus on discussing the potential impacts of C&T in
this paper rather than debating the merits of C&T versus a carbon tax. The
Institute assumes C&T will be implemented – as it has already been announced
in the 2016 Budget – and uses all publicly available information to measure the
impact of the program’s proposed design on Ontario’s economy, emissions, and
global emissions.
This Working Paper aims to answer the following questions:
1. How does C&T impact the projection of Ontario’s economy and
GHG emissions?
The Institute defines
a low-carbon economy
as an economy
with low carbon
intensity — in other
words, low emissions
per unit of GDP.
2. How can Ontario optimally design its C&T program in order to
alleviate competitiveness concerns and reduce the greatest
amount of global GHG emissions?
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What is the low-carbon economy? This will stimulate the domestic production of
Sustainable economic growth can be described
in many ways, yet not all definitions are
interchangeable.2 The terms clean economy
or green economy refer to the market and
production of ‘environmental goods’ – those
that reduce or eliminate adverse environmental impacts.3 The clean or green economy can
also refer to sustainable development activities
– those that do not result in the depletion of
natural resources. Although there are aspects
here that are undoubtedly interconnected,
we endeavour to simplify the definition. The
low-carbon transition requires more than just
the production of environmental goods and
services – it requires a transition across all
aspects of the economy.
The Institute defines a low-carbon economy
as an economy with low carbon intensity – in
other words, low emissions per unit of gross
domestic product (GDP).
The low-carbon economy emerges as a result
of a successful transition from high carbon
intensity, in which firms rely on emissionsintensive inputs, to one of low carbon intensity
utilizing cleaner inputs. As low-carbon
technologies are increasingly adopted,
economic growth is decoupled from GHG
emissions, creating the necessary conditions
for a prosperous, low-carbon future.
The low-carbon economy creates benefits
Embracing the low-carbon transition may
give rise to several economic and social
benefits outside of its direct focus of reducing
emissions.
New economic activity The demand for less
carbon-intensive energy, products, and
services will increase in the low-carbon
economy. Through electrification (the
process where an original power source,
particularly a fossil fuel, is changed to an
electrified power source), regions that are net
importers of oil and gas, such as Ontario,
benefit from a reduced reliance on imports.
14
electricity, creating jobs and economic activity
at home.
As more economies transition, global capital
flows will increasingly be diverted away from
fossil-fuel based industries and energy
production and toward cleantech or other
low-carbon industries. Regions that make an
early transition can establish themselves as
cleantech ‘hubs,’ thus attracting investment,
creating jobs, and exporting their products to
other economies. For example, Ontario has
expertise in nuclear energy, recycling, and
water technologies, and is home to over
300 cleantech companies.4 Promoting these
industries at home will help these companies
grow and establish themselves in the global
marketplace, creating new economic activity.
Building modern, resilient infrastructure The
low-carbon transition forces the province to
rethink its infrastructure strategy. By acknowledging that the low-carbon future will be
characterized by heavier use of public transportation, less emissions-intensive electricity,
and more efficient buildings, a jurisdiction can
identify the optimal infrastructure to build.
This new infrastructure must be resilient to the
increasing burden of extreme weather events
such as flooding, drought, and frequent
storms. Without proper planning, a region
runs the risk of building infrastructure that
Despite the wide range of
available levers, carbon pricing
is the strongest incentive
available to curb emissions, and
an essential building block for a
low-carbon economy.
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may become prematurely obsolete, and this
will come at a high economic cost.5 Thus,
building resilient infrastructure has potential
economic benefits. The government is expecting about $1.9 billion in annual revenues from
its C&T system, and a portion of these funds
can be used for this purpose.6
Health improvements Curbing GHG emissions
also reduces other, more localized emissions
such as tailpipe pollutants from vehicles.
Reductions in harmful pollutants will keep
citizens healthier, rendering them more productive and likely to participate in the labour
force. These health improvements could also
lead to cost savings for the provincial health
care system.
Beyond these local benefits, building a
low-carbon economy is essential in order to
tackle climate change, one of the most famous
‘wicked’ problems of the 21st century.7 In
doing so, governments have two fundamental
goals to achieve: reducing emissions and
keeping their economy competitive and
prosperous.
EXHIBIT 1
Carbon pricing is essential for
the low-carbon transition
Policies aiming to promote low-carbon
development range from pricing mechanisms
(congestion pricing, carbon taxes, and C&T)
to government regulations (fuel and building
standards) to policies that promote conservation (encouraging the use of alternative
modes of transportation or efficient light
bulbs). Despite the wide range of available
levers, carbon pricing is the strongest incentive
available to curb emissions, and an essential
building block for a low-carbon economy.8
A carbon tax or C&T provides an explicit price
signal that other policies cannot. Ideally, it has
broad sectoral coverage and includes a large
majority of a region’s emissions. In theory,
carbon pricing is capable of targeting the
lowest cost abatement opportunities across
firms and even across sectors, unlike most
strict regulations (Exhibit 1).
How cap-and-trade works
TRADE
UNUSED
ALLOWANCES
ALLOWANCES
EXCESS
EMISSIONS
P
CA
P
CA
TRADE
EMITTER A
MONEY
EMITTER B
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Setting a price on carbon can reduce emissions
by signalling the levels of carbon intensity in
goods and services to consumers, producers,
investors, and innovators.9 Households and
firms alter their choices and adopt new
technologies for each opportunity where the
cost of doing so is below the cost of the carbon
price. As the price rises, it slowly drives
investment away from emissions-intensive
industries and toward low-carbon industries.
Over time, fossil fuel-intensive products and
industries become too expensive, rendering
them less competitive. Carbon pricing will
help shift industry composition and can help
build up the cleantech market.
That being said, carbon pricing will not be
able to achieve its goals without proper
design, longevity, and stringency. Policies
are amenable to businesses when they can
outlast a two- to four-year cycle. Without
this, businesses and investors are not
compelled to change their behaviour in
favour of low-carbon activities.
To achieve significant decarbonization, the
carbon policy must continually increase in
stringency – either the tax rises in regular
intervals, or the cap tightens every compliance
period. Without this measure in place, the
policy is unlikely to incent the shift it intends.
Most carbon prices around the world are
currently too low to incentivize the behavioural
shifts necessary for the transition.10
It must be stated that carbon pricing is not the
be all and end all to emissions reductions. It is
an essential economic signal but it is not the
only element needed to make the low-carbon
future possible. Especially when the price is
too low, or when dealing with the marketfailures associated with the policy, other
activities will be necessary.
16
Two types of carbon pricing
Nearly forty nations and more than twenty
sub-national jurisdictions are pricing carbon or
planning to do so in the near future.11 The two
types of carbon pricing are a carbon tax and
C&T. (See Carbon pricing policy explained.)
Both policies seek to offer different forms of
certainty. A carbon tax provides certainty in
the price of carbon at a given time, but not
emissions reductions; whereas a C&T system
sets a target for emissions reductions, but not
price.12 Both options deliver new revenue for
the government. When evaluating the pros
and cons of the two carbon pricing options,
one must consider which provides the most
certainty, feasibility, and is the most beneficial
for the environment and the economy.
CARBON PRICING POLICY EXPLAINED
Carbon tax
A carbon tax is a tax placed on GHG emissions, putting a price on each tonne of
GHG emitted. Its design does not favour any particular type of emission reduction
activity over another. This additional tax is often offset by reductions in other
taxes (as has been done in British Columbia). Generally speaking, a carbon tax is a
guaranteed way to price carbon, since the government sets the price directly. On
the other hand, political pressures may prevent the government from continually
raising the tax to an extent that would incent behavioural changes.
Cap-and-trade
C&T can be more complicated in design and administration than a carbon tax
but has a number of favourable elements.13 The ‘cap’ is a maximum limit of GHG
emissions produced in the economy. The ‘trade’ creates a market for buying and
selling permits known as allowances. Since the carbon price is not determined
beforehand, it develops through the trading of allowances. Once all permits are
allocated during the set-up of the program, companies who are covered by the
system buy and sell permits with one another.14
Companies obtain emissions allowances either through free allocation by
government, purchase at auction, or on the carbon market. To be compliant,
companies must surrender permits for every unit of GHG they emit at the end of the
period. This is known as a ‘true up’. To reduce emissions, companies can switch to
cleaner inputs, improve their energy efficiency, capture their emissions, purchase
offsets, or produce less carbon-intensive goods and services.
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Optimal design addresses
economic concerns
Ontario has chosen to move forward with
C&T as its carbon pricing policy. There are
two main economic concerns associated with
C&T: carbon leakage and cost pass-through.
Carbon leakage occurs when a firm operating
within a jurisdiction that prices carbon either
relocates or shifts a significant portion of
their activities to a region that does not price
carbon. This adversely impacts a region’s
competitiveness since the firm’s associated
GDP leaves the jurisdiction. This is a primary
reason why governments are reluctant to
pursue carbon pricing. In this Working Paper,
the Institute measures changes in economic
activity (GDP) to evaluate competitiveness in
reaction to carbon pricing policy. If a region’s
(or a sector’s) GDP increases in reaction to
carbon pricing, the region (or sector) becomes
more competitive. A fall in GDP indicates
eroding competitiveness.
The industries considered more at risk of
leakage are those that are energy-intensive
and trade-exposed (EITE). If firms relocate or
shift production, their associated GHG
emissions move to the new jurisdiction.
When this happens, the policy fails to achieve
its desired impact, since the overriding goal
is to reduce global GHG emissions. As a
result, governments must focus heavily on
the upfront design of C&T to minimize
leakage risks.15
It is important to be mindful that input costs
are part of a series of factors influencing a
firm’s competitiveness. In reality the effect
of carbon pricing may be negligible because
other business costs – labour, capital, and tax
rates – differ considerably among regions.
These costs can more than offset any carbon
price differential. Concerns are diminished
altogether when a jurisdiction’s trading partners also apply a carbon price. Furthermore,
loss of competitiveness of one industry does
not necessarily reduce the overall competitiveness of the economy.
Carbon pricing schemes to tackle GHG
emissions are in use in almost sixty
jurisdictions around the world and will
soon come to Ontario. The government
has made a decision to move ahead with a
C&T program, providing a price signal to
producers, consumers, investors, and
innovators that will initiate the low-carbon
transition. In order for the policy to reduce
GHG emissions and the economy to remain
prosperous, competitiveness concerns must
be addressed.
Cost pass-through occurs when regulated firms
under the cap pass the carbon price onto
consumers rather than absorbing the costs
themselves. This has positive benefits for the
regulated industry and alleviates some
competitiveness concerns. However, it
negatively affects Ontario’s consumers who
end up paying more for goods and services.
