At last week’s Ontario Carbon Forum, CaliforniaCarbon.info caught up with the Ontario Minister for the Environment, Glen Murray. In this, the first part of the interview, discussion is dominated by Canada’s national carbon price proposal, its consequences for the WCI and the prospects of pan-Canadian linkage.

Harry Horner

Many stakeholders believe that the recent proposal for a Canadian national carbon price will act as a ‘carrot and stick’ to persuade other provinces towards the use of carbon markets. The WCI would in many ways prove the natural linkage partner for this cohort of regions.

Given the equivalency clause in WCI linkage regulation for California and Quebec, could the extra ambition of the WCI in emission reductions (circa. 40% of 1990 levels by 2030) as opposed to the less aggressive Canadian national, and by extension provincial, target (30% of 2005 by 2030) dissuade such states from linking?

SummaryGlen Murray

If you want to get to carbon neutrality by mid-century, you have make more aggressive reductions before 2030. We believe is hard to get to 80% or better by 2050 if you’re not somewhere between 35-40% by 2030. Which is where a lot of the New England states are also. The federal government has got its challenges, as we have ours.

HH: How likely do you think the National Carbon Price proposal is of being put into place?

GM: Very high, because it recognises how you have two systems that have emerged in Canada, and this enables federal regulators to hold provinces to account over reductions seen under a market based system, or through the price schedule.

HH: Because of the rapid scheduled increase of ‘$10 a year’ in the price of the federal proposal, do you think cap-and-trade presents the more attractive option of the two for undecided provinces?

GM: If you look at the economic modelling, even at a carbon price of $50/ton, there is a very significant probability that that is not sufficient to bring about the necessary reductions in carbon dioxide. The leading economic modellers, people like Dave Sawyer, believe that to achieve what you would with $18 cap-and-trade market price, you would need something several times higher under a straight carbon price. To achieve the federal target, you would need something in the range of $110-$150/ton, and raising that sort of price under elected officials is a hard sell.

Under a market system, the price is driven by the abatement cost and the consequent demand for allowances, and thus in some ways the price stays low as a reward for the success of entities who have managed to cut their emissions.

There is an economic test and a political practical test between these two paths. Which system do you think will work? One that can generate the same reductions at $20 that the other can only achieve at $100; a system that relies on market forces to drive price up, or a system that relies on politicians for price change.

HH: As this market grows, mitigation costs fall, and your citizens are better off. So what steps are you taking to persuade other provinces to join the market?

GM: We are in discussion with a number of major US states right now, and several of the smaller Canadian provinces also. There are in essence five consequential provinces: Quebec and Ontario are in the market trading; BC’s emissions are going up with their carbon price; Alberta, whose emissions are going up, albeit at a much slower rate under this new government under the offset capping system; and Saskatchewan. Saskatchewan will be the other large emitter in Canada, they have a small population but high emissions per capita. They have been very negative on a carbon tax, but surprisingly neutral on the idea of Cap-and-Trade.

HH: So you think that could be a route for them to take. Having not dismissed it publically, no politically problematic U-turn would be required?

GM: They have been very quiet on it, which I found very interesting. When it comes to markets, which is a fairly conservative idea monetarily, they haven’t closed the door. And I hope they don’t.

HH: Do you now see Ontario’s role as a Canadian and global example to other jurisdictions considering implementing cap-and-trade? So as to provide a successful blueprint for others going forward.

GM: The Chinese have been over in Ontario, Quebec and California; and they are talking to us over the WCI market. And now we are seeing the Chinese launch a market in March which will see 16% of the world’s economy covered by a carbon price looking highly comparable to the WCI model, and would likely be compatible with it.

I think we will be saying how the turning point in the carbon trading narrative wasn’t so much Paris and Article 6, but China starting its national market in March of next year. When China has the largest market in the world next year, the impacts on trade and on industry makes a carbon pricing and cap-and-trade a global entity by the force and efficiency of the market.

Also, I can’t name them, but we now have European countries senior officials and members of cabinet of European countries showing up in Montreal and Toronto, saying ‘how would you feel about linking? We might be more interested in linking with the WCI system than simply continuing to work in the EU ETS system’. So you may see both more American states approaching the WCI, and possibly even certain European states joining a Western market.

HH: We have heard some calls from various stakeholders insisting that the auction floor in the Ontario carbon market should be aligned with the proposed national carbon price and its rising schedule. What do you say to this?

GM: Those people don’t understand carbon trading then. In answering this, it is first necessary to understand the difference between a tax and a market. A price is just a tax on emitting activity, and is often recycled back through to the people in other tax cuts. I won’t comment on that, but I think there are some challenges that have emerged from having tax systems without that pool of capital to facilitate further, and cap-and-trade or non-revenue neutral systems do provide those funds. Cap-and-Trade systems generally do result in that pool of capital, as the market price system drives the lowest cost abatement opportunities. The market will find the least cost reductions.

HH: So how are you planning to fight against calls of that nature?

GM; A market doesn’t rely on a higher price, it relies instead on a cap, and the efficiency of the market system that is the great wonder of capitalism. People like Naomi Klein attack capitalism, and define it as the problem. We see the markets in Ontario as the solution. It is the only way you get efficiency of dollars in emission reductions.

It also gives us a green investment pool of around $8 billion dollars, necessary as there are a lot of reductions that are expensive, that the market won’t efficiently go to right away, but they have to be done for competitive reasons eventually. Big steel plants, refiners and other major entities have some low-hanging fruits; but other big emitters have structural costs that are not going to be identified by the market as reduction options to drive capital to. We are doing partnerships, with Nova corporation for example, where we are reinvesting in their facilities to accelerate the fuel switching process.

As a province, we have 75% of Canada’s heavy industry, whereas our partners California has a large manufacturing base, Ontario is unique and thus needs a cap-and-trade system that works in ways that others do not. It has to serve older larger industrial operations as well as the new clean economy.

In sum, the aforementioned pool of capital is going to almost two opposite ends of the economy: firstly, to help drive for the structural changes that have to happen in our industrial processes, and secondly, at the other end to low-income people, who may live in modest apartments or social housing, and don’t have the ability to change their heating system to avoid the extra fuel cost resulting from cap-and-trade…

Harry Horner – (harry@californiacarbon.info)

The second part of this revelatory interview will be published soon by CaliforniaCarbon.info, stay tuned for all of the most pertinent WCI insights and updates.