Among the main reasons that progress on climate change is so slow are that the policy options are complex and demanding, while the benefits are diffuse. Twenty years after the initial GHG framework convention in Rio, global emissions are still rising and wide agreements on firm reductions remain elusive.
There are notable exceptions and attention-worthy examples where carbon reductions have been embraced and are happily producing economic and social benefits. Canadian industry, amongst the most energy-intensive in the world, has steadily reduced its carbon footprint in recent years. (See “Canadian industry continues to use less energy,” IPPSO FACTO, February 2014.) Ontario has shut down coal-fired power generation and energy efficient building standards have been widely adopted. Renewable power generation is growing by leaps and bounds all over the world.
Against this simultaneously challenging and hopeful backdrop, led by the fiery Minister of Environment and Climate Change Glen Murray, Ontario is expected to launch ambitious new measures in the coming months to further reduce carbon emissions. Whether these new measures sail forward like the wind on Lake Erie, or become embroiled in protracted debate, will depend to a large degree on how well the program recognizes the basic human factors that determine the pace of change in the energy, transportation, manufacturing and housing sectors and incorporates them into its strategic planning.
It has often been said that you can’t make change in the electricity sector without satisfying requirements in three areas: The physics (generally measured by system reliability), the economics (roughly measured by prices), and the politics (roughly measured by adherence to legal, regulatory and policy dictates). Even though technology is evolving with amazing speed, politics is without doubt the realm that has grown most quickly in terms of creating new conditions, and proven to be the most unpredictable.
Because policy-driven changes have been the primary cause of price increases and other disruptions in recent years, the industry devotes a lot of time to trying to understand what to expect from the next round of politics. As noted by experts in our special feature on climate change elsewhere in this issue of IPPSO FACTO, many are looking to Ontario’s upcoming climate change decisions as a means of improving certainty. Definitive policy will be crucial in planning the next round of infrastructure investment, which is itself fundamental to meeting both climate change objectives and those of the economy as a whole.
In coming to terms with these forces, it is arguable that there is now a fourth identifiable driver affecting development in the electricity sector. In addition to physics, economics and politics, decision makers and investors must also proactively consider perceived social equity. In other words, will the new climate change measures be seen as fair? While politics should in principle encompass questions of fairness, it’s become apparent in recent years that public opinion can sometimes be ahead of the politics or point in different direction. Proponents need to have public support, not just government support. Considering that the political realm as it’s presently defined is occupied in dealing with rates, supply mix, emission standards, regulatory mandates, agency re-structuring, executive compensation and long term planning, it’s questionable as to whether a systematic method for assessing and ensuring social equity is likely to be properly developed and maintained through conventional political processes alone.
At a high level, any group of investors or decision-makers likely has to be concerned about questions like the following:
1. Considering that the future is likely to include more smart grid infrastructure, distributed generation, storage and related technology, all of which have high proportions of private or at least non-utility ownership, how can the increasing level of customer-owned infrastructure be structured and managed so as to ensure investors are rewarded for their initiatives while customers who don’t make similar investments are not penalized, directly or indirectly? In other words, how to ensure basic equity between customer classes?
2. If Ontarians are asked to accept higher energy prices to decarbonize the energy system, how can such change be accomplished without placing an unfair burden on any one segment of society? In answering this question it is important to recognize that climate measures can have differential impacts by industrial sector, by income level, by age group and by region.
3. How best to communicate the social equity principles that are built into a reasonable plan for climate action? Assuming that methods are found to address fairness questions related to customer class, industrial sector, income level, age and region, how can the choices and associated action plans be properly explained and effectively communicated to all the concerned groups?
