The Cost Implications of Ontario’s Environment Plan to Reduce Greenhouse Gas Emissions

We assess the economic costs of the greenhouse gas (GHG) mitigation measures contained in the Made-in-Ontario Environment Plan (Plan) and the alternative Federal Backstop Carbon Pricing approach to be applied in Ontario. We conclude the cost of the Made-in-Ontario Plan on businesses and households is 59% higher in 2022 and 50% higher in 2030 than the Federal approach for the same quantity of GHG reductions.

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We estimate the total cost of the Ontario Plan in 2022 is $334 million with an average cost of $62 per tonne removed. In 2022, the Plan could reduce Ontario’s GHGs by about 3.3% or 5.4 megatonnes (Mt). To achieve the 18 Mt reduction in 2030 sought by the Plan, we calculate the average cost per tonne of emissions removed is $69 per tonne with a total cost of $1.23 billion. The cost of the Federal approach for the same level of emission reductions is estimated to be $214 million in 2022 with an average cost of $40 per tonne removed. In 2030, total costs are $811 million with an average cost of $45 per tonne.

We estimate that household costs under the Ontario Plan total $450 million in 2022 and $924 million in 2030. Given there are no carbon revenues to address the household impacts of the policy, we find that on average, Ontario households are worse off under the Plan. In 2022, the Ontario Plan could cost the average Ontario household $80 rising to $154 in 2030. Assuming all carbon costs are passed on by industry, an assumption consistent with recent Parliamentary Budget Office analysis, household costs would rise to $94 in 2022 and $181 in 2030.

Under the Federal approach, households are better off in both time periods due to the federal rebates, even when accounting for abatement and carbon costs passed on by industry through higher prices. In 2022, the average Ontario household under the Federal approach is ahead $130 while in 2030 the benefit is $25. Assuming all carbon costs are passed on by industry, the benefit in 2022 falls to $71 with rebates greater than carbon costs. In 2030, the benefit shifts to a net cost of $24, where the rebates are insufficient to offset the costs.

Large final emitters under the Ontario Plan could be overcompensated in 2022 and 2030 as carbon costs are passed on while carbon payments are rebated under the Industry Performance Standard and subsides provided under the Carbon Trust. Under the Federal approach, there are competitiveness risks for segments of the economy that can’t opt-in to the Output-based Pricing System and likely will pay more than they are rebated.

While we did not assess the feasibility of the GHG measures contained in the ON Plan, integrated economy-wide modeling accounting for the policy interactions between the Plan’s measures would likely find higher costs for the same GHG reductions. Under the Federal approach, this policy interaction effect is less of a risk due to economy-wide carbon pricing, but there is some interaction risk given the presence of the Clean Fuel Standard.