Cost pass-through also disadvantages lower-income populations since this group spends
a higher percentage of their income on
carbon-intensive goods and services (especially
home heating and transportation fuel).16
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CHAPTER 2
ONTARIO’S
CAPACITY FOR
DECARBONIZATION
M
oving toward a low-carbon economy will
require a shift in Ontario’s economic
composition. Ontario has decarbonized
its electricity sector by closing its
coal-fired plants, which will facilitate emissions
reductions across other sectors. Despite this
achievement, more action is needed to ensure the
province meets its climate change goals. Cap-andtrade is Ontario’s next step to bring the low-carbon
economy within reach.
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Ontario is well-positioned to
decarbonize
and the competitive advantages of its
various sectors.
Ontario is using C&T as a central policy
instrument to kick-start the transition to a
low-carbon economy. The competitiveness
concerns associated with this policy cannot
be ignored. However, there are a number of
factors that will aid Ontario in this transition.
Ontario’s economy is less carbonintensive than its peers
Ontario and its future Western Climate
Initiative (WCI) trading partners have
relatively less carbon-intensive economies
than their peers (Exhibit 2). Jurisdictions that
produce fewer emissions per unit of output
will see a smaller portion of their economy
affected by carbon pricing. Low-carbon,
service-oriented economies in particular will
undergo less economic restructuring than
Three key factors will affect the province’s
ability to prosper through the low-carbon
transition: the emissions intensity of the
overall economy and of the electricity sector;
EXHIBIT 2
Most
favourable
Carbon intensity of economy, Ontario and North American peers, 2013
New York
Massachusetts
California
Washington
Québec
New Jersey
Ontario
Virginia
British Columbia
North Carolina
Florida
Georgia
Illinois
Michigan
Pennsylvania
Ohio
Texas
Least
favourable
Indiana
Alberta
0
0.1
0.2
0.3
0.4
0.5
0.6
Mt of energy-related CO2/$billion GDP
Note: Partner WCI C&T members (Québec and California) are marked in teal. GDP is measured in 2013 Canadian dollars, converted using
PPP exchange rates. Energy-related CO2 data were used rather than CO2e (which includes CO2, methane, NO2 and other GHG emissions) due to
data constraints at the US state level, which only reports reliable figures for energy-related CO2.
Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada, Environment Canada, US Bureau of Economic
Analysis, US Energy Information Administration, and the Organisation for Economic Co-operation and Development.
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resource-dependent economies. Amongst its
peers, Ontario is relatively well-situated,
emitting about 15 percent fewer GHGs per
unit of GDP than the median. As a result,
Ontario will not have to address the same
challenges that, say, Alberta or Indiana may
have to face in restructuring themselves to
become less carbon-intensive economies.
Ontario has a low-carbon
electricity sector
Decarbonizing electricity is an important first
step to achieving widespread emissions
reductions, as it facilitates the reduction of
emissions from buildings, industry, and
transportation.17 Ontario has successfully
phased out coal-fired plants, and with a
sufficient supply of nuclear energy, the
province’s electricity generation is much less
GHG-intensive than many of its North American
peers (Exhibit 3). By having a low-carbon
EXHIBIT 3
Most
favourable
electricity sector, households and firms can
switch fuels (i.e., from fossil fuels to electricity)
by using an electric vehicle or electricpowered machinery to avoid carbon costs. If a
region still relies on coal, however, electric
heating and charging of electric vehicles will
still consume a significant amount of carbon.
As the price of carbon increases, regions with
decarbonized or ‘clean’ electricity sectors will
not face a significant increase in energy costs
due to the minimal carbon content embedded
in the electricity. However, by already having a
decarbonized electricity sector, further incremental GHG reductions in this sector are more
difficult and expensive. Ontario has already
achieved many of its low-cost abatement
opportunities through this initiative, and in a
linked system, it may become a net importer
of allowances if other jurisdictions have more
low-cost abatement opportunities available.
Carbon intensity of electricity generation, Ontario and North American peers, 2013
Québec
British Columbia
Ontario
Washington
New Jersey
New York
California
Massachusetts
North Carolina
Virginia
Pennsylvania
Georgia
Illinois
Florida
Michigan
Texas
Ohio
Least
favourable
Alberta
Indiana
0
100
200
300
400
500
600
700
800
900
1,000
g CO2/kWh
Note: Partner WCI C&T members (Québec and California), are marked in teal. Emissions are denoted in grams of CO2 per kWh of electricity.
CO2 rather than CO2e was used because the US electricity sector's emissions data at the state level does not include methane, NO2, or other
GHG emissions. CO2 emissions in the electricity sector account for approximately 98 to 99 per cent of total CO2e (or GHG) emissions.
Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada, Environment Canada, and US Energy
Information Administration.
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Ontario has a competitive advantage in
service sector industries
As a carbon price increases the cost of goods
and services proportionally to their carbon
content, the cost of low-carbon products will
fall relative to carbon-intensive products.
To an extent, demand will shift away from
carbon-intensive goods and toward more of
the low-carbon services that Ontario produces
(nearly 80 percent of Ontario’s economy is
composed of services). This will continue
to occur as more jurisdictions begin to price
carbon, and new export opportunities will
present themselves. Furthermore, global
capital will increasingly be directed away
from the resource sector and toward low- and
zero-carbon industries – of which Ontario
is home to many. Previous research by the
Institute has found that Ontario enjoys lower
unit labour costs in most service sector (i.e.,
low-carbon) industries.18 This means that in
most service sectors, Ontario workers can
produce a given level of output for lower
compensation than in other jurisdictions.
This bodes well for the province’s low-carbon
transition.
Ontario’s emissions reduction
targets are ambitious
In 2013, Ontario’s GHG emissions (measured
in CO2 equivalents) were 171 megatonnes
(Mt).19 This is only slightly below 1990
emission levels which were 182Mt.20
Emissions peaked in 2000 and 2005 when
the production of coal-fired electricity was
highest (Exhibit 4).21
Since 2009, Ontario’s emissions have levelled
off but do not show signs of reducing in the
near future. Although closing coal-fired plants
allowed for a significant decarbonization of
Emissions and targets, Ontario, 1990-2050
EXHIBIT 4
Emissions
(Mt CO2e)
240
200
Necessary reductions
to meet targets
Historical emissions
220
182
-2.8% per year
180
174
160
140
2020 target
155
-3.0% per year
120
100
2030 target
114
-5.6% per year
80
60
40
20
2050 target
36
0
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Note: Data for 2014 and 2015 are preliminary estimates.
Source: Institute for Competitiveness & Prosperity analysis based on data from Environment Canada and the Ministry of the Environment and
Climate Change.
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the electricity sector, emissions are rising
across the transportation and building sectors
and the Ministry of Environment and Climate
Change projects that this will continue.22
Even though the province is well-positioned
to decarbonize, most reports suggest that
Ontario is not on track to meet its targets.
2 degrees Celsius.23 Ontario sought to set
reduction targets that support this leadership
and optimism for building a low-carbon
economy. The province also set targets in
line with other leading jurisdictions to
make a future North America-wide carbon
market possible.
Ontario has set ambitious GHG reduction
targets to fulfill its role in fighting climate
change:
Emissions are rising in many sectors
GHG emissions have risen in the transportation, buildings, and waste sectors since 1990
(Exhibit 5). This is for a few reasons. First,
Ontario’s population is growing and the
demand for building space and transportation
fuels has risen accordingly. Population growth
has to some extent offset the recent improvements in energy efficiency. Between 1990 and
1999, Canada experienced strong economic
growth and low oil prices, and despite
improvements in vehicle fuel efficiency,
emissions from the transportation sector
increased.24 Emissions from buildings in Ontario
are high due to the dominant use of natural
gas (rather than electricity) to heat space and
water. Emissions from the waste sector are
increasing due to the methane emitted during
waste decomposition in landfill sites.25
• 15 percent below 1990 levels by 2020
(to approximately 155Mt)
• 37 percent below 1990 levels by 2030
(to approximately 114Mt)
• 80 percent below 1990 levels by 2050
(to approximately 36Mt)
Ontario was motivated by two main factors
when setting its emissions reduction targets.
The first was its commitment to being a leader
on climate action both within Canada and
among sub-national governments worldwide.
It also hosted the Climate Summit of the
Americas in 2015 and has signed an agreement with other subnational governments to
limit the earth’s warming to less than
EXHIBIT 5
Emissions by sector, Ontario, 1990 & 2013
Emissions
(Mt CO2e)
1990
2013
70
60
50
40
30
20
10
0
Transportation
Industry
Buildings
Electricity
Agriculture
Waste
Note: The guidelines for emissions reporting are set out by the UNFCCC and do not follow the North American Industrial Classification System
(NAICS). Instead, jurisdictions typically report their GHG emissions according to the six sectors above.
Source: Institute for Competitiveness & Prosperity analysis based on data from the Environmental Commissioner of Ontario.
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Cap-and-trade is Ontario’s
next step to reduce emissions
The Ontario government has stated an
intention to introduce carbon pricing through
a C&T program beginning in 2017. (See
Ontario’s cap-and-trade program design.) It
plans to link with the WCI in a joint market by
2021 (possibly sooner).26 The WCI is a group
of jurisdictions committed to working together
to implement a North America-wide C&T
system to tackle climate change. Ontario has
been a participant in the WCI since its creation
in 2007. At its height, the WCI had seven US
states and four Canadian member provinces;
however, every US partner except California
has since dropped out of the program.27 The
current Canadian members are Ontario,
Québec, Manitoba, and British Columbia.28
Québec and California have participated in a
linked C&T system under the WCI since 2012,
with their first joint auction of allowances
taking place in 2014.29 Under the WCI, each
jurisdiction sets their own cap on emissions,
but when they link, this cap becomes shared.
Each regulated firm must surrender allowances for each unit of GHG they emit. Firms
are permitted to trade allowances across
participating jurisdictions within the WCI C&T
system, and as a result, a common WCI-wide
price on allowances is determined.30
Each region in a linked system benefits from
allowance trading. The high-cost region can
import cheaper allowances and face lower
abatement costs; while the low-cost region can
abate and then sell their excess allowances to
firms in the high-cost region.
Ontario is well-positioned to compete
in a less carbon-intensive world. The
low-carbon transition should build on the
province’s strengths in its service sector
industries, and take full advantage of its
decarbonized electricity sector. However,
the province has exhausted many of its lowcost abatement opportunities, suggesting
that new policies will be necessary in order
to help reduce emissions further. Ontario
will introduce its C&T system in 2017 to
fulfill its role in the global fight against
climate change.
