Melissa Ollevier melissa.ollevier@ontario.ca Re: Citizens’ Climate Lobby submission on carbon pricing policy design To whom it may concern: Before Paris COP 21:“Finance ministers need to think about reforms to fiscal systems in order to raise more revenue from taxes on carbon-intensive fuels and less revenue from other taxes that are detrimental to economic performance, such as taxes on labour and capital. They need to evaluate the carbon tax rates that will help them meet their mitigation pledges for Paris and accompanying measures to help low-income households vulnerable to higher energy prices,” – Christine Lagarde, Managing Director of the International Monetary Fund. During Paris COP 21: “They’re negotiating which decade will be the one when humanity becomes extinct.” – Canadian Delegate to COP21 As climate lobbyists, when we read the news, we often alternate between hope and despair for the future. It gives us hope that we have the opportunity to provide input to the development of Ontario’s carbon pricing policy. Citizens’ Climate Lobby (CCL) would like to propose some innovative design elements to the new pricing system. We are also worried that the design does not avoid the pitfalls of Cap and Trade. We have some advice on that too. On October, 5 2015 33 Citizens Climate Lobbyists descended on Queen’s Park and lobbied for the use of the following six core principles of effective carbon pricing in the design of Ontario’s carbon pricing system: A fly in the ointment is that, despite the fact that you have repeatedly solicited civil society input, we feel that you are ignoring it. Thousands of Ontarians contributed many thousands of hours of volunteer labour at the MOECC consultations earlier this year and just days after closing down consultations, you announced cap and trade, despite there being very little grassroots support for it. The latest release of the MOECC carbon emission pricing policy shows that you have not yet managed to meet all of your own overarching principles, particularly Environmental, Administrative Efficiency and Equitability nor have you met most of the principles recommended to you by CCL. We understand that many other civil society groups have recommended a similar list of principles which were also unmet. With all due respect, many of CCL volunteers feel that the MOECC has not listened to them. CANADA POST ELECTION 2015: OUR FAVOURITE POLICY: SUMMARY REACTION TO CURRENT PROPOSAL: TOO LOW, TOO SLOW AND UNFAIR: BE AUDACIOUS: Obviously, this involves steep annual reductions which must start as soon as possible. That may mean that Ontario should begin with carbon reduction strategies that can be implemented immediately. A revenue-neutral carbon fee and dividend can be put in place quickly. British Columbia’s system took six weeks to initiate. This pricing system has many advantageous characteristics. THE MOECC’S CURRENT CAP AND TRADE PROPOSAL AND THE SIX CORE PRINCIPLES: The first principle appears to have been achieved by the suggested auction reserve price for permits which will act as a floor price. We recommend a steady, resolute and rising carbon emission floor price for business predictability, effectiveness and to prevent the market collapse such as experienced by the EU. If this reserve price rises along with the declining cap, and is set years in advance, this can provide the predictability that business has requested. Thank you. The second principle is that costs be incrementally internalized, according to the polluter pay principle, fairly, steadily and with no exemptions, no free permits and no offsets. This has only been partially achieved. The exemptions, delayed start dates, free permits and offsets add up to a “polluter doesn’t pay” system. Delayed start dates and lengthy benchmarking periods will de-incentivize early emission reductions. The sectoral exemptions, permit giveaways, differences between small and large emitters end up with a mess of inequitable treatment. Who will decide who gets what treatment and why? Agriculture was not mentioned anywhere in this iteration of the policy. CCL would like to remind you that agriculture seems not to have been adversely affected by carbon pricing in British Columbia. The report – The Effect of British Columbia’s Carbon Tax on Agricultural Trade – written by Rivers and Schaufele, is the first of its kind to use real data, rather than simulation models, to assess the tax’s impact on the sector. The authors suggest the existing tax exemptions appear unnecessary based on the trade data, although they acknowledge that some agricultural subsectors are likely to be more exposed to the carbon tax than others. http://pics.uvic.ca/sites/default/files/uploads/Carbon%20Tax%20Agriculture%20July%202014%20.pdf If citizens cannot understand why some sectors are exempt and can continue to pollute, and why permits are given freely, there will be pushback. Are these concessions supportive of absolute reduction of GHG emissions? Or do they contradict that MOECC