Nicholas Bannon, Aaron De Laporte, Daniel Schuurman and Alfons Weersink
The Supreme Court of Canada ruled in March 2021 that the federal carbon pricing scheme is constitutional. While the Supreme Court’s decision shows the legality of carbon pricing, widespread controversy still surrounds the policy, especially with recent increases from $30 to $40 per tonne and further proposed annual increases by $15 per tonne until the price reaches $170 per tonne in 2030. Inevitably, this ever-increasing carbon price will drive the cost of farm inputs higher. However, in the recent April 2021 budget announcement, the government also announced significant supports for the adoption of agricultural best management practices (BMPs) that tangibly reduce carbon emissions or encourage sequestration, creating new revenue opportunities surrounding carbon credits. Given these recent somewhat opposing evolutions in agri-environmental policy, it is relevant to explore the potential impacts that carbon pricing and markets may have on Canadian and Ontario farms.
The Carbon Pricing system in Ontario is a combination of both federal and provincial policies. At the federal level, carbon pricing is meant to act as a backstop and only apply to provinces and territories that lack a carbon emissions reduction plan that meets federal standards. While Ontario had a cap and trade policy that met the standards set out in the Greenhouse Gas Pollution Pricing Act, the Ontario cap and trade policy was cancelled in 2018 following a provincial election. This change meant that the federal carbon price would now be applied within the province.
Federal carbon pricing has two components: the first being an output-based pricing system (OBPS) for large industrial producers, and the second being a tax applied to fuel purchases. In Ontario, the current federal OBPS that sets emissions standards for industrial facilities and issues credits to facilities that emit less will be replaced at the beginning of 2022 with the Emissions Performance Standards (EPS) program. Both programs only apply to larger industrial facilities emitting 50,000 tonnes of carbon per year, such as oil refineries or fertilizer production facilities. Although the EPS is unlikely to apply directly to most farmers, they will feel the effects indirectly. If facilities producing farm inputs such as nitrogen fertilizer are subject to stricter emissions standards, the costs of meeting these standards will get passed onto the farmer in the form of higher prices for farm inputs.
The federal carbon levy (or tax) applied to fuel purchases has a more direct impact on Ontario farmers. This tax is applied directly to all fuel purchases, including gasoline. For example, the current tax is 8.84 cents per litre, increasing to 11.05 cents per litre by 2022. With Ontario farms collectively spending nearly $500 million on fuel alone in 2019, the increases in prices at the pump will not go unnoticed by farmers.
While the demand for fuel is relatively inelastic because farmers cannot readily switch to more sustainable fuel alternatives, particularly for activities such as grain drying, the recent budget announcements include investments in agricultural clean technology, such as electric or hydrogen fuel cell retrofits to farm infrastructure, machinery and equipment, that could offset some of these costs as the price of carbon continues to rise. In the short-run, Canadian farmers will have increased fuel expenses relative to their competitors in international markets and, as price takers, will become relatively less competitive, bearing most of the cost of the tax. However, in the long-run, green energy technologies will become essential and (relatively) early on-farm investments could position Canadian farmers ahead of their peers.
Where there are new costs to farmers, there are also new opportunities. In early March 2021, the federal government announced a domestic carbon market that would allow the agricultural sector to earn carbon offsets and sell carbon credits for farming practices that sequester carbon and reduce biological emissions. Along with the federal budget, the government also announced direct funding support for the adoption of some of these practices, including $200 million for improved nitrogen management, cover crop adoption, and normalized rotational grazing, along with $60 million in set-aside funding for trees and wetlands. This is in addition to other existing programs to encourage carbon friendly practices, such as the small grains and cover crop adoption program offered by the Ecological Farmers Association of Ontario, or numerous natural land conservation initiatives through Ducks Unlimited Canada and the Nature Conservancy of Canada, for example. Through the carbon market and various programs, farmers may gain the ability to ‘stack’ carbon credits with program incentives, allowing farmers to be paid for both BMP adoption and sell the resulting carbon credits on the market. There are also potential opportunities to ‘stack’ water, or wildlife habitat benefit, credits, for example, in addition.
While farmer participation in carbon offset markets alone may not balance the higher costs of inputs as the carbon price rises, green technology adoption along with carbon credits stacking could very well end up being net beneficial to farmers across Ontario and the rest of Canada.
Recommended citation format: Bannon, N, A, De Laporte, D. Shuurman, and A. Weersink. "A Price on Carbon and What it Means for Ontario Farmers". Food Focus Guelph (115), Department of Food, Agricultural and Resource Economics, University of Guelph, June 1, 2021.