Climate change has been much debated policy space over the past several decades, and it’s about to get hotter in the post-Paris Agreement era. The point is that there is a certain degree of willingness across the political spectrum to try and leave the world cleaner than we inherited it, and there is much to laud about that goal. Politicians and governments want to be seen as positively building a legacy in this regard, and this is true of governments of all political stripes.

In Ontario, the government has proposed to put a price on carbon.  There are generally two ways of doing so: a cap and trade system or a carbon tax.  Of course there are different sub-approaches, and sometimes people like to debate which of the two is better.  I won’t dive too much into that, because it confuses most people, but I have to ask some questions: what is the main purpose of pricing carbon? Is it to better for the environment? Is it to improve government revenues? Why do it? Let’s look at how Ontario is doing.

The government of Ontario deserves some credit for actually reducing carbon emissions!  We pretty much met our Kyoto commitments.  How did Ontario reduce its emissions? It closed down coal fire power plants, which historically have been the biggest polluters.  I might add, as this is the relevant point, our emissions declined without a price on carbon.  It went down because the government decided it would legally decommission coal power plants.  To repeat, we cut emissions without a carbon tax.

With the Paris Agreement on climate change, Canada has committed to reducing its emissions by at least 30% from 2005 levels.  Ontario is well on its way to meeting that target as well.  It must be said that there are more regulatory changes coming that will again reduce emissions.  By 2025, for example, car manufacturers are rushing to beat new American emissions targets.  Since transportation accounts for about a quarter of our total emissions, this is going to go along way to reduce the GHG emissions for Ontario to 2030.  Again, without a provincial price on carbon, Ontario is likely to achieve its reductions by 2030.

The Paris Agreement also has a goal of being carbon neutral by 2050.  Carbon neutral is defined as the total carbon emissions being equal to or less than the carbon that is absorbed by land and water.  This takes into account natural carbon sinks, such as trees, that require CO2 for its living cycle.  Since we have a lot of trees and a sparse population, guess what, we are already carbon neutral.  That is, even without a price on carbon, Ontario will continue to be carbon neutral.

You see where this is going, I hope. All of this good stuff is occurring without a price on carbon, yet our political leaders are moving ahead with it anyway.  And you know what will happen too.  Political leaders will attribute all of these reductions and carbon neutrality to their prudent carbon pricing scheme even though this will have nothing to do with meeting their goals.  The question that begs is what they might do with the money that they generate from these schemes, and therein lies the big questions about the politics of this plan.

Your policy leaders will spend a lot of time debating whether a cap and trade is better or worse than a carbon tax.  In the Ontario case, what has been shown to be the best approach is to regulate emissions and convert polluters from dirty to cleaner energy sources, or to promote energy conservation, which is also an important part of the equation.  These should all be part of the policy mix going forward.  But a price on carbon? It might help, or it might not.

Remember those smart meters? They were installed at a massive expense in your homes to offset your energy use to off-peak times.  As an incentive, homeowners got cheaper electricity at the off-peak rate and paid massive premiums for consuming energy during peak hours.  I can’t tell you how many phone calls I received from shift workers and seniors who felt that they were being punished for following their routine.  As the Auditor-General pointed out, the net effect wasn’t that people started consuming less power during peak periods.  Their energy consumption didn’t really change at all.  In fact, the A-G said that smart meters had only “a modest impact on reducing peak demand” for homeowners and had“no impact at all on energy conservation.”  Ouch.  In plain English, it means people didn’t change their routines all that much, yet paid through the ceiling to do what they always have.

The point here is that there is a degree of elasticity when it comes to energy prices.  In order for it to severely alter people’s behaviours, the extra cost must be extraordinarily higher.  Put a different way, the government’s plan to price carbon at 4.3 cents a litre for gas is not in anyway going to make people alter their driving habits, especially when consumers got used to paying 50 cents more during a period of high energy prices.  To repeat, all this price on carbon is going to do is add to the government coffers and not change the carbon habits of individuals.  Regulations limiting carbon use have done a better job.  Our province has shown that you don’t need a price on carbon to reduce emissions.  The graph above shows it.

Where I find the most interest in carbon pricing schemes, however, is the potential to actually shift the way government taxes different things.  In essence, government should tax things that are less desirable and not tax things that are desirable.  This is where I see carbon pricing schemes helping to that end.  Why not tax carbon, the thing we don’t want because it dirties our environment, instead of taxing income, since we want more income, wages, and productivity?  Did you see that I used the word “instead”. That was very intentional and meant to be very literal.  If you’re going down this road, why not go bold.  Eliminate income taxes and replace it with a host of other taxes and fees on behaviour deemed less desirable like polluting the air with GHG emissions.  It’s certainly worth a good debate instead of the minimal tinkering the government’s plan will produce.