Skip to content

This won’t hurt, will it doctor?

Cap and trade is coming to Ontario. The legislation was enacted in 2009. Consultation documents were prepared in December. Sooner or later there will be some action. The first thing to know is that you shouldn’t get your knickers in a knot.

Cap and trade is coming to Ontario. The legislation was enacted in 2009. Consultation documents were prepared in December. Sooner or later there will be some action.

The first thing to know is that you shouldn’t get your knickers in a knot. The Ontario government has said that it will release a detailed five-year action plan in 2016. Ontario has to come up with rules that are acceptable to its partners, California and Quebec, so don’t expect any real cap-and-trade action in Ontario for at least a year. Even then, the system will be phased in over several years. Small and medium manufacturing and service suppliers will probably be the last ones asked to do anything. They may never be asked.

Ontario will follow B.C., California and Quebec and require firms that emit more than 10,000 tonnes of CO2 per year to report. Burning one litre of diesel releases 2.68 kg of CO2. To qualify, you have to burn 3.7 million litres of diesel per year.

The regulations will hit SMEs indirectly because fuel suppliers will have to have permits. Fuel will cost more, but the extra cost will be small compared to the normal fluctuation in gas prices and exchange rates. The price per tonne of emissions in California on January 15 was U$13.21, or about five cents per litre for gasoline in Canada. That is about one fifth of the price needed to really affect climate change, so the price will eventually rise, but the system is so unwieldy and so political that it may take many years to get to a level that has much effect.

Mining is energy intensive, so you might expect cap and trade to hurt mining. The mining association of B.C. points out that even though the B.C. carbon tax is revenue neutral, it is not neutral for the industry. Canadian open pit mines spend an average of $1,189 per kiloton of rock on energy. Underground gold mines in Canada spent an average of $22.12 on energy costs per troy ounce of gold in 1999. A five per cent increase in energy prices is significant but small compared to ordinary price movements. Cap-and-trade costs are not likely to have any effect on international competitiveness for mining supply firms, especially given the current level of the Canadian dollar.

Since a large share of the energy used in mining in Ontario comes from electricity and Ontario’s electricity generation is green, electricity prices won’t change much. If Ontario models its system on California’s even the gas-generated fraction will not be affected. To avoid political fallout from consumers, California provides free allowances to utilities to keep consumers happy.

In any case, mining is likely to be exempted. Quebec and California provide emission allowances free of charge for sectors perceived as trade-vulnerable. California has given mining a 100 per cent exemption right out to 2020. There is no chance that Ontario will rush ahead on this issue.

If the cap and trade systems applied to smaller firms, it would be a nightmare with serious costs. European research shows that reporting and compliance costs can be almost as costly as the permits. For small firms, cap and trade is terribly inefficient compared to a simple carbon tax.

Ontario could have had a carbon tax in place last August, but it went for the slower, much less effective and much costlier cap-and-trade system. If you are wondering why, the answer is probably related to the fact that carbon trading is the fastest growing segment of the financial services industry. The Chicago Climate Exchange estimated the world carbon market will eventually be worth $10 trillion. That is a lot of commission fees for lawyers and traders.