Our new 4% 5-year bonds will be on sale soon!

Response: Joe Oliver on Ontario’s Cap and Trade Program

Aug 09, 2016

Ontario-Legislative-Building-Long-Hall
Photo courtesy of Roland Shainidze


By Nicholas Shatalow, SolarShare Outreach Coordinator 

The pundits can’t seem to get enough of the Ontario government’s impending cap and trade program. Since Ontario unveiled its climate plan over a month ago, the province’s editorialists and other spin masters have taken to every conceivable medium to decry the plan’s central carbon pricing program. Former Canadian Minister of Finance Joe Oliver is the latest critic to enter the fray. Oliver’s take on the issue, titled “Kathleen Wynne’s cap-and-trade scheme is just a cash grab dressed in fake green garb”, seems a little confused: the majority of Oliver’s arguments take aim at government spending rather than emissions trading itself. The justification he gives for his anger with the government’s plan is hardly rock solid. Basically, Oliver seems to think cap and trade is bad for two reasons: first, because it doesn’t work; and second, because it’s really a “cash grab […] for the government to dispense on its pet projects”. Let’s take a closer look at these claims.


It Doesn’t Work?

The speed and certainty with which Oliver rejects cap and trade as a means for reducing greenhouse gas emissions is astounding; as though the overwhelming support that carbon markets and other carbon pricing programs enjoy among economists means nothing. “But even if you buy into Wynne’s sense of urgency [concerning climate change]”, Oliver ruminates, “why pick a solution that has proven not to work?”. His boldness here can’t be overstated. While a claim of this magnitude – once and for all putting the discourse on emissions trading out of its apparent misery – shouldn’t be taken seriously without substantial evidence, Oliver only provides one example to support his case. For Oliver’s sake, it better be a damn good example.


Oliver cites the European Union’s carbon market in his attempt to demonstrate that “cap and trade is ineffective”. The EU’s program encountered many early difficulties when, as Oliver puts it, “[m]assive free credits were doled out to large emitters and trade-exposed industries”. Europe’s early struggles with cap and trade have been well documented, but they're hardly evidence that the emissions trading endeavour as a whole is doomed to fail. Even if we grant Oliver’s claim that the EU's cap and trade system is a total disaster – and this is hardly an uncontroversial thing to do, as subsequent phases of the program have “driven significant reductions in greenhouse gas emissions […] at […] a fraction of [the] predicted costs” – it is absolutely ridiculous to suggest that cap and trade as a policy mechanism has been proven not to work. While it’s certainly possible to design a bad cap and trade system (or any other policy for that matter), carbon markets should not be brushed off so lightly. To counter Oliver’s claim that cap and trade doesn’t work, here are two (of many) emissions trading success stories.


I. California

California’s carbon market, the largest of its kind in North America, is widely viewed as a success. While Oliver is quick to dismiss cap and trade, the fact is that California’s emissions have dropped by every relevant metric since implementing their carbon pricing program: the state’s net greenhouse gas emissions, greenhouse gas emissions per capita, and greenhouse gas emissions relative to GDP have all decreased since the early 2000s while GDP has steadily grown (with the exception of a drop during the 2008 global financial crisis). Moreover, California’s economy has grown at a faster rate than the rest of the American economy. Even the Wall Street Journal, a publication with a noted history of climate change denial, acknowledges that “California’s [cap and trade] program is working well”, further recognizing “its sound design and strong fundamentals”. When seeking a comparison for Ontario’s emissions trading system program, California is particularly relevant because its carbon market (along with Quebec’s) will eventually merge with Ontario’s. Ontario isn’t, as Oliver puts it “[imitating] the European failure”. Rather, Ontario is looking to join in California’s success. In the light of California’s accomplishments, Oliver’s rejection of cap and trade appears premature.


II. Acid Rain

With all of the recent sensationalizing that Ontario’s cap and trade program has endured at the hands of pundits, it’s important to remind ourselves that emissions trading systems aren’t new. In fact, cap and trade was used to solve the American acid rain problem just a few decades ago. Here’s a brief history of how emissions trading subdued the threat of acid rain in America:


By the 1980s, acid rain, primarily caused by industrial emissions (sulfur dioxide and nitrogen oxide) was a serious environmental concern, posing a significant threat to freshwater ecosystems. In 1990, the George W. H. Bush administration responded to this problem by creating a cap and trade system for sulfur dioxide emissions under the existing Clean Air Act (nitrogen oxide emissions were later included in the program as well). The system ensured that no company got to pollute for free, resulting in a dramatic drop in emissions from 17.26 million tons of sulfur dioxide in 1980 to just 2.67 million in 2013. It’s also worth noting that America solved its acid rain problem while experiencing a prolonged period of economic growth. All this considered, Oliver is imprudent to dismiss cap and trade so quickly. Both California’s carbon market and America’s acid rain program demonstrate that cap and trade systems can be used to successfully reduce emissions while still facilitating economic growth.


It’s a Cash Grab?