ONTARIO’S CAP-AND-TRADE PROGRAM DESIGN
Since Ontario intends to link with its WCI partners in a joint carbon
market, it has mirrored their C&T design.
BENEFIT
Start date
January 1, 2017
First auction
March 1, 2017
Coverage
Facilities that emit more than 25,000 tonnes of
carbon dioxide equivalents (CO2e) per year
Fixed process and combustion emissions
Permits
Permits will be tradable with other WCI members
New facilities
Firms with operations beginning January 2016 or
later will participate in their third year of operation
Price floor
(minimum price)
Increases by 5 percent per year plus inflation
Price ceiling
(maximum price)
A strategic reserve will be in place to act as a
price ceiling
Source: Institute for Competitiveness & Prosperity analysis based on data from Government of Ontario, Cap and
Trade Program Design Options, November 2015.
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CHAPTER 3
THE IMPACT OF
CAP-AND-TRADE
G
overnments must ensure that
competitiveness concerns are addressed
when implementing climate policies.
As Ontario takes a leadership role in
implementing cap-and-trade, it must provide
flexibility in order to uphold the policy’s
environmental goals while ensuring robust
economic growth in the province.
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Modelling the impacts of cap-and-trade
The Institute commissioned Navius Research to model the impact of Ontario’s
C&T program on the province’s economy, GHG emissions, and global emissions.
For a detailed explanation of the model’s methodology please visit the online
appendix at competeprosper.ca.
Four scenarios were modelled:
1. Business-as-usual (BAU): The BAU scenario provides a projection of the
province’s GDP and GHG emissions under current climate policies without the
introduction of the C&T program. This provides a baseline against which the marginal environmental and economic impacts of the C&T system can be evaluated.
An optimally designed
cap-and-trade system
reduces global
emissions and has only
a minor effect on the
provincial economy.
The Institute modelled three C&T scenarios where different flexibility mechanisms
were incorporated (linking and support). The scenarios were chosen to show
whether variations in the design of the program can address competitiveness
concerns and achieve better outcomes for the environment and the economy.
It is possible that linking and providing support to EITE firms in the form of free
allowances can significantly mitigate adverse impacts on firm competitiveness.
The three scenarios are:
2. No flexibility: Ontario does not link its C&T system with the WCI and no
support is provided to EITE industries.
3. Link: Ontario links its C&T system with the WCI market in 2021, but no
support is provided to EITE industries.
4. Link & support: Ontario links its C&T system with the WCI market in 2021
and the province supports EITE industries.
All four scenarios include adherence to four non-C&T emissions reduction
policies to which the province has committed:
• Federal vehicle emissions standards: Fleet-wide emission standards for
passenger cars of 98g CO2e/km in 2025 (2016 average is 153g CO2e/km)
• Building standards: New residential and commercial buildings are required to
meet EnerGuide 80 standards
• Renewables target: 10,700MW of installed capacity from non-hydro renewables
by 2021 (On December 14, 2015, Ontario had 3,869MW)
• Nuclear refurbishment: Nuclear refurbishment of four units at Darlington and
six units at Tiverton, including the extension of Pickering power plant’s operation
until 202431
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Cap-and-trade design assumptions
Full design details of Ontario’s C&T program are not yet
publicly available, so the design elements discussed here are
based on reasonable assumptions made by the Institute.
emissions will be reduced within Ontario’s borders, since the
system is designed to reduce emissions wherever low-cost
abatement opportunities exist.
Emissions caps The Institute set emissions caps in accordance
with the province’s reduction targets for 2020 and 2030. To do
this, the cap was set below the targets in order to account for
emissions from uncapped sectors, such as agriculture, waste,
and small emitters.32
Offsets To comply with C&T, regulated firms can either sur-
render allowances or purchase offsets. The model assumes that
offset opportunities are available in the province’s waste sector.
Auction revenue recycling As the government has indicated,
allowance auction revenues will be reinvested back into the
economy. The Institute assumed that 50 percent of auction
revenue is allocated toward support for households and
50 percent is allocated toward helping firms adopt new lowcarbon technologies and undergo building and industrial
efficiency programs. This distribution is roughly in line with
the allocation of the government’s 2015-16 Green Investment
Fund.33 While the investment is evenly split in the model, this
allocation may change in future years.
Linking with the WCI Under a linked system, each jurisdiction
issues a certain number of allowances for auction. Firms in
the linked regions bid on the same pool of allowances under a
combined system. This creates a WCI-wide price on carbon.
Although each region sets its own total emissions cap, the cap
becomes inter-jurisdictional when the regions link, and thus
the ‘WCI cap’ is equal to Ontario, Québec, and California’s
caps combined. Emissions allowances can flow freely between
the three jurisdictions. Therefore there is no guarantee that
EXHIBIT 6
Allowance price Before linking, the allowance price in Ontario
is $84.13 if support is provided, and $49.98 if support is not
provided. When the systems are linked in 2021, the price falls to
$23.12 (Exhibit 6). If Ontario chooses not to link its C&T system,
the allowance price will continue to rise. This is because
lowest-cost abatement opportunities are performed first, and
then each additional reduction becomes more and more
expensive each year.
From 2017 to 2020, before Ontario is assumed to link, the
allowance price is higher when support is provided to EITE
industries. When EITE support is given, firms are more likely to
stay in the province, which increases the demand for allowances, thus increasing the price.
As seen in the link and link & support scenarios, joining the
WCI drastically reduces the allowance price. In 2021-2023,
the price is nearly $100 lower and only gradually rises through
2030. Since the allowance price reflects the cost of abatement, this reduced price indicates that lower-cost abatement
opportunities exist in other WCI regions. Low-cost abatement
elsewhere reduces the incentive to abate within Ontario, as
firms can buy cheaper allowances rather than incur the costs
of reducing their emissions. As a result, the province ends up
becoming a net importer of allowances.
There are a number of reasons why abatement opportunities
are more expensive in Ontario than in other WCI regions.
While Ontario and Québec both have largely decarbonized
electricity sectors and are net exporters of electricity, California
generates 62 percent of its in-state electricity from fossil fuels.
The state is also a net importer of electricity and a significant
Allowance price forecast under three scenarios (C$ 2016), Ontario, 2017-2030
Scenarios
2017
2018
to
2020
2021
to
2023
2024
to
2026
2027
to
2029
2030
Link & support
37.14
84.13
23.12
27.79
40.35
52.67
Link
33.30
49.98
23.12
No flexibility
33.30
49.98
117.14
27.79
40.35
52.67
---------- No reliable long-term forecast ----------
Note: Shaded values represent the allowance price for the Western Climate Initiative's cap-and-trade system.
Source: Institute for Competitiveness & Prosperity analysis based on data from Californiacarbon.info and modelling from Navius Research.
26
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portion of these imports is generated from fossil fuels. Under
the WCI C&T system, both domestic production of electricity as
well as imports are subject to the cap. By including imported
electricity, California has approximately 90Mt of electricity
sector emissions to tackle, whereas Ontario has about 10Mt.34
Electricity sector emissions are expected to provide the
lowest-cost abatement opportunities, likely making California
the low-cost region. Therefore, reducing emissions from
California’s electricity sector is likely going to be less expensive
than reductions in Ontario.
Support for emissions-intensive and trade-exposed
industries The second flexibility mechanism is support for
EITE industries. Issuing free allowances to at-risk industries
reduces the incentive for firms to relocate production to
regions outside of Ontario and is a major mechanism for
addressing competiveness concerns.
While Ontario and
Québec both have
largely decarbonized
electricity sectors and
are net exporters of
electricity, California
generates 62 percent of
its in-state electricity
from fossil fuels.
The Institute’s expectation regarding support levels was guided
by California’s experience. In the initial years of Ontario’s
program, it is assumed that all EITE firms are allocated enough
allowances to cover 100 percent of their expected emissions
(Exhibit 7). The level of support is slowly phased out over time
as firms are given time to adapt (replace capital, adopt more
efficient technologies, switch fuels, electrify processes, etc.).
Although firms will receive allowances for free, they will still
have an incentive to abate because of the ability to sell their
excess allowances to others for profit. According to the Ontario
government’s Cap and Trade Program Design Options, there is
an intention to provide support to EITE industries starting in
2017 and to link with the WCI by 2021 (possibly sooner).35 For
these reasons, the most likely of the three scenarios is the one
in which Ontario links its C&T program with the WCI and
supports EITE industries, called ‘link & support’ in our analysis
(and highlighted with a red box throughout the exhibits).
EXHIBIT 7
Percent of emissions covered by free allowances, Ontario, 2017-2032
Sector
Low risk of carbon leakage
2017
2018
to
2020
2021
to
2023
2024
to
2026
100
100
50
30
2027
to
2029
0
2030
to
2032
0
Medium risk of carbon leakage
100
100
75
50
30
0
High risk of carbon leakage
100
100
100
100
75
50
Note: 100 percent support would mean that firms are allocated enough allowances to cover expected emissions (either based on historical emissions, or an output benchmark).
Source: Institute for Competitiveness & Prosperity.
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Cap-and-trade reduces
GHG emissions
2030 target Meeting Ontario’s 2030 target
In the absence of C&T (BAU), Ontario’s
economy is projected to grow at an average
annual rate of 2.08 percent between 2015 and
2030. Together with population growth, this
drives a 0.58 percent annual growth in the
province’s emissions. This represents a
decoupling of Ontario’s economic growth from
GHG emissions and is due to existing climate
policies, more robust growth in the service
sector relative to the goods-producing sector,
as well as technological change at the household and firm levels. However, even with the
vehicle and building standards, renewables
target, and nuclear refurbishment schedule,
the decoupling is not enough to ensure that
Ontario meets its reduction targets. Without
C&T, Ontario’s emissions rise to 177Mt in
2020 and 183Mt in 2030.
requires that the province reduce its emissions
by 69Mt below its BAU forecast, down to
114Mt. If Ontario provides no flexibility, it
narrowly misses its target and achieves its
reductions purely through domestic
abatement.36 In this case, Ontario undergoes a
significant low-carbon technological transformation which dramatically reduces emissions.
Under link and link & support, Ontario is
unable to meet its 2030 target because
firms are able to import cheap allowances,
which reduces the incentive to abate. Since
Ontario is the high cost region, linking reduces
the cost of compliance. Unfortunately, Ontario
does not meet its target when operating in a
linked system.
