Thursday, October 30, 2014

A Carbon Tax for Ontario, today

There are lots of opinions about how to reduce global emissions of greenhouse gases. A carbon tax is frequently presented as the preferred choice of most economists, and it is a carbon tax that Ontario is ideally suited to introduce to its electricity sector. There need be no immediate costs to most consumers in introducing a tax which promises significant benefits.

A carbon tax could fulfil a political need, both domestically and internationally, to do something that is perceived as being about reducing greenhouse gas emissions. Every government wishes to present itself as active in reducing emissions. For the incumbent  Ontario government that will be important as the province is planned to enter a period of increasing emissions in its electricity sector. More significantly, Ontario could exert an influence beyond it's borders by introducing a very significant carbon tax in its electricity sector, and it could do so painlessly.

Figure 1: historical and forecast electricity costs
Since 2005 Ontario has recovered the cost of its electricity supply not simply through market rates, but through an additional "global adjustment" charge calculated to capture supply costs the market does not. That charge has been above $5 billion a year since 2010 and is anticipated to remain so for the next decade. Currently the global adjustment consists primarily of the costs of procuring supply less the money recovered from the sale of the supply to consumers.

One very contentious aspect of carbon taxation is what should be done with revenues. That should not be debatable in Ontario's electricity sector, because the revenues could simply be used to decrease the global adjustment charges currently payable by Ontario's consumers.