Carbon Tax or Cap and Trade? A Comparative Analysis of Carbon Reduction Programs for the

1. Carbon Tax or Cap and Trade? A Comparative Analysis of Carbon Reduction Programs for the Province of Ontario Dr. Philip R. Walsh Entrepreneurship & Strategy April 12th, 2018

2. Research Relevance to UN SDGs • Combating climate change and its impacts represents Goal 13 of the United Nations’ Sustainable Development Goals. • It has been recognized that exponential growth in greenhouse gas (GHG) emissions from human activities on the planet are impacting climate change in a negative way. Take urgent action to combat climate change and its impacts

3. Research Relevance to UN SDGs • Certain countries around the world have introduced policies to limit GHG emissions at the federal, state, and provincial levels. • Some of these policies have included the introduction of either a carbon cap and trade program or a carbon tax program to encourage reductions in GHG emissions. • These programs provide economic disincentives to using carbon-intensive fuels by industry and the general public (Carl and Fedor, 2016).

4. Comparative Review • A relatively new concept, the use of global carbon-revenue programs such as cap and trade or a carbon tax have been compared in the research literature and an emerging debate has appeared around which program contributes more to reducing GHG emissions and climate change (Carl and Fedor, 2016; Weitzman, 2017; Xu et al, 2016).

5. Comparative Review • Proponents of carbon taxes suggest that increasing the cost of carbon-intensive fuels through a simple tax mechanism will damper demand and encourage renewable energy alternatives and that cap and trade programs are subject to manipulation and do not provide enough financial disincentive (Weitzman, 2017). • Proponents of cap and trade systems argue that more revenue is designated for green spending than with a general carbon tax that tends to go into a general revenue account (Carl and Fedor, 2016).

6. Comparative Review • The debate remains in its early stage but never-the-less has significance in informing policy for those large emitting countries that currently are still considering the appropriate carbon-revenue programs. • Regardless of the positions taken by researchers, a common barrier to the generalization of their findings is the recognition that jurisdictionally-specific regulation can be a control factor.

7. Source: World Bank (“State and Trends of Carbon Pricing, 2016”). Note, ETS refers to emissions trading schemes (i.e., cap-and-trade).

8. Source: World Bank (“State and Trends of Carbon Pricing, 2016”). Note, ETS refers to emissions trading schemes (i.e., cap-and-trade).

9. Ontario • In 2016, the Ontario government passed Ontario Regulation 144/16 under the Climate Change Mitigation and Low-carbon Economy Act, 2016, S.O. 2016, c. 7 that introduced a carbon cap and trade program to the province. • During the 2017-2020 period, certain industrial emitters in Ontario will be given allowances free of charge while other emitters such as natural gas distributors will be required to purchase carbon credits to offset their current carbon emissions.

10. Ontario Climate Change Mitigation and Low-carbon Economy Act, 2016: • requires a comprehensive climate change action plan , which includes an assessment of potential greenhouse gas emission reductions and cost per tonne of those potential reductions. • establishes in law Ontario’s greenhouse gas reduction targets of 15% below 1990 levels by 2020, 37% below 1990 levels by 2030 and 80% below 1990 levels by 2050 • provides a framework for reviewing and increasing the stringency of targets, and establishing interim targets Source: Government of Ontario – Cap and Trade Overview 2018

11. Ontario Climate Change Mitigation and Low-carbon Economy Act, 2016: • provides the legal foundation for the cap and trade program that will help reduce greenhouse gas emissions across the economy • directs all cap and trade auction proceeds to a new Greenhouse Gas Reduction Account to fund green initiatives that reduce or support reduction of greenhouse gas emissions. • The act also includes strong compliance and enforcement provisions for the province’s cap and trade program, and facilitates linking Ontario’s program with other jurisdictions, including Quebec and California.. Source: Government of Ontario – Cap and Trade Overview 2018

12. Businesses in Ontario covered under cap and trade • Between 2017 and 2020 Allowances are provided to certain emitters free of charge to help with a smooth transition, after which they must comply. • Mandatory participants are required, by law, to participate in the cap and trade program if they are: • an electricity importer • a facility or natural gas distributor that emits 25,000 tonnes or more of greenhouse gas emissions per year • a fuel supplier that sells more than 200 litres of fuel per year.

13. Research Question • The principal research question to be addressed is: • Which program would be better for reducing GHG emissions, and therefore the impact on climate change, for Ontario?

14. Research Methodology • An assessment will be undertaken on the impact of the cap and trade program on industry in Ontario by using the results of the ongoing carbon credit auctions to determine which market participants are willing to utilize the carbon trading process. • Auction results will be compared to determine the extent to which financial and environmental impacts are being felt • Semi-structured interviews will be conducted with market stakeholders and a survey will be conducted among consumers to measure the response to outcomes currently being experienced under both programs in other jurisdictions.

15. Research Deliverable • The results will be used to inform future energy policy regarding carbon-revenue programs for reducing greenhouse gas emissions in Ontario.

16. Preliminary Results • During the past year (March 1st, 2017 to December 31st, 2017) there were four Ontario only Cap and Trade Auctions. • Beginning in 2018, auctions will occur involving participants in Ontario, Quebec and California with the first having occurred in February of 2018. • Approximately $2.8 billion in revenue generated • Allowances totaling 120.5 million Mt

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23. Preliminary Conclusions • Controlled process to date vis-à-vis available allowances • Approximately $2.8 billion in revenue generated but most appears to be utility sourced which will ultimately be recovered through cost of service so the customer is paying the tab for now with costs imbedded in their delivery charges. • Unregulated future participants will eventually seek to recover costs through product or service prices which will either contribute to inflation or in a purely competitive market space (which really doesn’t exist for most products or services) will result in lower profits and lower returns to shareholders

24. Preliminary Conclusions • Allowances totaling 120.5 million Mt with Ontario’s CO2 eq. in 2015 equating to 170 million Mt. • In 2015, the U.S. government calculated the cost of carbon to be $36 U.S. per metric tonne1 or at Fx of 1.3 approximately $47 CAD. • A carbon tax would have the same economic impact but might be a more transparent mechanism for consumers thus contributing more to behavioural changes in consumption 1. Henderson et al., 2017 – Harvard Business School Case Study 9-317-032

25. Next steps • Present to industry participants preliminary findings to gather further insight into the cap and trade mechanism and its efficacy • Survey consumers to see if they have a preference for either mechanism • Prepare final policy research paper summarizing findings and providing recommendations that would encourage further GHG emission reduction.

26. Wrap Up • Any Questions???????