Will Ontario's Carbon Market Withdrawal Harm The Western Climate Initiative? No, Says Price Rebound.
Shortly after his June 7th election, populist Ontario Premier-designate Doug Ford announced his intention to withdraw from the California-Quebec-Ontario linked Western Climate Initiative (WCI) carbon market and promised to fight the Canadian government’s broader efforts to reduce greenhouse gas emissions, causing turmoil for companies in the province.
Doug Ford, Ontario's premier-designate, speaks during a briefing on North American Free Trade Agreement negotiations in Toronto, Ontario, Canada, on Thursday, June 14, 2018.
But while Premier-designate Ford’s actions may have fulfilled his campaign promise, they add up to a nostalgic play for 20th century economics that could cost Canada’s most populous province billions in penalties and diminished clean energy growth opportunities.
Even though Ford’s withdrawal announcement initially caused a drop in carbon allowance prices across the market, prices have recovered remarkably fast, showing that Ontario’s departure is only a temporary setback for the WCI carbon market , which stands on a strong foundation.
Near-Term Costs From Abandoning Emissions-Reduction Efforts
Ontario formally joined California and Quebec in the WCI in September 2017, cooperating in the world’s strongest cap-and-trade program, agreeing to “cap” carbon pollution, and requiring major emitters in all three jurisdictions to obtain allowance covering their carbon emissions. The allowances are tradable in markets, like commodities.
WCI allowances are auctioned or distributed freely to large, energy-intensive industry facing international competition. Ontario has auctioned about 150 million allowances so far, raising more than $2 billion (roughly $2.8 billion Canadian). Either the holders of those allowances will have to be reimbursed, or the province may face even more costly litigation.
In spurning the Pan-Canadian Framework on Clean Growth and Climate Change, which centers on establishing a national carbon price, Ontario will also lose out on an estimated $316 million it could have leveraged from a federal Low Carbon Economy Fund. Provinces and territories would have wide leeway on how they spend these funds under the Pan-Canadian Framework.
It is unclear how this allowance liability, and looming carbon pricing disputes with the federal government, will play out – and the resulting uncertainty will weigh on business decisions in Ontario.
A Backward-Looking Economic Strategy
Beyond the near term policy cost, the combined strategy of backsliding on clean energy and climate progress will put Ontario’s businesses at an economic disadvantage to competitors.
Reversing course on carbon pricing is a bad move for Ontario, environmentally and economically. Fast-falling technology costs and global demands for cleaner air, including in Asian markets like China and India where most growth is occurring, mean the future of energy economics is in clean technology.
For example in the realm of cars, the world’s markets are accelerating toward electric vehicles (EVs), rising from 11 million EVs sold globally in 2025 to 60 million sold in 2040. Ontario is the heart of Canada’s large auto manufacturing sector, and WCI participation was helping shift the province toward EVs.
Carbon pricing is a cost-effective policy to level the playing field for clean technologies compared to fossil fuel technologies. Moreover, fees from otherwise unchecked pollution are the most economically efficient way for governments to underwrite the necessary capital investments for a clean energy transition , and have gone toward funding zero emission vehicle rebates and other clean tech upgrades in Ontario. Such investments are crucial for priming the market to set the conditions for commercial forces to take over.
Snap back In California Carbon Allowance Prices
While Ontario’s businesses must contend with new uncertainties and its new government struggles to explain what an orderly withdrawal means, officials in California and Quebec worked quickly to contain the decision’s effect – and they have succeeded. It is remarkable how quickly the rest of the WCI market has shrugged off the withdrawal news.
This rebound is evident in the prices for California carbon allowances (CCAs), which have recovered all the ground lost after Ford’s election. CCAs have actually risen slightly higher than before, up 0.07 cents to $14.92 on June 22nd compared to a price of $14.85 before the election.
Market Fundamentals Create Solid Foundation for WCI Carbon Market
The WCI carbon market remains on solid ground. Cross-party support exists for the WCI approach in Quebec, and in 2017 California cemented the legal authority for its carbon market through 2030 by adopting legislation with a 2/3rds supermajority.
Unshakable support for cap-and-trade exists in California from the top levels of government, across executive and legislative branches, down to popular opinion among residents. It is not a big surprise why, since the state’s economy has surged to the 5th largest worldwide, in tandem with its carbon market – with 12% of the population, California contributed 16% of total U.S. job growth and its share of the national economy grew from 12.8% to 14.2% between 2012-2017.
Ontario’s departure is a temporary setback. All things being equal, a larger carbon market has advantages, but the California-Quebec linked market is certainly large enough to thrive without Ontario – as it did for four years before linking to the province. Additional partners may join, but these are not necessary for the program to succeed, and the market itself is sending this message through the price allowances prices, which stand higher today than they did the day before the recent election results from Ontario.