2020 target Meeting Ontario’s 2020 target
requires that the province reduce its emissions from 177Mt to 155Mt. In all three C&T
scenarios, before Ontario links with the WCI,
the province is able to meet its 2020 target
through domestic abatement (Exhibit 8).
EXHIBIT 8
Emissions forecast under different scenarios, Ontario, 2000-2030
Emissions
(Mt CO2e)
Historical
250
Forecast
200
183 BAU
166 Link & support
162 Link
Target
155
150
120 No flexibility
Target
114
100
50
0
2000
2005
2010
2015
2020
2025
2030
Source: Institute for Competitiveness & Prosperity analysis based on modelling from Navius Research.
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Ontario’s cap-and-trade program
reduces global emissions
The design of Ontario’s program has a powerful influence on emissions in both Ontario and
other jurisdictions. Depending on the design,
emissions in other jurisdictions will either
increase or decrease. When looking at the
effectiveness of Ontario’s program, one must
evaluate the reductions achieved both within
and outside the province.
under link & support results in 61Mt of global
reductions, the greatest amount of all scenarios.
The link scenario produces less desirable
results. With no support, some EITE firms’
activities relocate to other regions, resulting in
6Mt of carbon leakage.
If Ontario provides no flexibility, the allowance
price rises to an extent that induces significant
technological change within the province. As a
result, Ontario reduces its emissions by 64Mt
(relative to BAU in 2030). However, due to the
stringency of the system, many EITE industries
(primarily non-metallic minerals, metals, and
chemical industries) relocate to regions with
less stringent climate policies. This is suboptimal for Ontario’s economy and the global
environment. By 2030, 24Mt of emissions and
associated economic activity leave the province.
This leakage represents a relocation of
Under all three C&T scenarios, global emissions are reduced (relative to BAU) (Exhibit 9).
Global emissions include both Ontario’s emissions as well as those outside of its borders.
Although fewer reductions occur within
Ontario in the link & support scenario, more
occur in other WCI regions and there is less
carbon leakage to places with weaker or nonexistent climate policies. Ontario’s program
EXHIBIT 9
Impact of Ontario’s cap-and-trade program on global emissions, by region, 2030
Emissions
(Mt CO2e)
Other regions
(carbon leakage)
Ontario
CA & QC
Increases
30
20
24
10
0
-10
3
-17
6
BAU-level
emissions
(baseline)
-21
Reductions
-20
-30
-40
-64
-47
-43
-50
-60
-70
Link & support: 61 Mt
global reductions
Link: 58 Mt
global reductions
No flexibility: 40 Mt
global reductions
Note: Global reductions are calculated as the sum of reductions in Ontario, California, and Québec plus the rise in emissions in other jurisdictions
(carbon leakage).
Source: Institute for Competitiveness & Prosperity analysis based on modelling from Navius Research.
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emissions rather than a true reduction. In the
end, Ontario’s policy under no flexibility is
only effective at reducing global emissions by
40Mt, much lower than in the optimal
scenario (link & support).
Overall effectiveness on GHGs
If the province’s primary goal is to fight
climate change, link & support is the optimal
program. Although Ontario fails to meet its
2030 target under this scenario, the policy
works to reduce global emissions and the
impact on the province’s economy is minor.
In the global fight against climate change,
it should not matter where emissions
reductions are achieved. Ontario can look to
complementary policies (see Chapter 4) to
close the gap on its own emissions. By linking
and providing support, Ontario’s policy
achieves its environmental goal.
EXHIBIT 10
Cap-and-trade’s effect on the
economy depends on its design
By using the flexibility mechanisms of link &
support, C&T can achieve its environmental
goal while having only a minor effect on
the economy.
Economic growth
In the absence of C&T (BAU), Ontario’s
economy is projected to grow at an average
annual rate of 2.08 percent from 2015 to
2030. C&T reduces this rate to between 1.90
and 2.05 percent depending on the design
parameters (Exhibit 10). For perspective, in
the first year of the program, C&T will reduce
Ontario’s GDP by between $140 million (link &
support) and $1.12 billion (no flexibility).
By 2030, a C&T system with no flexibility
reduces the province’s GDP by 2.60 percent,
or $18 billion (Exhibit 11). Most of this loss can
be addressed through linking with the WCI
market and providing support to at-risk
industries. In 2030, Ontario’s GDP under the
link & support scenario is $701 billion dollars,
only slightly (0.35 percent, or $2 billion)
below the BAU scenario.
GDP growth rate under four scenarios, Ontario, 2015-2030
Average annual
GDP growth rate (%)
2.4 %
2.2
2.08
2.05
2.04
2.0
1.90
1.8
1.6
1.4
1.2
1.0
BAU
Link & support
Link
No flexibility
Source: Institute for Competitiveness & Prosperity analysis based on modelling from Navius Research.
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Ontario’s program under link &
support results in 61Mt of global
reductions, the greatest amount
of all scenarios.
The benefits of supporting EITE industries begin in the first
year of Ontario’s program; whereas the benefits of linking
begin in the 2021-2023 WCI compliance period when linking
is assumed to begin. Since linking provides substantial
benefits, Ontario should join the WCI C&T market as soon as
possible. This will cause benefits to begin to accrue in 2017 or
2018, rather than 2021.
If designed optimally, Ontario can maintain robust economic
growth while reducing emissions under C&T. In link &
support, firms in Ontario are able to import cheap allowances
rather than face high abatement costs that would exist in an
unlinked system, allowing Ontario’s firms to remain competitive. Combined with EITE support, this policy design allows
carbon leakage to be minimized and Ontario’s GDP to remain
almost unchanged.
EXHIBIT 11
GDP forecast under four scenarios, Ontario, 2015-2030
GDP
($2002 billion)
$750
703 BAU
701 Link & support
700
699 Link
685 No flexibility
650
600
550
500
450
2015
2020
2025
2030
Source: Institute for Competitiveness & Prosperity analysis based on modelling from Navius Research.
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Cap-and-trade reduces emissions
across all covered sectors
Emissions reduction opportunities exist across
all sectors. However, the cost of abatement
varies by sector, firm, and household. The
Institute finds that under C&T, GHG emissions
are reduced across most sectors (Exhibit 12).
Emissions reductions under no flexibility
In the no flexibility scenario (where Ontario
does not link with the WCI or provide support
to at-risk industries) the carbon price rises and
contributes to significant decarbonization
across most sectors. The carbon price becomes
high enough to render natural gas power plants
uncompetitive with nuclear and renewables. As
a result, all natural-gas-fired electricity facilities
are shut down, leading to a complete decarbonization of the electricity sector by 2030.
induces firms to adopt low-carbon technologies as they turn over their capital stock.
There is a significant degree of fuel-switching
away from fossil fuels and toward electricity.
However, many of these reductions occur
because heavy emitters leave the province.
Nevertheless, emissions are cut by nearly 30Mt
in this sector alone.
Emissions reductions under a flexible
cap-and-trade system
Emissions reductions in Ontario in a linked
system are more moderate due to the lower
carbon price. The moderate carbon price (in
the link and link & support scenarios) pushes
up the price of electricity generated from
natural gas. This causes a shift toward more
renewables and emissions from the electricity
sector fall by 2Mt (link & support) or 3Mt (link).
In the buildings sector, households and firms
undergo a significant transition away from
natural gas, and toward electricity – reducing
14Mt of emissions in 2030.
In the transportation sector, the carbon price
induces some switching to electric vehicles,
and some mode-switching to alternative forms
of transportation. However, the reductions are
not very significant.
The most significant reductions occur in
the industrial sector. The high carbon price
For buildings, the carbon price in a linked
system is not high enough to induce a
EXHIBIT 12
Emissions by sector under four scenarios, Ontario, 2030
Emissions
(Mt CO2e)
BAU
Link & support
Link
No flexibility
70
60
50
40
30
20
10
0
Transportation
Industry
Buildings
Electricity
Agriculture
Waste
Note: Emissions reporting does not follow the North American Industrial Classification System (NAICS). Instead, jurisdictions typically report
their GHG emissions according to the six sectors above.
Source: Institute for Competitiveness & Prosperity analysis based on modelling from Navius Research.
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significant transition away from natural gas
and toward electric heating.
In the industrial sector, firms achieve over 7Mt
of reductions in 2030.
Across all sectors, the main difference between
the two linked scenarios is that when support
is given to EITE industries, firms are more
likely to stay in the province. As a result, their
associated GDP and emissions also stay.
Finally, in all three scenarios, 8Mt of reductions are achieved through the purchase of
offsets in the waste sector.
C&T induces a slight shift in industrial
composition toward services
To an extent, C&T policies are expected to
induce a shift in an economy’s industrial
composition. Typically, less carbon-intensive
industries will be favoured at the expense
of more carbon-intensive industries and this
normally means a shrinking of the goodsproducing sectors. However, this effect
is reduced when support is given to EITE
industries and firms are able to import lowcost allowances.
EXHIBIT 13
Based on the modelling results, C&T is likely
to cause only a slight restructuring of Ontario’s
economy. It should be noted that the restructuring caused by C&T (if the link & support
design is adopted) is small in comparison to
the industrial shifts that have been occurring
across the economy over the past couple of
decades, as well as the forecasted shifts in the
BAU scenario.
From 2002 to 2014, the manufacturing sector’s
share of provincial GDP fell by 9.3 percentage
points and is expected to fall by an additional
2.6 percentage points by 2030 in the BAU
scenario. In comparison, C&T is only expected
to reduce the manufacturing sector’s share by
an additional 2.6 (no flexibility), 0.5 (link), or 0.2
(link & support) percentage points. Therefore,
if the manufacturing sector continues to contract
over the next fifteen years, most of this will be
attributable to industrial shifts, and not C&T.
From 2015 to 2030, even in the absence of
C&T, the composition of the economy
shifts toward the service sector (Exhibit 13).
This shift is almost identical in magnitude
between the BAU, link & support, and link
scenarios; by 2030, between 83.1 and
Goods and services sectoral composition under four scenarios, Ontario, 2030
Goods
2015
Services
BAU
Link & support
Link
No flexibility
0
10
20
30
40
50
60
70
80
90
100%
Percent of total economy
Source: Institute for Competitiveness & Prosperity analysis based on modelling from Navius Research.
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83.6 percent of Ontario’s economy will be composed of
services, versus 79.7 percent in 2015. However, if Ontario
provides no flexibility, C&T causes the service sector to grow
to represent 85.6 percent of the economy.
Although the restructuring caused by C&T is minor, the service
sector does grow at the expense of the manufacturing sector.
