Ontario’s low-carbon transition: The role of a provincial cap-and-trade program

This major research paper addresses the question of how a sub-national entity such as Ontario can design an environmentally effective greenhouse gas (GHG) emissions trading system in the context of policy gridlock in Canada and through the UNFCCC process. The paper begins by exploring the historical context of climate change policy at the international and national levels in order to demonstrate how we have arrived at the current situation of policy gridlock and illustrate the opportunity for sub-national entities such as Ontario to take a progressive approach to climate change mitigation. But as climate change policy develops in an asymmetrical fashion within Canada, North America and the globe, policymakers in Ontario need to carefully design the proposed emissions trading system to balance the need to maintain environmentally integrity of the system (i.e. make a contribution to the decarbonization of the provincial economy) without overly harming the economic competitiveness of the province vis-à-vis neighboring jurisdictions who are not implementing comparably stringent policies. Such asymmetrical policy development could damage the long-term political acceptability of the program should economic losses reduce the relative prosperity of Ontarians and also the environmental integrity of the program if emissions-intensive activities relocate to jurisdictions without stringent GHG controls. As such the paper examines important elements of emissions trading programs: setting the cap; distributing allowances; designing the offset system; managing the interaction with existing renewable energy policies; and the treatment of emissions-intensive trade-exposed industries; with a view to improving the environmental integrity of Ontario’s proposed program without harming its economic competitiveness. In each of these areas the experience garnered in the European Union Emissions Trading program (EU ETS) has been leveraged to provide policy recommendations to Ontario policymakers. The EU ETS has been in operation longer than any other GHG emissions trading program, and is the closest in design to Ontario’s proposed system. With the EU ETS having undergone a major revision in 2009 which will apply for the 2013-2020 time period, there is a major opportunity for Ontario to apply the lessons learned in Europe to its emissions trading program. The research methodology for this paper was a comparative analysis that used primary sources in the form of policy documents and interviews to understand the proposed design of Ontario’s program and secondary research using academic research that has evaluated the effectiveness of emissions trading programs in Europe and beyond.