Ontario will likely face an early test of these questions as it moves to implement revenue decoupling. Although the specifics are still being resolved, the Ontario Energy Board has said that the province will move to a system of fixed charges for grid infrastructure. This will ensure that grid owners are kept whole as customers opt for alternatives to centralized shared investments. It sounds like a big step forward for customer choice, but there is a catch: There will likely be some underused assets left over for which the utilities will have to collect money. The impact of new fixed rates on those customers who choose not to opt out could be viewed through a lens of social equity as for example, people on fixed incomes might see net bill increases and be unable to muster the investments necessary to take advantage of new efficiency and emission-reducing technology. Any number of scenarios are possible where unfairness could be perceived, even as government and energy agencies struggle to implement policy that is otherwise sound, efficient and reasonably fair overall.
It is entirely possible that the provincial government was anticipating issues of this nature when it announced the new Ontario Electricity Support Program for low-income families on March 26. (See "Ontario announces low-income electricity support program," elsewhere in this issue.) Ontarians may enjoy the benefits of a competitive wholesale power market but market signals in prices can often be obscured by other factors such as Global Adjustment, Rural Rate Assistance, regulated price plans, uplifts, and the Ontario Electricity Support Program. The government plans to eliminate both the Debt Retirement Charge and the Ontario Clean Energy Benefit from bills as of January 1, 2016, although some aspects of debt retirement costs will continue to be collected from consumers indirectly. Based on public statements from the government it appears that rates may be rising further in the near future, possibly in part to recognize the higher costs of bringing on infrastructure that will allow for further reductions in GHG emissions.
In order to move forward with climate change policy, a much more comprehensive and nuanced approach to ensuring public acceptance, addressing the perceived fairness of proposed new initiatives, will be needed. It’s a big job, and one of the core questions at the outset will be how to define meaningful indicators of fairness that can be easily communicated and used as a basis for public discussion.
The province’s discussion paper on climate change makes it clear that both carbon pricing in some form and “sector specific actions” to achieve greenhouse gas targets will be tools in the government’s arsenal. It says, “Complementary, sector-specific actions and technology innovation are critical along with carbon pricing to achieve greenhouse gas targets.” The precise nature of those sector-specific actions could be a defining issue in Ontario’s program, a key question to be resolved with stakeholders in the months ahead, and a test of the social equity characteristics of the program.
All indications are that Ontario’s government intends to propose bold and decisive action on climate change, with cap-and-trade being only one of the tools to be used. This carries risks, both economic and political. There are risks to the economy and to the entire initiative if it’s not evidently built on a framework of fairness and well explained. There are dangers that it will be unfair to the electricity sector, which has already decarbonized to a much greater degree than any other growth sector of the economy. There are dangers that the entire undertaking will be rejected or undermined if it’s perceived as unfair to consumers as a whole, or unduly burdensome on any one class of consumers or segment of society.
Ontario’s climate strategy will almost certainly need to establish a standard for ensuring its impacts are seen as generally equitable amongst the various segments of society – and be prepared to demonstrate how it has met or exceeded that standard.
While many will see the need for provincial action on climate to be a matter of economic efficiency, or simply an environmental necessity, it is clear that progress will be choppy at best without a clearly defined means of ensuring the initiatives meet basic tests of fairness.
— Jake Brooks, Editor
Selections from the Ministry discussion paper
Actions in Key Sectors to Support Transformation to a Low Carbon Resilient Economy
¶ A low-carbon, resilient economy is one that pollutes less, wastes less and makes more efficient and productive use of energy, waste and resources. It’s also an economy that is built on climate resilient infrastructure, institutions, and natural systems that can absorb and adapt to the stresses of a rapidly changing climate. Complementary, sector-specific actions and technology innovation are critical along with carbon pricing to achieve greenhouse gas targets.
¶ Ontario will integrate climate change adaptation and resilience considerations in key infrastructure and asset planning decisions by applying an ‘adaptation lens’ (consideration of vulnerabilities, risk and corresponding resilience to climate impact) to all funding and infrastructure processes. For examples, vulnerability, risk impacts and resilience to climate changes including extreme weather will be integrated into Ontario’s Long-Term Infrastructure Plan (LTIP).