In terms of GHG emissions reductions, this is beneficial since
one way to reduce the province’s emissions is to produce less
carbon-intensive goods and services. Part of the transition
involves facilitating the growth of low-carbon sectors (including services). This shift is one part of decoupling emissions
from growth.
C&T favours the growth of the service sectors in which Ontario
has low unit labour costs and is internationally competitive. By
implementing a C&T system, Ontario can steer its economy to
where it is most competitive.
Not all sectors are affected equally by cap-and-trade
Carbon pricing increases the cost of firms’ inputs proportionally to their carbon content. Since the carbon intensity of firms’
inputs varies across sectors, C&T will affect the growth of each
sector differently. The Institute analyzed the forecasted GDP
growth of each sector between 2015 and 2030 under the four
scenarios (Exhibit 14).
Resources The resources sector represents about 1.6 percent
of Ontario’s economy and is expected to expand by about
$700 million (in constant 2002 dollars) by 2030 in the absence
of C&T (BAU). In the no flexibility scenario, permit prices rise
significantly, which stifles growth as firms in this sector are
unable to afford the cost of their carbon-intensive inputs.
However, with flexibility (link & support), the sector’s growth
is only reduced by $100 million in 2030.
Utilities The utilities sector represents about 2.1 percent
of Ontario’s economy, which is not expected to change
substantially over the next fifteen years. In both the link and
link & support scenarios, because the carbon price is low,
there is no significant effect on the utilities sector.
However, in the no flexibility scenario, the electricity sector’s
output (watts) and GDP significantly increase. The electricity
sector expands because households and firms switch away
from fossil fuels (whose price has risen drastically as a result of
C&T), to the relatively cheaper form of energy: electricity.
Ontario’s low-carbon electricity sector grows in order to
facilitate the decarbonization of other sectors. By 2030, all
fossil fuel generated electricity in the province is shut down as
34
EXHIBIT 14
GDP by sector under four scenarios, Ontario, 2030
BAU
Change in sector
GDP, 2015-2030
($2002 B)
Link & support
Link
No flexibility
Resources sector
$1.0
0.5
0.0
Utilities sector
$2.0
1.5
1.0
0.5
0.0
Manufacturing sector
$20
15
10
5
0
-5
-10
Service sector
$180
170
160
150
140
130
120
110
100
Source: Institute for Competitiveness & Prosperity analysis based on modelling
from Navius Research.
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it is no longer competitive with renewables and nuclear power.
Although in this scenario C&T aids Ontario’s transition to a less
carbon-intensive economy, it comes at the cost of a significant
reduction in GDP across other sectors.
Manufacturing The manufacturing sector represents about
16.6 percent of Ontario’s economy. In the absence of C&T
(BAU), the manufacturing sector’s GDP is expected to increase
by $12.6 billion by 2030. However, an inflexible C&T system
will have serious ramifications for this sector. If Ontario
implements a C&T system with no flexibility, the sector’s GDP
will contract by $7.5 billion ($20.1 billion below BAU). This
would be felt across almost every manufacturing sub-sector
since these are heavy users of carbon-intensive inputs.
Ontario’s manufacturing sector is always in competition with
its neighbours to attract investment, and a high carbon price
could potentially deter future investors. The impacts on the
manufacturing sector would be even more drastic had the
province’s electricity sector not been decarbonized over the last
decade through the coal phase-out.
Although the total effect on the manufacturing sector is
negative in the link & support scenario (GDP is $1.5 billion
below BAU), certain manufacturing industries perform better
as a result of C&T (Exhibit 15). Ontario’s transportation
equipment manufacturing sub-sector, which includes the
motor vehicles and parts manufacturing industry, performs
better under both C&T scenarios where the province links with
EXHIBIT 15
the WCI. This is because the transportation equipment
manufacturing sub-sector is not carbon-intensive. The
GHG/GDP ratio in this sector is lower than the economy’s
average; therefore, just like the service sector, economic
activity shifts in its direction. This is consistent with the finding
that C&T favours the growth of less carbon-intensive industries
at the expense of carbon-intensive industries.
Services The service sector represents about 79.7 percent of
Ontario’s economy. Much of the current dialogue surrounding
climate policy overlooks the effects C&T will have on the
province’s largest sector. The modelling shows that, under all
scenarios, the service sector is forecasted to grow by between
$170.6 and $173.8 billion by 2030.
The Institute’s analysis shows that program design will
significantly influence the impact C&T will have on
Ontario’s emissions and competitiveness. While some
sectors will experience challenges under the program, the
overall economic impact is expected to be minimal if
Ontario links with the WCI market and provides support to
at-risk industries. Ontario’s strong service sector is poised
to help the province’s low-carbon transition. With the right
design elements, Ontario can decouple economic growth
from emissions and achieve the global emissions reductions necessary to fight climate change.
Manufacturing sector GDP under four scenarios, Ontario, 2030
Change in sector
GDP, 2015-2030
($2002 B)
BAU
Sector
Link & support
Link
No flexibility
Sub-sectors
$16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
Total manufacturing
Heavy manufacturing
Transport equipment
Other manufacturing
Source: Institute for Competitiveness & Prosperity analysis based on modelling from Navius Research.
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CHAPTER 4
THE TRANSITION
AHEAD
C
ap-and-trade will not be enough to meet
Ontario’s emissions targets. If meeting
the target is deemed a priority, the
province must find additional abatement
opportunities through complementary policies.
However, not all policies are compatible with the
program. It is useful to look at other jurisdictions
that have decoupled economic growth from
greenhouse gas emissions for best practices.
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Not all carbon policies are compatible with
cap-and-trade
The Institute’s analysis shows that although C&T is effective at
reducing global emissions, Ontario will miss its targets under
the proposed C&T system. Ontario must take further action to
meet its ambitious 2030 and 2050 targets. Some of Ontario’s
existing climate change policies may be overlapping (targeting
the same emissions), reducing the effectiveness and efficiency
of each individual policy (see Complementary Policies).
Consequently, Ontario needs to review its emissions reduction
policies to align with these objectives.37
For instance, a policy that subsidizes renewable energy
generation to Ontario’s grid, such as the Feed-in-Tariff program
(FIT), overlaps with C&T. The existence of the FIT program
distorts emitters’ choices for reduction, thus driving up the
cost of abatement.38 The FIT program could target emissions
reductions in the electricity sector when this might not
necessarily be where the lowest cost opportunities exist.
Complementary policies
must operate efficiently
with the incoming
cap-and-trade program.
Complementary policies address market
failures and reduce emissions
There are three ways that complementary policies can improve
the overall effectiveness of Ontario’s climate strategy.39
Resolving market failures In general, homeowners and
businesses do not have perfect information about future
energy prices and the payback periods associated with making
building retrofits. Unfortunately, C&T does not provide further
certainty on these elements. As a result, additional polices are
needed to incentivize individuals to undertake these actions.
Research and development (R&D) also brings numerous
economic benefits by promoting innovation and generating
positive spin-offs for other firms (known as externalities). C&T
will not necessarily incentivize low-carbon R&D investment.
Governments are encouraged to incentivize low-carbon R&D,
as they would any other R&D, to enhance both productivity
and their climate change objectives.
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COMPLEMENTARY POLICIES
Electric vehicles
Building retrofits
Emissions from personal vehicle use is a concern in Ontario, as
they constitute the fastest-growing emissions in the transportation sector.40 Population growth will exacerbate this trend. One
way to reduce transportation sector emissions is to reduce the use
of personal vehicles, in favour of public transportation and/or
cycling. However, changing citizens’ behaviour requires significant
investments in infrastructure, is challenging, and takes time. It is
unlikely that government policies will suffice to shift the behaviour
of millions of Ontarians away from personal vehicle use and toward
public transit or cycling. Investing in electric vehicles (EVs) and EV
infrastructure is likely to have the largest impact on emissions
today because it does not require Ontarians to change their
personal vehicle behaviour.
In Ontario, natural gas supplies the majority of the energy used
to heat space and water in residential, commercial, and
institutional buildings.45 This is problematic since natural gas
is more carbon-intensive than the province’s electricity.
Furthermore, Ontario’s population is rising, meaning that demand
for space and water heating will also rise. Changing the fuel
inputs will reduce emissions from buildings and can help Ontario
meet its emissions targets.
One of Ontario’s approaches to tackling transportation emissions
is to make EVs more affordable and increase the number of
charging stations.41 The Institute supports these policies since the
purchase of EVs through rebate programs has shown to be highly
effective in driving sales in Canada, especially in Québec and
British Columbia.42 The province launched its vehicle incentive
program in 2010. However, these rebates can be made more
effective by building a comprehensive EV charging infrastructure
throughout the province. Ontario’s EV infrastructure lags Québec
and British Columbia, since these provinces began making
investments several years before Ontario. In 2016, the province
announced a grant program of $20 million to build EV charging
stations across the province over the next 12 to 16 months.43
According to many EV stakeholders, this is Ontario’s first substantial push toward increasing infrastructure for EVs.
Incentives can move beyond financial rebates to include access to
priority lanes on highways, either through high-occupancy vehicle
(HOV) or toll lanes. Encouragingly, the province already provides
green license plates for EV drivers, allowing them access to HOV
lanes in Ontario.44 EV drivers could also receive special parking
access at major centres or parking lots.
That said, the province needs to place a higher priority on public
education and marketing of EVs. Although there is choice in the
market place, consumers do not have perfect information about
the benefits and availability of EVs. Automotive companies have
not invested nearly as much into marketing and promoting their
EV fleets and there is much myth-busting to be done on the public
perception of these vehicles (e.g., that they use more energy, are
not practical as a primary vehicle, are less safe). If the government intends to make EVs its key transportation policy focus for
a low-carbon economy, they ought to also consider their role in
educating Ontarians.
38
C&T will work over time to incentivize low-GHG-intensity energy
production. However, the province must further invest in areas
that will encourage the transition away from natural gas. Energy
storage is one option. Because renewable energies are intermittent (such as wind and solar), it is necessary to capture surplus
energy for times when there is peak energy demand. There are
numerous ways to store energy: at the generation site, within the
grid, or at a customer’s site.46 The province’s Long-Term Energy
Plan mandated 50MW of energy storage to be introduced in the
province.47 The Ministry of Energy should specify how it intends to
achieve this storage capacity since no update has been provided
as to the progress toward this goal.
Businesses and homeowners must be incentivized to undertake
energy efficiency retrofits. Any programs introduced – for instance
through the Green Investment Fund announced in February 2016 –
must reduce information barriers and the uncertainty regarding
payback periods.48 Unfortunately, the government’s announcement
included no such details, leaving businesses and homeowners
unsure of how the program will be implemented and affect them.
