Ontario's economic investment outlook dims with new government energy actions

August 13, 2018
Published in Forbes (August 13, 2018)

Ontario's Legislative Building in Queen's Park. Photo: Viv Lynch

Ontario’s government framed its reversal of carbon pricing and clean energy programs as an attempt to “save the little guy” – but it may have inadvertently thrown its economy in reverse while losing jobs and costing consumers.

Under recently elected Premier Ford, the Ontario government’s decisions to withdraw from the Western Climate Initiative (WCI) carbon market, oppose federal carbon pricing plans, and cancel hundreds of planned clean energy projects seem short-sighted for an economy that was already humming along.

By backsliding on climate, Ontario may have just cost businesses billions, added millions in consumer costs, eschewed thousands of jobs and muddied its investment outlook.

Ontario’s carbon pricing reversal will cost billions

In 2016, Ontario established a cap-and-trade system in the province with the passage of the Climate Change Mitigation and Low-Carbon Economy Act with the first auction in March 2017, and linked the system with California and Quebec through the WCI carbon market in January 2018. Two joint auctions were successfully held, selling out all available allowances in February and in May 2018 – demonstrating a high level of future confidence in the system. All told, the individual and joint auctions generated over $2.8 billion for Ontario.  

The province then sustained a dramatic reversal in policy in early June. Eschewing the agreements signed with California and Quebec, Premier Ford declined to provide the agreed upon one-year notice or wait, and instead announced an immediate end to the program. While the broader California and Quebec markets recovered quickly after a move by California to freeze trading, extensive uncertainty remains for entities that purchased and held allowances in Ontario and either are prevented from using these for compliance in the previously linked markets as planned, or are now stuck covering losses. 

Ontario’s Minister of the Environment Rod Phillips, announced that out of more than $2.8 billion in allowances sold by the province, only roughly $5 million in compensation will be provided to market participants – leaving companies responsible for covering billions in lost allowance value. The government has said some of these costs are expected to be passed onto consumers. Simultaneously, the government has introduced legislation immunizing Ontario from civil legal action related to these losses – a dangerous precedent for a jurisdiction looking to build investor confidence.

Canceled clean energy projects will cost thousands of jobs

Ontario’s climate rollback wasn’t limited to the carbon market, however. The provincial government pulled out of more than 750 early-stage wind and solar energy contracts in early July, pledging that the move would save ratepayers nearly $800 million – but the move could have quite the opposite economic effect.

Solar and wind are emerging from a nascent stage in Canada, and Ontario has led the way with more than 90% of national solar capacity. But Canada’s Solar Industries Association (CanSEIA) estimates the cancellations will cost Ontario 6,000 jobs and around $500 million in expected investment, while the cancellation of just one approved wind farm could cost more than $100 million, which may be paid by power consumers across the province. Those jobs and investments may shift to other provinces – CanSEIA expects increased development interest in Alberta and Saskatchewan, both of which have 2030 renewable energy targets.

Renewable energy costs have fallen fast over the past decade, making them cheaper than new coal or nuclear and cost-competitive with natural gas globally as of 2017, and those cheaper costs can create savings for electricity consumers through new development. 90% of the cancelled Ontario contracts were distributed solar that would have benefited farmers, schools, cities, and Indigenous communities – and clean energy installations had already pushed down medical costs due to declining coal use and increased public health.

The government also cancelled a wide array of energy efficiency programs including support for high-efficiency window and door installations to reduce energy use and costs for homeowners and businesses — causing concerns for an industry valued at $1 billion across Ontario — as well as heat pumps and wood heating systems.

Ontario’s clean energy rollback could also hit the brakes on its budding electric vehicle (EV) industry and market, with the government’s cancellation of EV rebate programs, as well as a host of programs supporting electric school bus and commercial vehicle purchases.

Ontario is the heart of Canada’s auto manufacturing sector, but domestic and global markets are shifting toward clean transportation – EVs could reach 28% of global sales by 2030 – so Ontario automakers risk losing out on accelerating market growth if domestic demand declines while investments dry up. 

Business community flags risks over climate policy backslide

Canada’s federal government will implement a federal carbon pricing backstop on January 1, 2019, in all provinces that do not already have a carbon pricing system in place that complies with the minimum federal requirement. The backstop system combines a carbon price on fossil fuels paid by fuel producers or distributors with an output-based pricing system for emissions-intensive trade exposed sectors. This policy approach allows provinces and territories to design systems that work for their own unique circumstances, while ensuring that a carbon price is applied across the country.

The Ontario government has set aside $30 million for a legal challenge to the federal carbon plan but broad consensus, echoed in a legal opinion obtained by the Government of Manitoba, is that the federal government has a constitutional right to apply such a system. In addition to a costly legal fight, Ontario’s intransigence would cost it an estimated $316 million in discretionary funding it would have received from a federal Low-Carbon Economy Fund.

This leaves the business community understandably cautious about investing in Ontario at this point – with two key sources of uncertainty looming over future investment decisions.

First, the government’s action breaking contracts that companies made in good faith by purchasing allowances combined with legislated immunity sets a dangerous precedent. Potential investors have voiced concerns, from German and multinational companies to businesses across Canada – including John Manley, president of the Business Council of Canada, who flagged the recent decisions as a risk to Ontario’s “reputation for fair dealing and respect for the rule of law”.  

Second, businesses find themselves in the difficult investment situation of facing uncertainty about future environmental regulation and costs. While cap-and-trade is clearly out, Ontario’s public has been clear in its desire for climate action, and the provincial government has provided few details about what a new climate plan might look like. Meanwhile, the federal government has been clear that provinces without a price on carbon will be covered by the federal carbon pricing backstop.

As a result, instead of taking the opportunity to design a carbon pricing system that is unique to Ontario’s economic realities, by default the provincial government is opting to have the federal backstop applied to its economy. Thus, companies considering investments might instead consider neighboring jurisdictions which have more clarity on policies and decarbonization support. 

Ontario’s major economic steps backward

The decisions made by Ontario’s government risk missing out on long-term economic opportunities to transform the province’s energy consumption footprint, as well as to transition the economy into one that manufactures the products which are valued in a low-carbon future.

Moreover, a significant portion of the permits already purchased by businesses could be passed onto Ontarians, who may also be stuck with the legal fees for a challenge to federal plans with little chance of success.  

In one fell swoop Ontario’s government has dramatically slashed a source of funding for clean transportation infrastructure to help consumers lower travel costs, erased hundreds of clean energy projects to help consumers reduce electricity costs, dimmed the prospects for jobs and economic growth from clean tech industries, and took a major step backwards in making the province an attractive climate for business and investment today - and into the future.

Silvio Marcacci is Communications Director at Energy Innovation. Sara Hastings-Simon is Managing Director, Clean Economy at Pembina Institute.

This article originally appeared in Forbes.