Oliver’s second objection to cap and trade isn’t really an objection to cap and trade at all. Under the guise of carbon market criticism, Oliver spends a significant portion of his article rallying against what he perceives as the Ontario government’s ‘tax and spend’ mentality: “[s]ince this is really just a cash grab cloaked in green garb, Ontarians should brace themselves for more changes to extort more money for the government to dispense on its pet projects or other priorities”. Clearly, Oliver is concerned about government spending, which is fine, but totally irrelevant in an article about cap and trade. Hardly a “cash grab”, cap and trade doesn’t necessarily entail any new government spending, and can even be revenue neutral (a fact Oliver himself acknowledges). Oliver’s criticism of the so-called “regressive” nature of cap and trade is equally irrelevant. The extent to which low income people are negatively effected by cap and trade is determined by the use of the revenue, not, as Oliver implies, by the mere existence of a cap and trade program. That said, Ontario's program might be regressive: the problem is Oliver's article doesn't attempt to show us whether or not it is. Oliver just makes catch-all claims about cap and trade in general, rather than addressing any details specific to Ontario's plan. As such, framing his article as a critique of Ontario’s cap and trade system is misleading. Most of Oliver’s concerns pertain to the use of cap and trade revenue, rather than the nature of cap and trade itself.


Oliver’s bait and switch style has been a common approach among the editorialists reacting to Ontario’s climate plan. Frustratingly, many pundits have focused on issues which are simply not in question: the merits of carbon pricing are well established, both theoretically and empirically. We should, however, have a thoughtful and vigorous debate about about the design of the province’s carbon pricing policy. Should we have a cap and trade system (as the Liberals and NDP support)? Or should we have a carbon tax (as the Progressive Conservatives and Greens support)?1 Should our carbon pricing program be revenue neutral? Or should the revenue be used to fund 'green' initiatives? These are the questions we should be asking! Frankly, this sort of politicized rambling – the kind that Oliver and other editorialists like him have wasted our time with – isn’t just counterfactual, it’s harmful, distracting us from the discussion we need to have about the actual content of the province’s policy.


Oliver’s Ideological Motivation Shines Through

While Oliver frames his article as a critique of cap and trade in Ontario, his writing actually has very little to do with the government’s carbon pricing plan. Oliver’s piece is ideologically motivated and mostly uninterested in the specifics of the government’s policy. When talking about the cost of the Ontario's climate plan, Oliver makes one of his more outrageous claims:

“So apparently [the] cost [of climate change action] is irrelevant. Of course cost is never irrelevant, because it means making choices among priorities or passing on the accumulated debt for today’s expenses to the next generation.”

Oliver’s talk of debt here is very strange. He is either guilty of implying that cap and trade, a revenue source, will cause government debt (which is ludicrous) or of ranting about an issue which has absolutely nothing to do with cap and trade (which is at best inappropriate and at worst deceptive). Either way, Canada’s former Finance Minister should know better. I suspect Oliver was more concerned with presenting political talking points (e.g., ‘debt is bad’, ‘spending is bad’, et cetera)2 than actually engaging with the substance of Ontario’s cap and trade policy. Oliver further reveals the underlying motivation for his writing here:

“Since cap and trade is ineffective, at least it could be made revenue neutral by reducing taxes by an amount equal to its cost. Alas, no chance of that in Ontario, since one of the motivations for the scheme is to generate revenue for a bloated and spendthrift government.”

Again, we have another passage demonstrating that Oliver’s chief concern is the government’s fiscal (ir)responsibility. Whether or not Oliver’s beef with our apparently “bloated and spendthrift” provincial government is warranted, it has no business being the focus of any reasonable article about cap and trade.


Final Concerns

Though I feel that the arguments above have done more than enough to delegitimize Oliver’s article, there is a bit more to be said about the article’s credibility. Partway through the article, Oliver writes about climate projections, claiming that even if cap and trade allows us to meet our emissions targets, it won’t make a significant impact on the global climate. Oliver supports this claim by citing Dr. Bjørn Lomborg, a Danish academic and author of the popular work “The Skeptical Environmentalist”. Without getting into this issue too deeply, it’s worth nothing that Lomborg is a political scientist, not a climate scientist. That is to say, he is not an expert on climate modeling. Given that the consensus assessment among climate scientists regarding the danger of climate change differs significantly from Lomborg’s view, it would be irresponsible to do anything but take Lomborg’s view with a grain of salt. Oliver’s faith in Lomborg is a bit like trusting a veterinarian to fill your cavities: while both vets and dentists are medical professionals, only one of them is trained to drill into your teeth.


1a The Ontario Progressive Conservatives officially oppose cap and trade and support a "sensible" revenue neutral carbon price. While they haven't specifically used the words "tax" or "levy", it is fair to assume that this is what they mean.
1b The Ontario Green Party supports a "fee and dividend" which is essentially a more complex carbon tax.
2 
These are fair opinions to have, but irrelevant in the context of this discussion.


Appendix

Below I’ve included definitions for several terms which are used throughout this blog post:

Cap and trade is a form of pollution control which sets a finite limit (a cap) on emissions and issues permits to be traded among emitters. Essentially, those who emit less can sell their excess permits to those who require more. Cap and trade may also be referred to as emissions trading.

Carbon pricing is legislation which places a fee, either directly or indirectly, on greenhouse gas emissions. Both carbon taxes and carbon markets are examples of carbon pricing.

A carbon market is a cap and trade system used to price carbon.