Past experience with the federal government’s ecoENERGY
retrofit incentive illustrated the power of financial incentives.49
Ontario residents undertook energy audits at a significantly
increased rate when the program was in operation.50 There were
close to one million pre-retrofit evaluations and 700,000 postretrofit evaluations done, resulting in an average energy savings of
19 percent.51 Under the program, homeowners could hire any
certified energy advisor licensed by Natural Resources Canada to
perform their evaluation.
Since its cancellation in 2012, regional programs have continued,
and recently, Ontario’s largest natural gas utilities have been
tasked with demand-side management programs. It is not quite
clear why this is the case as this may create a conflict of interest.
Why would a natural gas distributor encourage its customers to
install an electric water heater or electric furnace? The Institute
recommends that Ontario modify its program in future years to
allow audits from all certified energy advisors.
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Low-cost allowances The second reason for pursuing comple-
mentary policies is to encourage short-term infrastructure and
capital stock investments that reduce emissions. This creates an
incentive when the price signal is still low in the short term.
When the carbon price is low, fossil fuel energy and less
efficient capital may be more cost-effective than low-carbon
options. This is not desirable for building a low-carbon
economy since it ‘locks-in’ inefficient infrastructure. The
government should incentivize low-carbon infrastructure
through complementary policies.
By investing in energy storage and ensuring
proper design of energy retrofit programs,
Ontario can achieve further emissions
reductions from the buildings sector. This is
an important feat in order to meet Ontario’s
GHG reduction targets.
Cover uncapped emissions Complementary policies can bring
about additional emissions reductions if they target emissions
that are not covered by the C&T system. The two policy areas
for immediate government focus are transportation and
buildings. Emissions from these two sectors have been increasing and measures are needed to reverse this trend. Targeting
emissions from small emitters and the waste and agricultural
sectors would also be beneficial for Ontario, as these sectors
will not be covered under C&T.
Sweden and California demonstrate
possibilities for Ontario’s future
Offsets from uncapped sectors
Ontario’s C&T program is expected to cover
about 82 percent of provincial emissions.
Emissions from small producers (those emitting
less than 25,000 tonnes of CO2e per year),
agriculture, and waste are not likely to be
covered. Offsets are a great complement to
C&T because they apply to the sectors that
C&T misses, thereby providing the opportunity
to identify lowest-cost abatement across the
entire economy.
The Institute’s modelling assumes that landfill
gas capture in the waste sector will be eligible
as an offset. Firms in Ontario could cover their
emissions by either surrendering allowances
to the Ontario government, or by purchasing
offsets from the waste sector. In all three C&T
scenarios, Ontario achieved 8Mt of reductions
in the waste sector, illustrating that offsets are
a cost-effective way to reduce emissions. By
allowing offsets in the agricultural and waste
sectors, Ontario can make compliance with the
cap less costly, and ensure that more emissions
reductions occur within the province.
Jurisdictions abroad demonstrate possibilities for Ontario’s
low-carbon future. Sweden and California are two economies
of relevance to Ontario. One has achieved the highest carbon
price in the world while maintaining economic growth, and
the other has achieved a stronger GDP growth rate than the
national average while under C&T.
Sweden has decoupled economic growth from emissions
Sweden offers important climate policy lessons for the
province, as its economy bears many similarities to Ontario’s.
Both have similar population densities, climates, industrial
composition, and electricity generation mixes (Exhibit 16).
Sweden introduced a carbon tax in 1991 which has continuously become more stringent over time to approximately
$129 USD.52 The country’s overall emissions have fallen by
almost 24 percent since 1990, while emissions intensity per
unit of GDP has also been reduced.
The stable and predictable carbon pricing policy is undoubtedly to thank for the country’s transformation, but a number of
other programs have also been foundational. Introduced in
2003, the Green Electricity Certification system increases the
production of renewable electricity to level the playing field
with fossil fuel energy. The certification process provides
financial support for the production of electricity from
renewable energy sources and is applied in both Norway and
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EXHIBIT 16
Economic prosperity and GHG reductions can exist together
SWEDEN
CALIFORNIA
ONTARIO
GHG EMISSIONS
OVERVIEW (all data is for 2013)
Total population
9.6 million
38.4 million
13.6 million
0.1%
1.0%
0.4%
Share of global emissions
Total emissions
(Mt, 1990 and 2013)
72
Emissions per capita (tonnes)
GDP per capita (USD)
Emissions intensity
(tonnes/USD $1 million GDP)
Emissions by sector (% of total)
12%
56
433
459
182
5.8
12.0
12.6
$60,282
$57,791
$49,491
97
207
254
3%
8%
2%
6%
Electricity & Buildings
35%
37%
21%
28%
Industry
Waste
5%
33%
Transportation
Agriculture
171
33%
19%
32%
26%
FACTORS AFFECTING
ABATEMENT
Emissions reduction targets
(% below 1990 levels):
2020
2030
2050
40
N/A
100
Climate challenges
Cold winters
15%
Electricity generation mix
(% of total)
Cold winters and
hot summers
Hot summers
71% services
27% goods
2% agriculture
Industrial composition
15
37
80
0
40
80
82% services
17% goods
2% agriculture
4%
77% services
22% goods
1% agriculture
6%
21%
10%
24%
Fossil Fuels
Nuclear
34%
Hydro
Renewables
47%
8%
62%
60%
9%
Cleantech
353 companies, 42 with patents
2,032 companies, 298 with patents
377 companies, 40 with patents
Carbon price (2015, USD)
Carbon tax (est. 1991): $129.60;
EU ETS (est. 2005): $5.33
WCI cap & trade (est. 2012): $13.24
WCI cap & trade (est. 2017): TBD
Source: Institute for Competitiveness & Prosperity analysis based on data from various sources, please visit the online appendix at competeprosper.ca.
40
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Sweden.53 It has also encouraged the development of the biofuel industry, enabling Sweden
to cut its emissions from transportation and
buildings.54
The country further mandates gas station
operators to offer at least one type of alternative fuel to consumers under the Act on the
Obligation to Supply Renewable Fuels.55 These
measures have substantially increased the use
of biofuels for personal transportation.56
Sweden is also moving toward a zero-waste
economy. The country burns household waste
and turns it into energy, rather than letting
it sit in a landfill releasing CO2 and methane
(both of which are GHG emissions).57 Sweden
has 32 incineration plants for energy recovery.
In the south of the country, about 40 percent
of households receive their energy from waste.
There are some GHG emissions associated
with incinerating waste, but the intensity is
much lower than the use of fossil fuel energy,
and the government has regulated strict
emissions clean-up policies for all of its wasteto-energy facilities.
California’s economic growth is outpacing
the national average
As a current WCI member and future emissions trading partner, California’s experience
is relevant for Ontario. Under C&T, California
has grown its service sector. The state achieves
lower emissions intensity per unit of GDP
than Ontario and lower emissions per capita.
California shows that this industrial shift is
not economically damaging, and sheds light
on how Ontario’s economic composition may
shift in the coming years as a result of C&T.
The state was transparent in its program
launch because it released its free allowance
schedule for EITE industries for the following
eight years. This allowed businesses and
investors to make future plans and can be
viewed as a best practice in C&T design.
Other policies, such as California’s imported
coal-phase out, hydrofluorocarbon phase out,
light-duty vehicle efficiency standards, and
its strategic plan for efficient buildings, will
help drive emissions reductions in the coming
years, so long as their interaction with C&T
is examined closely and policies are adjusted
accordingly.60
Sweden and California illustrate that
carbon pricing can facilitate a decoupling
of economic growth from emissions and
provide insight into how Ontario can
implement and complement its program.
The Institute recommends that Ontario
focus on reducing emissions in the most
efficient way possible. Although C&T is an
essential tool for the low-carbon transition,
complementary policies such as electric
vehicle infrastructure and incentives, and
building retrofit rebates must be used
strategically to address market failures and
incentivize investments when the carbon
price is still low.
California has grown its economy while
becoming more efficient under carbon pricing.
Since introducing C&T in 2012, both GDP and
employment have grown faster than the
national average. California’s average
annual GDP growth from 2012 to 2014 was
2.4 percent, compared to the national average
of 1.8 percent.58 Average annual employment
growth was 3.0 percent, compared to the
national average of 1.8 percent.59
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RECOMMENDATIONS
BUILDING
ONTARIO’S
LOW-CARBON
FUTURE
T
he Institute proposes ten ways the
government can successfully achieve
its climate change goals. These actions
will ensure the greatest emissions
reductions while providing the best outcomes
for the provincial economy.
42
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CAP-AND-TRADE DESIGN
Link with the WCI as soon as possible
The Ontario government has stated its intention to link with
the WCI in 2021 or earlier. The province should strive to link as
soon as possible to capitalize on the advantages of linking in
2017 or 2018, rather than in 2021. Although this short time
frame is ambitious, it will provide tremendous economic benefits.
Linking with the WCI is the most efficient way to reduce
emissions while maintaining robust economic growth. When
Ontario links with the larger market, it is less likely to meet its
own subnational GHG emissions targets, but emissions
reductions are instead jointly met throughout California,
Québec, and Ontario. A linked system offers expanded
opportunities to find the lowest cost abatement across firms,
sectors, and regions. At the same time, linking reduces
competitiveness risks for Ontario’s firms. Overall, the analysis
shows that linking provides the best outcomes for Ontario’s
economy and the environment.
Maintain support for at-risk industries in the short to
medium term
Ontario should provide support to its emissions-intensive and
trade-exposed sectors for at least the next four years. Without
these supports, Ontario experiences carbon leakage. When
support is provided, Ontario’s average annual GDP growth rate
is higher and more global emissions are reduced.
Allow offsets in the agricultural and waste sectors
The Ontario government should allow regulated firms to
utilize domestic offset projects undertaken by the province’s
uncapped sectors. The Institute’s analysis shows that
purchasing ‘made-in-Ontario’ offsets reduces the province’s
emissions by 8Mt. Permitting a variety of offsets from agriculture, waste, and forestry sectors provides many benefits. It
provides firms with an additional option for complying with
the C&T system, as well as another channel for the province to
reduce emissions. Although C&T covers about 82 percent of
the economy, including uncapped sectors brings this number
closer to one hundred. Involving more stakeholders will help
develop the province’s capabilities for a lower-carbon future.
