April 18, 2018 by Abhilasha Fullonton
The Pembina Institute is tasked with providing science-based solutions to fight the negative consequences of fossil fuels and help Canada with its transition to a clean energy future. As a former cabinet minister, and an advocate of the clean energy transition, Glen Murray played a vital role in bringing cap-and-trade to Ontario and led the charge in the linkage between California-Quebec-Ontario.
This April, while attending NACW the CaliforniaCarbon.Info team sat down with Glen for an interview about the future of cap-and-trade in the context of Ontario.
Asha (CC.Info)- In terms of fiscal policy- in Ontario we’ve seen large amounts of funding coming in from cap-and-trade…
Glen- They can only be spent on a narrow range of things. They can only really be spent on building retrofits, subsidies to technologies and companies to decarbonize and some money going into mass transit to construction and active transportation so they can’t go to fund existing programs. They can’t be substituted for general revenues, they have to actually be used to fund the Climate Action Plan. When I was Environment Minister you write a plan that goes to treasury board and treasury board is supposed to follow the plan laid out by the Environment Minister and that plan is turned over to the auditor general or the environmental commissioner. It is not made public but they get access to it so they can see what the variance between what the program of government is and the rules around spending money cause the legislation restricts a lot on what the money can be spent on.
Asha- …So it does make fiscal sense to still be part of cap-and-trade
It’s proceeds that come on the price of pollution so it’s a regulatory fee, it’s not a tax so when you have a regulatory fee it is very restrictive. So, the regulatory fee regulates identified greenhouse gas pollution. The regulatory fee can only go to new initiatives that meet new reductions of those gases. So that’s pretty much the constructs of how it is.
Asha -I remember you mentioned yesterday (on the panel for ‘Navigating the North American Carbon World’) that local businesses need to take a lead role…
Glen- Yes with governments and the media
Asha- Yes, but if de-linkage happens and I am speculating a lot since it might take a couple of years for anything to happen– Do you think businesses can initiate that [conversation about continuing cap-and-trade] and stick to it in terms of voluntary participation?
Glen- Especially the nine large emitting industries work with the government closely on the fee and dividend for a carbon tax or a cap and trade system and the Ontario government did quite a lot of research and spent a lot of money as a government looking and modelling and all those different scenarios. The thing that came out best for people—to help them transition and to reduce the cost of transition and it actually made sense so that the province did not have leakage or job loss because relocation of businesses was within the cap-and-trade system. It was actually also the most effective modelling for getting the greatest number of results because when you have a cap decline rate of over 4% as Ontario does you’re really getting a 20% reduction in over 5 years built in. Because if cap-and-trade gives you reduction certainty, tax does not give you any guarantee of reductions it gives you price certainty. So with cap and trade the market sets the price, you don’t have price certainty. So there is a lot of work done in that and there is billions of dollars of allowances are out there which are also leveraging billions of dollars of investment in cement facilities (decarbonizing them), refineries that are using CO2 as a input—as a feed stock—and a lot innovations built around that. It would be really hard to disentangle all of that and the government would have significant liabilities and cost to undo it at this point. Because you need a certainty for both industry. Some of these investments that are being made cost hundreds of billions of dollars which are going to last a long time, like decades and decades – most of the century. So if you’re going to get people to decarbonize and make them invest in the private infrastructure and the public infrastructure they need some stability and guarantee that the program that is helping facilitate the mobilization of that private capital is going to be in place. And government needs that certainty because governments need that stability to hold its stats base. If you want to build a cement facility, the government needs a program that is going to keep that plant open. You can’t put public money into cement plant and have it closed. So the whole cap-and-trade system is, at this point, mutually locked in. It protects citizens and consumers, it protects industries and government and it’s well supported. Really no one is complaining about it—it rarely comes up.
Asha- We would be interested to see how things are going to flesh out
Glen- If I was still in politics I would not find it too difficult to make that case. You want an efficient system that drives innovation and attracts capital and is working and supported by industry and is managing a transition to the low carbon economy at a fairly low price—at less than $40 a ton. Or you want to go to a tax that breaks up all of the commitments around decarbonization and is driving large amounts of capital into critical industry and pay $50 a ton to reduce and have a much higher fuel costs and much higher prices. It doesn’t make any sense. It’s going to interesting to see how supporters of a cap and trade rollback defend that position.
Chandan (CC.Info)- Regarding the industry assistance factor- so how is this going to change if cap and trade stops?
Glen – It would be very difficult to stop it before 2020. I mean I guess you could take measures the same way president of the United States is – by dismantling the power plan. Cap and trade is much more complex. It is already a market—a market that is free from political influence, it a market that has issues of investor confidence and all this. But industries have smart lawyers too. If the government does something stupid there will be a lot of litigation because companies looked at that and government lawyers- and government hires some of the best lawyers – legal minds, former justices to write the legislation with government so it is pretty bullet proof. The second part of it is, if companies are not making massive investments in cement plants or a mine or a mill of some sort without looking at the legal and political landscape. So, the fact that every single auction that Ontario ran on its own not only sold out but in most cases significant amounts of futures were bought which tells you they have confidence now and they have confidence years into the future. When they had the first joint auctions this year they also sold out with a heavy pick up of futures as well. They paid it forward, so to speak already. And what are you going to accomplish by dismantling it? You’re going to lose the momentum of greenhouse gas emissions. You’re not going to meet your target. You’re going to have the federal government impose a much higher price on consumers which you’re knowingly doing. The rules are very clearly out there. And Canada, without Ontario, because Ontario is 40% of the Canadian economy one of the largest sources of emissions, if it doesn’t meet its goals it embarrasses Canada internationally and puts it in a very vulnerable situation next to Paris. Because the other provinces, especially Saskatchewan and Alberta which have natural gas and oil reserves issues to resolve which are much more difficult, it really leaves the Canadian government in a difficult position. And every single province with the exception of Saskatchewan was encouraging the federal government to sign on to a more aggressive target than the one they did.
It would be very hard for government to go in and dismantle the Toronto stock exchange for good reasons. When you’re subject to major international negotiations you have contrast with major industries and they are reducing pollution the way you want them to. Sometimes it should be very difficult or impossible for governments to break these systems and governments that break contracts aren’t trusted by anyone. You cannot do business in the world if you don’t honor the contracts you have signed and you inherit it.
Asha- Thank you so much for taking the time to sit and chat with us!