How Ontario’s cap-and-trade could affect gas pumps and maybe beer taps

WATCH: The premiers of Ontario and Quebec signed a cap-and-trade agreement aimed at getting businesses to reduce their greenhouse gas emissions. Vassy Kapelos has the details.

Premier Kathleen Wynne has announced that Ontario intends to implement a new carbon cap-and-trade program, working in conjunction with Quebec.

The government says that the system is “one of many actions Ontario needs to fight climate change,” but the opposition says that the plan “isn’t about reducing GHG emissions; it is about taking more money from the taxpayers to fund this government’s spending addiction.”

WATCH: Wynne explains how cap-and-trade plan will benefit Ontario

Although details are thin so far, here is what cap-and-trade could mean for Ontarians.

How does cap-and-trade work?

Carbon cap-and-trade is a simple idea, with a pretty complicated implementation. Essentially, the government sets a target level of carbon emissions for industry (the “cap”). Companies aren’t allowed to exceed that level – unless, that is, they trade.

If a company emits less than the cap, they can sell their unused emissions allowance (called pollution credits) to other companies. If a company buys pollution credits, then they’re allowed to emit more pollution.

The government will slowly reduce the cap over time, with the idea that industry will become less and less polluting since it will become expensive for them to buy extra credits year after year.

In some jurisdictions, like California, the government actually auctions additional pollution credits directly to the most polluting businesses, and keeps the cash. In California’s case, that money is then used for projects that support pollution reduction – though the state’s government has occasionally dipped into that fund for other initiatives.

A background paper from the Ontario government states that the program’s proceeds will be reinvested into “projects that reduce greenhouse gas pollution and help businesses remain competitive.”

How will Ontario’s program work?

We don’t really know yet. A lot depends on which industries will be included in the program, how high or low the carbon cap will be set, how the trading and auction systems will be run and what kind of price the government plans to charge for those extra pollution credits.

In a release, the Ontario government stated that the province will consult with communities and industry over the next six months on the design of the program.

How will it affect you?

Without specifics, it’s really hard to say. However, looking at other jurisdictions can offer some clues. Since Ontario intends to join the trading regime that already exists in Quebec and California, they’re good places to start.

1. Gas prices

Ontario’s own press release states that in Quebec, gas prices went up by 2 to 3.5 cents per litre because of the cap-and-trade system, according to government and oil industry estimates. The release also quotes a University of California Berkeley report that estimates cap-and-trade will add 2.6 cents per litre to the price of gas in the state.

According to Ontario’s Climate Change Update 2014, the transportation sector is the biggest source of carbon emissions – accounting for 34 per cent of the province’s total emissions in 2012. Of that, the biggest emitters are personal vehicles and light trucks. So, higher gas prices might convince a few drivers to keep their cars off the road – particularly if the government uses pollution credit proceeds to pay for more public transit. But without any details, it’s very hard to say whether this is the government’s intention or if so, whether it will work.

2. Consumer goods

This is where it gets tricky. It’s likely that high-polluting businesses that are faced with higher production costs because they have to buy pollution credits will pass those costs onto their customers.

In Ontario, some of the highest-emitting businesses are steel manufacturers, like the Dofasco steel plant in Hamilton, according to open data on carbon emissions put out by the Ontario government. Also on the list are oil and chemical facilities, concrete manufacturers, pulp and paper mills, car manufacturers, smelters, city waste disposal facilities, some university campuses and even the Labatt brewery in London.

So, depending on how the system is set up, you could pay more for a lot of things – maybe even a can of Labatt Blue. In a news release, Ontario Progressive Conservative interim leader Jim Wilson called cap-and-trade a “carbon tax” that will “raise the price of everything that Ontarians buy from a store shelf.”

It’s worth mentioning though that a lot depends on how the system is set up. For example, Quebec decided to protect its aluminum producers by giving them free pollution credits. According to a government backgrounder, the business faces international competition that means that they have little control over their prices. So, the free credits ensure that their production costs don’t go up.

It’s possible that Ontario might choose to protect some industries in the same way.

3. Possible savings

According to a 2011 report by the National Round Table on the Environment and the Economy, climate change could cost Canada $5 billion a year in economic costs, damages to dwellings and human health problems by 2020. Climate change is already costing the people of Ontario, according to the Ontario government, which says that cap-and-trade is a way to fight emissions and reward innovative companies.

WATCH: Premier Kathleen Wynne argues lack of climate change action could be more costly to taxpayers