principle? When you give permits to polluters, isn’t that counter-productive to the ultimate goal of Cap and Trade? Carbon emission reductions due to offsets are difficult to prove and activities supported by offsets often occur regardless. Offsets, give-aways and exemptions taint the system in the eyes of the public. They are not recommended because, simply put, they are perceived as suspect and unfair. The third principle deals largely with the trust of the public and political robustness of the policy. We recommend bureaucratic simplicity and effective reduction of emissions, along with transparency and fairness. These will all be closely examined by the people of Ontario. If any of these are found to be deficient, there will be a backlash. We add that timing of the implementation of this policy is almost as bad as it can possibly be. Any perceived flaws and doubts about efficacy of the policy will be minutely dissected during an election campaign. This may be an issue that loses an election. Sadly, one benefit of a revenue-neutral carbon fee and dividend that cannot be built into a cap and trade pricing system is simplicity of administration. There will be levels of bureaucracy essential to running the Cap and Trade system. The public sector will incur administrative costs that will affect revenue. There are significant transaction costs to cap and trade. Businesses will incur additional compliance, monitoring and verification costs. These need to be made clear from the onset. Regarding bureaucratic simplicity, adopting a complicated bureaucracy from elsewhere is not the same as having a simple set-up of your own. It could, however, simplify the system if the MOECC pushed all the caps completely upstream. There are three points of entry for almost all fossil fuels entering the Ontario economy: train, truck and pipeline. These are simple to monitor so can be easily captured. That is the sensible point of regulation. Pricing carbon at the source of extraction or importation also ensures broad coverage. Broad coverage is a fair, effective, economy-wide incentive to reduce emissions by improving efficiencies and investing in clean technologies. The costs to the suppliers/importers would be dispersed in trickle down pricing throughout the economy. This Cap and Trade system must be effective and fair. It must also be easily seen to be effective and fair. Transparent operation of the system will be addressed in CCL’s last principle. The fourth principle is to create a system that stimulates the economy from the individual level through to the business level; one that encourages the economy and creates jobs while reducing emissions without causing undue economic stress to the vulnerable. This has been achieved in British Columbia: “British Columbia’s carbon tax design includes a tax credit for low-income households to offset the financial burden of more expensive fuel. The credit was last increased in 2011, when it rose to Can $115.50 per adult and Can $34.50 per child. A study found that low-income households would be better off after 2010 because the Low Income Climate Action tax credit was more than the amount paid in carbon tax.” Lee, M., and T. Sanger (2008), Is B.C.’s Carbon Tax Fair? An impact analysis for different income levels (Canadian Centre for Policy Alternatives), access at https://www.policyalternatives.ca/publications/reports/bcs-carbon-tax-fair . “Negative economic effects can be mitigated through effective policy design, primarily smart revenue recycling.” These can be used to protect the vulnerable, enhance affordability and improve equity, while maintaining incentives for low-income households to improve energy efficiency and reduce their emissions. At least a portion of the revenues generated by carbon pricing can be used to compensate the income loss of the poorest and most vulnerable energy consumers. According to the World Bank, this has been the case around the world. CCL recommends that Ontario return revenues from the auctions to Ontarian households to help citizens, particularly low-income Ontarians, shoulder rising costs passed onto them by industry. In all carbon pricing systems, consumers ultimately pay for the costs of carbon fuels and goods produced with carbon. Dividends help people manage costs and encourage them to switch to energy saving products and services. The carbon dividend would augment pension or other income. It is not sufficient to fund programs that may or may not benefit certain low income individuals such as the 2015 Low Income Energy Rebate program where currently fewer than 7% of eligible Ontarians applied for the rebate. The MOECC plan to reduce the overall cost to households and business by investing in energy retrofits and low carbon transportation options will in no way compensate for the increase in prices that will occur under any pricing system. Jeff Rubin, economist and author of The Carbon Bubble, explains this. He spoke to CCL in October before we lobbied you and said that in order to reach