Ontario's cap-and-trade program comes into effect Sunday

Ontarians will start paying for the Liberal government's ambitious cap-and-trade program almost immediately after it comes into effect Jan. 1 with higher prices for gasoline and natural gas.

The plan, which is aimed at reducing greenhouse gas emissions to 15 per cent below 1990 levels within four years, will drive the price of gasoline up 4.3 cents per litre and increase the cost of home heating by up to $6.70 a month.

In her 2016 annual report, auditor general Bonnie Lysyk said households will pay an average of $156 next year in added costs because of cap and trade, rising to $210 in 2019 plus another $75 that year in indirect costs on goods and services.

Under the plan, businesses will have limits -- or caps -- on the amount of pollution they can emit. Companies that exceed those limits -- which will be reduced each year -- can buy permits or allowances through government-run auctions or from other companies that come in under their limits.

However, there will be major exemptions in the first four years, with some of Ontario's largest companies -- such as Essar Steel Algoma Inc. in Sault Ste. Marie, Vale Canada's nickel refinery in Sudbury, Petro-Canada Lubricants in Mississauga and Imperial Oil's chemical plant in Sarnia -- given free allocations.

The New Democrats said giving big industry "a four-year holiday" creates the perception of unfairness, but Environment and Climate Change Minister Glen Murray defended the exemptions.

"The free allocations are to protect Ontario jobs in industries that are competing with jurisdictions without a carbon pricing system, and to recognize industries that have made significant emission reductions already and need time to invest in new technology," said Murray.

Ontario hopes to raise $1.9 billion a year from cap-and-trade -- $8 billion by the end of 2020 -- and promises to spend all of it on programs that reduce emissions and help businesses and consumers adapt to a low-carbon economy.

There will be subsidies to make homes and industries more energy efficient with solar electric systems, insulation, heat pumps and new windows, plus an existing $277-million program that provides generous rebates for electric vehicles.

"That $8 billion will be going back into the lives and pockets of Ontarians," said Murray.

The Progressive Conservatives want a "revenue-neutral" carbon tax, but leader Patrick Brown says they're still developing the policy and will have it released as part of their campaign platform for the 2018 election.

"If it's really about the environment, it shouldn't be a revenue grab for government," said Brown.

Murray said a carbon tax would cost consumers a lot more than an extra $13 a month for gasoline and home heating.

"That would see gasoline spike by dollars," he warned.

Murray said a carbon tax would also leave homeowners and businesses paying the entire cost of fighting climate change without financial help from the cap-and-trade revenues.

The government insists "there will be no net increase to electricity prices because of cap and trade," but plans to use $1.32 billion of the revenues it generates to offset its impact on electricity bills, decreasing greenhouse gas emissions in the process.

The auditor general, however, said residential electricity bills will still rise by 23 per cent and industrial bills by 14 per cent by 2020, just slightly less than they would have risen without the $1.32 billion from cap and trade.

"The plan claims that the pricing subsidy will result in a three mega tonne estimated GHG (greenhouse gas emissions) reductions in 2020, but without specifying any credible mechanism to achieve these results," wrote Lysyk. "The proposed subsidy will not meet any of the key policy objectives for effective emission reductions."

In 2017, only companies operating in Ontario will be able to participate in the quarterly cap-and-trade auctions -- the first one is expected in March. Starting in 2018, Ontario will join the existing Quebec and California cap-and-trade market.

Lysyk predicted Ontario would reduce its emissions by only 20 per cent of its 2020 target, with the other 80 per cent being reduced in California and Quebec, which have been holding joint cap-and-trade auctions since 2014.

She said businesses in the province would be more likely to buy allowances rather than pay for the more expensive equipment needed to actually reduce their emissions.

"Ontario businesses will pay approximately $466 million for Quebec and California allowances by the end of 2020, money that will leave the Ontario economy," she said. "This could rise to $2.2 billion in 2030."

However, Murray said the plan includes other ways to reduce greenhouse gases, such as increasing the number of electric vehicles on the road and giving financial help to the home-building, forestry and cement sectors to adopt more energy-efficient practices and materials.

"If you didn't spend the $8 billion and you didn't do it along the kind of program lines we're doing, most of those emissions (reductions) would be outside of Ontario," he said.

The Canadian Taxpayers' Federation, which calls the plan a "cap-and-trade tax," said the auditor's report was proof the program is a failure before it even starts.

"Kathleen Wynne is claiming political credit for emission reductions in California and Quebec and counting those reductions towards her goal because she linked the province into a carbon market," said CTF Ontario director Christine Van Geyn. "Cap and trade will achieve nothing, at enormous cost."