Torontoist Explains: Cap and Trade
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Torontoist Explains: Cap and Trade

Torontoist Explains is a recurring series where we tell you everything you need to know about local issues, ideas, and how things work.

Photo by Linda Edwards from the Torontoist Flickr Pool

Photo by Linda Edwards from the Torontoist Flickr Pool.

I remember hearing about this. What’s it all about?

In April, Premier Kathleen Wynne announced that Ontario would implement a “cap and trade” system to reduce greenhouse gas emissions. This plan will operate under the Western Climate Initiative, a group of Canadian provinces and U.S. states working to combat climate change.

What is cap and trade?

Cap and trade is a market-driven mechanism for reducing greenhouse gas emissions, which come principally from burning fossil fuels such as coal or oil, and are a significant driver of climate change. At a high level, cap and trade regulates how much certain greenhouse gases can be emitted by particular industries or economic sectors. Companies that produce emissions below their allocation are given credits or allowances for the difference, which can be sold to organizations that pollute over their limit. Over time the cap is lowered, meaning companies that don’t reduce their emissions will pay more.

The idea is to provide economic incentive to reduce emissions, as the impending collapse of the human enterprise has provided insufficient motivation.

Why do it?

Digging, drilling, and burning the remains of dead trilobytes creates inexpensive energy but brings with it a host of environmental problems. While we as a society have alternately addressed or ignored relatively benign downsides such as asthma epidemics and acid rain, growing awareness of the risks of climate change are driving more serious action. The provincial Liberals have indicated they want to be at the forefront of that fight. More cynically, the sale of carbon permits is also expected to raise a large pile of money for the cash-strapped provincial government.

What is the Western Climate Initiative?

The Western Climate Initiative began in February 2007, when the U.S. states of Arizona, California, New Mexico, Oregon, and Washington agreed to collectively develop a regional target for reducing greenhouse gas emissions, and to design and implement a market-based program to achieve it.

In 2007 and 2008, Ontario, along with British Columbia, Manitoba, and Quebec, as well as Montana and Utah in the U.S., joined the WCI. All 11 jurisdictions collaborated in the development of the Design for the WCI Regional Program, released in July 2010. However, in 2011, the WCI was largely Canadianized when New Mexico, Arizona, Washington, Oregon, Montana, and Utah all pulled out in favour of the more flexible—and ineffectual—North America 2050 [PDF] environmental initiative. While all remaining participants are expected to implement a cap and trade program by this year, the WCI has no regulatory or enforcement authority.

Is cap and trade better than a carbon tax?

The other common mechanism for reducing greenhouse gases is a carbon tax, which is what it sounds like—placing a price on carbon emissions, paid by the emitting company. Both a tax and cap and trade system have the same goal, which is to reduce greenhouse gases by making it cheaper not to burn than to burn. Carbon taxes have lowered emissions in Sweden and British Columbia with little apparent negative impact on their respective economies, and cap and trade has been successful in the U.S. in reducing sulphur dioxide and nitrous oxide—pollutants that cause acid rain.

Either can be effective depending on a number of variables, including what industries are included and how aggressively targets are set. The key difference is that with a carbon tax the price of carbon is set, and the amount of pollution dependent on whether emitters find cheaper alternatives. With cap and trade the amount of emissions is regulated, and the cost of polluting determined in the market where credits are bought and sold. However, a carbon tax is arguably simpler and less susceptible to manipulation by participating companies and industries.

What will this cost me?

However carbon is regulated, the cost inevitably gets passed on from greenhouse emitters to consumers and taxpayers; it’s been estimated that cap and trade in California has raised the price of gasoline by somewhere around 10 cents a gallon. While the amount of cash that Ontario will pull in from selling permits is uncertain, $2 billion annually is a number that’s being tossed around. Premier Wynne has promised that “the government will reinvest the money raised through cap and trade in a transparent way back into projects that reduce greenhouse gas pollution and help businesses remain competitive.” So keep an eye out for that.

Does cap and trade work?

It depends what you mean by “work”. As noted above, there’s been some success with cap and trade elsewhere, but as always, the devil is in the details, which remain undetermined. In terms of fighting global warming, Ontario is responsible for less than 0.4 per cent of global greenhouse gas emissions, so we could shut the whole province down tomorrow and still not save too many polar bears. However, implementation of cap and trade sends a signal that we take the problem seriously, and provides an example—hopefully a successful one—for other jurisdictions to follow.