the required environmental targets, the prices in any pricing system will ultimately have to be so high, and therefore the revenues will be so large, that this will be an economy destroying policy unless at least some of the money is returned to the citizenry. Listen here to Jeff Rubin, in particular from 35.30 minutes onward. https://youtu.be/xAZ371d1q9Q Returned revenue helps cycle money into the local economy and builds public support for the annually decreasing cap and strong floor price. However the revenue is spent, all of it must be spent on dividends or on emissions reductions initiatives. It must be revenue-neutral in order to be credible as an environmental policy, not a revenue generating policy. Longevity and political durability are important in a carbon pricing system. CCL knows that reducing carbon emissions must not be regarded as a ploy for political gain. Revenue-neutrality has been immensely popular in the jurisdictions that have carbon pricing systems. This popularity reduces the possibility that successive governments would want to tamper with the system. The more popular the system becomes, the less likely it is to be reversed. The fifth principle is that the policy be easy to implement, aligning and harmonizing across borders. Happily, the federal government will now handle the alignment and harmonization across borders. Ease of implementation is your job. As we have suggested, upstream capping makes implementation easier. Under our final principle, two other topics can create ease of implementation: trading only within the group of users, and arms’ length administration of monitoring, trading and revenues. The last principle is transparency and integrity, achieved by the institution of arms’ length management of administration, monitoring and revenues and by limiting who can trade. The system must be seen to be fair and effective for it to gain popularity. This avoids the look of a “tax grab” and of undue political influence in the trading and monitoring processes. If the system is revenue-neutral as we recommend, this also makes the accounting process transparent. An arms’ length body of administrators can prevent unfair influence from tainting or corrupting the system. There must be formulas, not opinions to rely on for decision-making. The government ought not to interfere in how the market adjusts to high carbon fuel prices. It is unfair to give advantages to any group. A level playing field for all is what we need. WILL YOUR CARBON PRICING POLICY HAVE GRASSROOTS SUPPORT? The public will incur administrative costs that will affect revenue. There are significant transaction costs to cap and trade, as well as compliance, monitoring and verification costs. These expenses must be made public before the program begins so that the citizens will not feel that they have been duped. We understand that Ontario plans to have extensive training and outreach to assist emitters with understanding their compliance obligations under the program. This should also extend to the general public. Congratulations for proposing a widespread education program because, frankly, it will be very badly needed. Please consider implementing these measures that would enable the MOECC Cap and trade policy to meet the above important characteristics. Many other organisations around the world recommend a similar list of principles in the design of any emission pricing system. Here is a joint report written by the Organisation for Economic Cooperation and Development (OECD) and the World Bank Group (WBG) with comments from the International Monetary Fund (IMF): World Bank The FASTER Principles for Successful Carbon Pricing: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/09/18/090224b0830eb27f/1_0/Rendered/PDF/The0FASTER0pri0n0initial0experience.pdf Their principles include Fairness, Alignment of Policies and Objectives, Stability and Predictability, Transparency, Efficiency and Cost-Effectiveness, Reliability and Environmental Integrity. We have four additional comments: ONE: We recognize that there are some industries in Ontario that are emission intensive and trade exposed that make a fair case for some sort of special treatment. We urge the designers of the pricing system to deny that special treatment within the pricing system. Ultimately, there must be a national carbon price in Canada and thus, they will be protected by border tax adjustments enacted federally. If they must have special government assistance, let it be given separately. Preferential treatment makes the pricing system nonsensical; carbon intensive industries, that is, high polluters, must be treated the same as everybody else. TWO: If fossil fuels are not priced as they enter the Ontario economy, it is extremely difficult to capture all of them. This is especially true of transportation fuels. CCL agrees with the position of the Green Party of Ontario on transportation emissions: “Since transportation is the largest source of GHG pollution in Ontario, it is essential that any pricing system cover GHG pollution from the transportation sector. It is difficult to design a cap and trade system that effectively covers the transportation sector. If the province adopts a cap and trade system, [the Green Party of Ontario] recommend[s] a hybrid model that would include a carbon fee and dividend for transportation emissions.”