Allocate a greater percentage of cap-and-trade’s
revenues toward businesses
In future years, a greater percentage of C&T’s revenues
(estimated to be around $1.9 billion per year) should be
reinvested to help firms invest in energy efficiency and lowcarbon technologies. Ontario’s 2015-16 Green Investment
Fund is poorly allocated: only 31 percent ($100 million) is
targeted to help firms. Addressing competitiveness concerns
is paramount for a successful C&T program. If Ontario’s firms
are not properly equipped to reduce emissions, they will see
their compliance costs rise, and may be enticed to relocate
production to regions with less stringent climate policies.
Depending on how quickly climate policies are introduced in
competing jurisdictions, the phase out of support beyond the
fourth year can either be accelerated (if other jurisdictions
introduce carbon pricing), or extended (if other jurisdictions
continue to lag). Doing so will provide certainty for firms and
flexibility for government.
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COMPLEMENTARY POLICIES
Conduct a review of existing emissions reduction policies
Ontario must conduct a review of all GHG reduction policies
to ensure they will operate efficiently with the incoming C&T
program. The primary benchmark is whether the policy allows
emissions to be achieved at the lowest possible cost. The
government must ensure that complementary policies meet
at least one of the following three criteria: address a market
failure, incentivize behavioural or technological change when
the allowance price is still low, and/or cover emissions from
uncapped sources. If a complementary policy does not meet
any of these objectives, it will likely raise the cost of abatement,
rendering the combination of carbon policies inefficient. If this
is the case, the province must alter or repeal these policies.
Refocus the province’s industrial policies
Government initiatives must be reoriented to help Ontario
excel in its strengths. Trends in the economy are shifting in
favour of the service sector, and will be strengthened by
C&T. Ontario’s service sector is forecasted to grow by over
$170 billion by 2030 and will soon account for over 80 percent
of GDP. Outside of Ontario, trade in services is continually
being liberalized and the demand for low-carbon goods and
services is likely to increase as other economies seek to reduce
their emissions. These factors will increase the global demand
for Ontario’s services relative to its goods.
It is time that industrial policies – such as business supports,
cluster strategies, and accelerated capital cost allowances – be
focused on the sectors of tomorrow’s economy. Unfortunately,
business supports are still disproportionally targeted to assist
companies in the goods-producing sectors.61 Refocusing initiatives will help grow the sectors that are compatible with a less
carbon-intensive future, and also where Ontario is most competitive.
44
Encourage electric vehicle adoption
Ontario should stay the course with its electric vehicle (EV)
infrastructure investments in order to bring the province in
line with investments made in B.C. and Québec. It should then
continue to properly educate the public on the location of
charging stations throughout the province, the benefits of EVs,
the rebate programs available, and ensure that myth-busting
around EVs is conducted.
Modify the ‘Helping Homeowners Save Energy’ program
The Ontario government has allocated $100 million of its
2015-16 Green Investment Fund toward helping homeowners
save energy and money through home retrofits. The program
intends to help owners identify cost-effective opportunities
for air sealing, insulation, installing ENERGYSTAR windows,
or to purchase more efficient water heaters and furnaces.
The program is to be administered by the province’s two
largest natural gas distributors, Union Gas and Enbridge
Gas Distribution.
Without a price on carbon, gas appliances may be more
efficient and less expensive than electric ones; but as the
carbon price increases over the years, electric-powered
appliances may be the superior investment. Since it is not clear
why the province has chosen to limit home evaluations to these
two companies, and there may be a conflict of interest, the
Institute recommends that the province modify the program to
allow audits from all certified energy advisors. This will create
opportunities for homeowners who rely on electric heating to
benefit from the program and find efficiency improvements.
It will also help homeowners transition away from natural gas
if they chose to do so.
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EDUCATION AND OUTREACH
Inform the business community about cap-and-trade
details early
Before the end of 2016, Ontario must communicate two key
elements to the business community: to what extent they are
considered at-risk of carbon leakage and for how long they will
receive free allowances (if any).
Both elements are essential in order to address leakage
concerns and to allow firms to be able to plan long-term
investments. This is in line with California’s approach which
has been widely praised by the business and policy communities for being transparent. California provided a detailed list of
industries and support levels upfront for the next eight years.
Educate the public about cap-and-trade
It is the duty of the government to educate the public on the
complexities of the C&T program. The public needs to understand the difference between Ontario’s emission’s targets and
the WCI’s emissions targets. Ontario’s targets may appear
misleading once it links with the WCI, especially since Ontario
is unlikely to meet its own targets, but will contribute to greater
reductions in global emissions. In particular, the regional cap
aspect of linking must be communicated.
The province should include imported abatement in its
calculation of provincial emissions reductions and communicate this with other WCI jurisdictions. If Ontario confirms
linkage with the WCI, all public documents which discuss GHG
targets and reductions need to make reference to Ontario’s
progress as well as the WCI’s progress.
In order to achieve its climate change goals, Ontario must
optimally design and implement its cap-and-trade program,
ensure complementary policies are used efficiently, and perform
the necessary outreach to businesses and the public. With
these key elements in place, the province will maintain economic
growth and competitiveness while reducing the greatest amount
of global emissions. Although carbon pricing presents some
economic concerns, implementing these recommendations will
ensure that the policy’s benefits outweigh its costs.
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END NOTES
1
United Nations Framework Convention on Climate Change, Paris Agreement,
2015.
2
Sustainable economic growth is defined as economic growth that can be maintained without having adverse impacts on the environment.
3
Analytica Advisors, Clean Technology Industry Report, 2015, p. 32.
4
Cleantech Group was used as the source for the number of cleantech companies.
This was done to allow for international comparability between Ontario, California,
and Sweden, later in the paper. Source: Cleantech Group, I3 cleantech data, 2016.
5
“The high cost of non-resilient infrastructure,” Next City, September 22, 2014.
6
Ontario Ministry of Finance, “Jobs for today and tomorrow: 2016 Ontario Budget,”
2016.
7
The World Bank, “A wicked problem: controlling global climate change,” September
30, 2014.
8
Melissa Harris, Philip Gass, Anne Hammill, Jo-Ellen Parry, et. al., Towards a low
carbon, climate resilient Ontario: IISD input to MOECC’s climate change discussion
paper, International Institute for Sustainable Development, 2015; Organisation
for Economic Cooperation and Development, Aligning policies for a low-carbon
economy, 2015.
9
The Climate Group, Carbon Pricing, Insight Briefing, May 2013, p. 2.
10 Ian Bruce and Ryan Kadowaki, Keeping Canada’s climate promise, David Suzuki
Foundation, 2014; Sustainable Prosperity, Carbon pricing: investment and the low
carbon economy, 2010.
11 The World Bank, “Pricing Carbon,” accessed January 4, 2016, http://www.worldbank.org/en/programs/pricing-carbon.
12 British Columbia Ministry of Finance, “What is a carbon tax?” accessed January
4, 2016, http://www.fin.gov.bc.ca/tbs/tp/climate/A1.htm; James Rydge,
“Implementing effective carbon pricing,” New Climate Economy Working Paper,
2015, p. 1; The Climate Group, Carbon pricing, 2013, p. 2.
13 The European Emissions Trading Scheme (EU-ETS) is a cap-and-trade system, for
instance.
14 Not all sectors of the economy will be covered by the C&T system. For example,
Ontario’s current program design may exclude waste-from-energy facilities and
landfill emissions.
15 To date under the WCI many EITE firms have been allocated free emission allowances in order to limit the risk of leakage. Source: Lawrence H. Goulder, “Using
cap and trade to reduce greenhouse gas emissions,” Resources for the Future
Backgrounder, December 2010.
16 Dana Krechowicz, “The effect of carbon pricing on low-income households, and its
potential contribution to poverty reduction,” Sustainable Prosperity Background
Paper, May 2011.
17 Chris Bataille, David Sawyer, and Noel Melton, Pathways to deep decarbonisation
in Canada, Deep Decarbonization Pathways Project CA 2015 Report, 2015, p. 24.
18 Unit labour cost denotes the amount spent on labour per dollar of output produced.
A lower unit labour cost is good for attracting business, and being cost-competitive.
Source: Institute for Competitiveness & Prosperity, Fourteenth Annual Report,
Disruptions ahead: The making of a dynamic and resilient Ontario economy,
November 2015.
19 2013 is the latest year of official estimates.
20 1990 is the baseline year against which emissions around the world are measured.
This was determined by the UNFCCC. Source: Environment Canada, National
Inventory Report, 1990-2013 Part 3, Greenhouse gas sources and sinks in
Canada, The Canadian Government’s submission to the UN Framework Convention
on Climate Change, 2015. p. 54; In Canada’s 2015 National Inventory Report
(NIR), Environment Canada was required to use revised UNFCCC reporting guidelines. The revised guidelines altered previous calculations slightly, resulting in higher
than previously reported data for the province’s baseline year as well as others.
The new recorded amount of GHG emissions in 1990 is 182 Mt, not 177 Mt as
previously recorded.
25 Environmental Commissioner of Ontario, Feeling the heat, 2015, p. 29.
26 At time of publishing, no specific date for linking was confirmed. The government
has stated an intent to link as soon as practicable, whether this is in 2017, 2018,
or 2021 is yet to be determined.
27 Gouvernement du Québec, “Western Climate Initiative,” accessed January 7, 2016,
http://www.mddelcc.gouv.qc.ca/changements/carbone/WCI-en.htm.
28 Jurisdictions can be WCI members without participating in the WCI’s C&T system.
29 Gouvernement du Québec, “Western Climate Initiative,” accessed January 7, 2016,
http://www.mddelcc.gouv.qc.ca/changements/carbone/WCI-en.htm.
30 Jurisdictions refer to US states and Canadian provinces.
31 Institute for Competitiveness & Prosperity analysis based data from Passenger
automobile and light truck greenhouse gas emissions regulations, SOR/2010-201,
2016; TransportPolicy.net; Ontario Ministry of Energy; Independent Electricity
System Operator; Ontario Ministry of Municipal Affairs and Housing.
32 The Institute assumed that the C&T program would cover 85 percent of the
economy. Updated information states that the Ministry of the Environment and
Climate Change projects that the program would cover 82 percent of the economy.
33 $192 million of $325 million has been allocated to the residential sector. Source:
Ontario Ministry of Finance, “Jobs for today and tomorrow: 2016 Ontario Budget,”
2016, p. 30.
34 “California Environmental Protection Agency (Air Resources Board), “California
Greenhouse Gas Inventory for 2000-2013 – by Category as Defined in the 2008
Scoping Plan,” 2015; Environmental Commissioner of Ontario, Feeling the Heat,
2015.
