Ontario’s cap and trade backers are excited for the billions of dollars in new money the scheme will create. California shows why the reality might be much different.

The legislators and bureaucrats pushing Ontario’s soon-to-launch cap and trade program have visions of billions of dollars in new spending to spread across the province, among them multi-billion transit projects, electric vehicle subsidies and energy efficiency upgrades. But Ontario need only look at what’s happening in California – its biggest partner in the cap and trade market – to see that the billions in revenue it hopes to capture may never materialize. Not only is the California program looking increasingly like a bust, the environmental credentials of many of the credits are nothing more than hot air.

Last week California held its latest auction of carbon credits, where polluters line up to buy offsets for their carbon emissions. The state was expecting to raise as much as $600 million dollars by selling more than 40 million carbon credits.

Instead, the state sold less than $10 million worth of carbon credits, leaving a giant hole in the expected pot of money it was planning to use on a variety of state programs – the most high-profile project being the state’s $64 billion bullet train from Los Angeles to San Francisco. The rail authority was expecting to earn $150 million from the latest auction, but instead received just $2.5 million.

Other hoped-for big ticket items to benefit from the carbon cash include affordable housing and “low carbon” vehicles. They must now find other funding to make up the difference, such as property, income or sales taxes. California has also dipped into previous funds from cap and trade auctions to pay off some of the state’s outstanding debt.

The “real” value of the carbon credits is even less than California’s regulated auction price. In every quarterly auction of carbon credits, California – and other jurisdictions like Quebec and, eventually, Ontario – establish a minimum price for each carbon credit. Sellers are prohibited from unloading their carbon credits for anything less than the minimum price.

But there are secondary markets where credits sold at previous auctions can be traded among different parties. Currently the price of carbon credits on those markets is below the minimum price established by regulators, meaning sellers are willing, in some cases, to take a loss on their carbon credits – which they had to buy at the higher, regulated price – in order to get rid of them, as the future of cap and trade program looks increasingly murky.

If the most recent auction – where more than 90% of all credits on offer went unsold – is any indication, California’s carbon market, which Ontario will be joining, will have a massive surplus of credits well into the future. Even without the recent crash in demand, the state’s own data pointed to a massive surplus in credits until at least 2020. Yet, at that point the whole program will likely have to reauthorized by legislators who will use the opportunity to push through recent demands for greater exemptions from the cap and trade program – thereby creating an even bigger surplus to be “managed” by regulators.

Just like in Europe, whose decade-long carbon market imploded shortly after every regulatory intervention to prop it up, California’s cap and trade scheme is increasingly looking doomed.

Not heeding the warning signs in California, Ontario still has big dreams for the money it expects to raise from cap and trade auctions. In 2017, when the province officially launches its cap and trade program, it hopes to bring in $1.9 billion. It hopes to raise similar amounts in subsequent years.

Money aside, even the environmental credentials of the millions of carbon credits being issued by California are empty. Many of the carbon credits from California come from carbon reductions that never occurred or are double counted in neighbouring states and jurisdictions. California regulators seem little inclined to fix the problem of double counting or the growing surplus of carbon credits that they continue to hand out.

California is also much more generous in the amount of free carbon credits it hands out to be big polluters, such as refiners and other heavy industry, than regulators in Ontario. Ontario businesses, then, will have to buy credits from polluters in California that were given a generous number of free credits for their polluting ways. This acts as little more than a wealth transfer from Ontario businesses and consumers to those in California.

Queen’s Park and the army of regulators it will employ to control the cap and trade system see a future with billions of dollars of new revenue and a cleaner environment. The reality is regulatory scheme that has blown up in every jurisdiction where it was launched and where consumers pay high prices to offset the exemptions to big business so they won’t take their business elsewhere.

Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236