(Mike Schreiner, leader GPO) THREE: For a model of a system that incorporates most of the desirable characteristics of a carbon pricing system, CCL asks that you please review the Healthy Climate and Family Security Act of 2015 recently introduced in the USA by Congressman Chris Van Hollen. This bill caps carbon pollution and reduces CO2 emissions gradually but steadily, auctions carbon pollution permits to the first sellers of oil, coal, and natural gas into the U.S. market, and returns 100 percent of the auction proceeds electronically each quarter to every American with a valid Social Security number in the form of a Healthy Climate Dividend. Look here for more information on this bill: https://vanhollen.house.gov/climate . FOUR: Citizen’s Climate Lobby firmly believes that putting a price on carbon is essential to creating the incentives and economic responses needed to significantly reduce emissions and combat the risks of climate change. If the MOECC can design Ontario’s Cap and Trade system to adhere to the desirable, advantageous characteristics CCL recommends, Ontario will have the strongest, most effective carbon pricing system in the world. Thank you for your attention and many thanks for the work you do in creating a sustainable world, Citizens’ Climate Lobby
Senior Policy Advisor, Cap and Trade
Ministry of the Environment and Climate Change
Climate Change and Environmental Policy Division
Dec. 9, 2015
Before a discussion of these principles, it is helpful to acknowledge that there is a new political atmosphere in Canada which will affect Ontario’s pricing policy. Ontario will no longer have to devise ways to work around the federal government. At this point, the new federal government is supporting much bolder targets than Ontario has proposed. This will mean changes to some of the elements of the Ontario provincial plan. Ontario must now negotiate co-operative solutions and co-ordinate to meet federal targets. Fortunately, we will no longer a need to worry about interprovincial trade or interprovincial leakage and border tariffs can be administered federally.
CCL’s preferred method for pricing carbon is carbon fee and dividend. However, since the MOECC has decided to implement Cap and Trade (our second favourite system), we ask that the government commit to developing the best Cap and Trade system possible to effectively and fairly reduce CO2 emissions.
What was proposed by the MOECC in your November 2015 stakeholder meetings is too low and too slow. Ontario’s Cap and Trade won’t begin until January 1, 2017, it won’t link with California and Quebec until 2018 and there will not be full reporting by industry (true-ups) until 2021. As well, the sectoral exemptions and give-aways don’t make for a level playing field and are therefore unfair. As well, they are likely unnecessary, given that there will be an overarching federal framework which can protect industries more effectively.
We need the best system to reduce the risks and costs of the climate crisis. In order to be effective, we urge the government to be bold, act quickly and comply with aggressive federal targets. We hope to meet or exceed the 2020 targets. The most recent IPCC (Intergovernmental Panel on Climate Change) report indicates that our targets for 2050 must be stronger than was previously thought. Bear in mind that the window of opportunity is closing soon. The latest target we recommend is carbon neutrality by 2050. This IS possible but we need to act boldly and quickly.
Since the overarching system to be put in place in Ontario is Cap and Trade, CCL now asks that you attempt to include the advantageous characteristics of revenue-neutral carbon fee and dividend in our Cap and Trade system. With that in mind, we urge the MOECC to consider our six core principles of effective carbon pricing when designing Ontario’s system:
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/09/18/090224b0830eb27f/1_0/Rendered/PDF/The0FASTER0pri0n0initial0experience.pdf Page 9
The auctioning or trading of credits should only be done amongst those who ultimately use them. This decreases the possibility of market manipulation. What we strongly discourage is the participation in a stock market style large scale trading system. Please do not commodify pollution credits. This is exactly what the citizens of the world do not want. Why do you think the COP19 at Copenhagen failed? Why do you think the USA has rejected cap and trade repeatedly? Everyday people do not trust the environment to global stock traders.
Open Letter to the Ontario Ministry of Environment and Climate Change
Posted on December 9, 2015 in Open Letter, Uncategorized