35 At time of publishing, the government’s design options were still being discussed
and no particular option was confirmed. Source: Government of Ontario, Cap and
Trade Program Design Options, November 2015.
36 The 2030 target is not guaranteed to be met because there is no true-up in 2030.
Also, firms can bank allowances across compliance periods. Domestic abatement
includes domestic offsets as well.
37 OECD, Interactions between emission trading systems and other overlapping policy
instruments, June 2011.
38 Ann E. Carlson, “Designing effective climate policy: cap-and-trade and complementary policies,” Harvard Journal on Legislation, 2012, Vol. 49, pp. 207-48.
39 Ibid, p. 216.
40 Environmental Commissioner of Ontario, Feeling the heat, 2015.
41 Ontario Ministry of Transportation, “Cars are EVolving,” modified February 12,
2016, accessed March 1, 2016, http://www.mto.gov.on.ca/english/vehicles/electric/index.shtml.
42 Electric Mobility Canada, Parliamentary commission on transportation and the
environment of the Quebec government, January 2015.
43 Ontario Office of the Premier, “More electric vehicle charging stations on the way,”
News Release, December 8, 2015; Personal communication, Ron Groves, Plug n’
drive. DC quick charge stations can charge vehicles from between 10-30 minutes.
44 Ministry of Transportation, “Green license plates,” modified August 18, 2015,
accessed March 2, 2016, http://www.mto.gov.on.ca/english/vehicles/electric/
green-licence-plate.shtml.
45 Ministry of the Environment and Climate Change, Ontario’s Climate Change Update
2014, 2014, pg. 6.
46 Peters Roger and Lynda O’Malley, Storing renewable power, York University and the
Pembina Institute, June 2008.
47 Ontario Ministry of Energy, Achieving balance: Ontario’s long-term energy plan,
December 2013.
48 Michelle Brownlee, Residential energy efficiency savings: Accessing key features of
residential energy retrofit financing programs, Sustainable Prosperity Policy brief,
December 2013.
21 Environmental Commissioner of Ontario, Feeling the heat: Greenhouse gas project
report 2015, 2015.
49 Shawn McCarthy, “Energy-saving program shut down too early, millions in rebates
never paid out,” Globe and Mail, September 28, 2012.
22 In this context, building emissions refer to emissions from the residential, commercial, and institutional sectors. Source: Environmental Commissioner of Ontario,
Feeling the heat, 2015, p. 24.
50 REEP Green Solutions, Climate change discussion paper: Boosting the economy –
turning existing homes and well built homes, 2015.
23 Government of Ontario, Ontario’s Climate Change Strategy, 2015, p. 6.
24 Environment Canada, Canada’s emission trends, 2014, p. 8.
46
51 Natural Resources Canada, CHBA Renovator’s Council, Office of Energy Efficiency,
June 2012, Slide 4, available at http://www.chba.ca/uploads/CRC/June%202012/
NRCan%20Presentation%20-%20June%202012.pdf
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52 Ministry of the Environment Sweden, 20 years of carbon pricing in Sweden 19912011, no date.
53 Swedish Energy Agency and Norwegian Water Resources and Energy Directorate,
The Norwegian-Swedish Electricity Certificate Market, Annual Report, 2013.
54 Government of Sweden, “Energy use in Sweden,” modified January 22, 2016,
accessed February 4, 2016, https://sweden.se/society/energy-use-in-sweden/.
55 If the gas station is large enough, it must offer an alternative fuel. Approximately
two-thirds of all gas stations must comply with this regulation. Source: International
Energy Agency, Energy policies of IEA countries: Sweden 2013 review, 2013.
56 Swedish Parliament Committee on Transport and Communications, The Act on the
obligation to supply renewable fuels – A follow up report, 2009.
57 Government of Sweden, “The Swedish recycling revolution,” modified
September 24, 2015, accessed February 9, 2016, https://sweden.se/nature/
the-swedish-recycling-revolution/.
58 US Bureau of Economic Analysis, Regional Economic Accounts – Annual Gross
Domestic Product (GDP) by State, 2016.
59 Ibid.
60 Jeffrey Greenblatt, “Modeling California policy impacts on greenhouse gas emissions,” Energy Policy, 2015, Vol. 78, pp. 158-72.
61 Institute for Competitiveness & Prosperity, Working Paper 23, A place to grow:
Scaling up Ontario’s firms, January 2016, p. 20.
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PREVIOUS PUBLICATIONS
Annual Reports
FIRST ANNUAL REPORT – Closing the prosperity gap, November 2002
SECOND ANNUAL REPORT – Investing for prosperity, November 2003
THIRD ANNUAL REPORT – Realizing our prosperity potential, November 2004
FOURTH ANNUAL REPORT – Rebalancing priorities for prosperity, November 2005
FIFTH ANNUAL REPORT – Agenda for our prosperity, November 2006
SIXTH ANNUAL REPORT – Path to the 2020 prosperity agenda, November 2007
SEVENTH ANNUAL REPORT – Leaning into the wind, November 2008
EIGHTH ANNUAL REPORT – Navigating through the recovery, November 2009
NINTH ANNUAL REPORT – Today’s innovation, tomorrow’s prosperity, November 2010
TENTH ANNUAL REPORT – Prospects for Ontario’s prosperity, November 2011
ELEVENTH ANNUAL REPORT – A push for growth: The time is now, November 2012
TWELFTH ANNUAL REPORT – Course correction: Charting a new road map for Ontario, November 2013
THIRTEENTH ANNUAL REPORT – Finding its own way: Ontario needs to take a new tack, November 2014
FOURTEENTH ANNUAL REPORT – Disruptions ahead: The making of a dynamic and resilient Ontario economy, November 2015
Working Papers
WORKING PAPER 1 – A View of Ontario: Ontario’s Clusters of Innovation, April 2002
WORKING PAPER 2 – Measuring Ontario’s Prosperity: Developing an Economic Indicator System, August 2002
WORKING PAPER 3 – Missing opportunities: Ontario’s urban prosperity gap, June 2003
WORKING PAPER 4 – Striking similarities: Attitudes and Ontario’s prosperity gap, September 2003
WORKING PAPER 5 – Strengthening structures: Upgrading specialized support and competitive pressure, July 2004
WORKING PAPER 6 – Reinventing innovation and commercialization policy in Ontario, October 2004
WORKING PAPER 7 – Taxing smarter for prosperity, March 2005
WORKING PAPER 8 – Fixing fiscal federalism, October 2005
WORKING PAPER 9 – Time on the job: Intensity and Ontario’s prosperity gap, September 2006
WORKING PAPER 10 – Prosperity, inequality and poverty, September 2007
WORKING PAPER 11 – Flourishing in the global competitiveness game, September 2008
WORKING PAPER 12 – Management matters, March 2009
WORKING PAPER 13 – Management matters in retail, March 2010
WORKING PAPER 14 – Trade, innovation, and prosperity, September 2010
WORKING PAPER 15 – Small business, entrepreneurship, and innovation, February 2012
WORKING PAPER 16 – Making sense of public dollars: Ontario government revenue, spending, and debt, May 2013
WORKING PAPER 17 – Untapped potential: Creating a better future for service workers, October 2013
WORKING PAPER 18 – Taxing for growth: A close look at tax policy in Ontario, October 2013
WORKING PAPER 19 – The realities of Ontario’s public sector compensation, February 2014
WORKING PAPER 20 – Building better health care: Policy opportunities for Ontario, April 2014
WORKING PAPER 21 – Open for business: Strategies for improving Ontario’s business attractiveness, May 2015
WORKING PAPER 22 – Better foundations: The returns on infrastructure investment in Ontario, September 2015
WORKING PAPER 23 – A place to grow: Scaling up Ontario’s firms, January 2016
WORKING PAPER 24 – Licence to innovate: How government can reward risk, February 2016
48
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HOW TO CONTACT US
To learn more about the Institute
please visit us at:
www.competeprosper.ca
Should you have any questions or
comments, you may reach us through
the website or at the following address:
The Institute for Competitiveness & Prosperity is an independent not-forprofit organization that deepens public understanding of macro and
microeconomic factors behind Ontario’s economic progress. Research by
the Institute is intended to raise public awareness and stimulate debate
on a range of issues related to competitiveness and prosperity. It is the
aspiration of the Institute to have a significant influence in increasing
Ontario and Canada’s competitiveness, productivity, and capacity for
innovation. We believe this will help ensure continued success in creating
good jobs, increasing prosperity, and building a higher quality of life. We seek
breakthrough findings from our research and propose significant innovations
in public policy to stimulate businesses, governments, and educational
institutions to take action.
The Institute for Competitiveness & Prosperity
105 St. George Street
Suite 9000
Toronto, Ontario M5S 3E6
Telephone 416 946 7300
Fax 416 946 7606
Copyright © April 2016
The Institute for Competitiveness & Prosperity
ISBN: 978-1-927065-17-4
Jamison Steeve
416 946 7585
[email protected]
RESEARCH DIRECTOR
Dorinda So
416 946 5325
[email protected]
POLICY ANALYSTS
Julia Hawthornthwaite (Project Lead)
416 978 7843
[email protected]
The Institute was formerly the research arm of the Task Force on
Competitiveness, Productivity and Economic Progress established in
2001 by the Ontario Premier, and led by Roger L. Martin. The Task Force
completed its work at the end of 2014. The Institute is now advised by
Ontario’s Panel for Economic Growth & Prosperity, led by Tiff Macklem.
Comments on this report are welcome and should be directed to the Institute
for Competitiveness & Prosperity. The Institute is funded by the Government
of Ontario through the Ministry of Economic Development, Employment and
Infrastructure.
EXECUTIVE DIRECTOR
Should you wish to obtain a copy of one
of the previous publications, please visit
www.competeprosper.ca for an electronic
version or contact the Institute for
Competitiveness & Prosperity directly for
a hard copy.
Jonathan Thibault (Project Lead)
416 946 3503
[email protected]
Erica Lavecchia
416 946 5595
[email protected]
Christopher Mack
416 978 7859
[email protected]
DESIGN
Hambly & Woolley Inc.
www.hamblywoolley.com
Illustration: ©2016 Carl Wiens/i2i art
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WORKING PAPER
APRIL 2016
25
WP 25 TOWARD A LOW-CARBON ECONOMY: THE COSTS AND BENEFITS OF CAP-AND-TRADE
WP 25
TOWARD A
LOW-CARBON
ECONOMY
The costs and benefits of cap-and-trade
ISBN: 978-1-927065-17-4
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