New report estimates canceling cap and trade program to result in CAD 3bn lost revenue for Ontario government

On 16 October 2018, the Financial Accountability Office (FAO) - an agency supporting the Legislative Assembly of Ontario with independent financial analysis –  released a report estimating the costs of revoking the cap-and-trade program on the province at over 3bn CAD for the Ontario government. As a result of this rollback, a federal carbon pricing backstop measure – a carbon tax levied on fossil fuels coupled with an output-based pricing system for large emitters – will come into effect in early 2019 for Canadian provinces and territories without their own carbon pricing instruments. This backstop would now be imposed in Ontario starting next year, although Premier Douglas Ford has joined Saskatchewan in challenging the legitimacy of the federal measure in court.

The FAO report provides a financial assessment between the Ontario cap and trade program and the federal backstop, as well as a “no carbon pricing policy” scenario for Ontario.

The report made the following key findings:

• Decreased revenue for government: In a no carbon pricing scenario, revoking the cap-and-trade program will lead to an estimated loss of CAD 3 billion in terms of government revenue over the fiscal years 2018-2019 to 2021-22 as a result of foregone auction revenue. Together with the cancelation of the cap-and-trade program came the decision to cancel most programs the cap-and-trade revenue was designated to fund. However, as some of these programs will be continued under the Ford government (totaling a volume of around CAD 500 million or the equivalent of 25% of cap-and-trade revenue in 2017-2018), an additional funding deficit is created.

• Increased direct carbon cost for households under the federal backstop: Compared to the federal backstop measure, the cancelled cap-and-trade system would have imposed a smaller cost on households by the early 2020s given the carbon tax’s rising rate and the cap-and-trade’s systems ability to contain costs by importing allowances from other jurisdictions such as California, which would likely have limited increased costs for households from heating and transport fuels.

• Both the cap-and-trade system and the federal backstop allow compensating consumers and industry for imposed costs: Under both the cap-and-trade program and the scheduled federal backstop measure, revenues are reinvested into the Ontarian economy. While about one third of the revenue under the cap-and-trade program was distributed to consumers through programs such as subsidies for clean cars, the redistribution of the federal backstop measure is unclear.

The new report provides further arguments to those opposing the Cap and Trade Cancellation Act (Bill 4), which is currently being considered by the legislature and would repeal the legislation underlying the cap-and-trade regulation, as the report shows the federal backstop would likely induce higher overall costs for Ontarian consumers and industry.