As discussed in my recently released Greenhouse Gas Progress Report, I believe that Ontario must establish a price for carbon. Such an approach, whether in the form of a tax or a cap-and-trade system, is supported by the majority of energy and carbon intensive industries in Canada and is already being used in three provinces (B.C., Quebec & Alberta) to manage greenhouse gas emissions (GHGs). A carbon price acts as a signal that encourages energy consumers to reduce the carbon footprint of their energy use, whether through reduced consumption (i.e. conservation) or a shift to low-carbon energy sources, and is thus critical for de-carbonizing the provincial economy and powering the growth of green industries.

I am often asked why a price on carbon is needed. The reality is that the price we pay for energy does not include the environmental, economic and social costs of climate change. As atmospheric GHGs continue to rise beyond levels considered safe by the world’s best scientists, the prospects of preventing future impacts on water resources, food production, and human health becomes increasingly bleak. The cost of these impacts is estimated to be in the range of 5% of global GDP annually (in Ontario this would translate into $26 billion in lost economic activity per year!). Thus, while transitioning Ontario’s energy system to a low-carbon pathway could be costly in the near term, a price on carbon can help to reduce these future damages. And, the sooner that carbon is priced in Ontario, the more time Ontario families and firms will have to adapt and thrive in a carbon-constrained world.

If Ontario were to go the route of a carbon tax like the one in B.C., it would impose an additional charge on fossil fuel producers or importers based on the carbon-content of their fuel. Thus fuels with relatively high carbon content would be taxed more than those with lower emission profiles. B.C.’s carbon tax is currently at $20/tonne which translates into an additional 4.45¢/litre on the price of gasoline. $727 million was collected from the carbon tax in 2010/11 which has been used to reduce personal and business taxes to the lowest levels in Canada. Quebec’s carbon tax is similarly levied on fossil fuel distributors in the province who are required to pay a fee of 0.8¢/litre of gasoline distributed. The $200 million/year collected through the tax is used to fund the province’s Climate Change Action Plan programs.

A carbon tax provides price certainty and ease of implementation (because of the existing tax system), but results in a visible increase in prices and is thus politically challenging to implement. Ontario has apparently chosen the route of a cap-and-trade system which requires the government to establish a cap on total emissions and distribute a corresponding number of permits to large emitters such as cement and steel production facilities. A carbon market is created because firms that emit less than the permits they hold can sell them to firms that are short on permits.

Properly designed, either cap-and-trade or a tax can provide significant economic benefits over the long term. Carbon revenues generated by a tax or the sale of emissions allowances can be used to reduce other taxes (i.e. income or corporate tax), reduce the deficit (as is done in Britain), or contribute to further low-carbon energy investment in the province. And, with Ontario sending more than $13 billon/year to outside jurisdictions to import gasoline (not to mention natural gas and other fossil fuels), a carbon price can help keep more money in the province now and shift consumption away from carbon-intensive imported fuels over the long term.