May 9, 2024 – Ontario is facing a potential $14.8 billion shortfall between funding for its net zero plans and its goals, according to a new C.D. Howe Institute report.
In “Mind the Gap: The Impact of Budget Constraints on Ontario’s Net Zero Plans,” author A.J. Goulding calculates that there is a significant potential funding shortfall for Ontario’s net zero targets relative to its current cost projections and the available sources to pay for it. “The need for thoughtful investment in net zero carbon emissions initiatives has never been greater. The purpose of this paper is to assess at a high level the extent to which projected funding needs for energy transition initiatives can be met using existing mechanisms,” says Goulding.
Using contributions from taxpayers, residential and commercial “willingness to pay,” vehicle and heating electrification, electric vehicle gasoline cost savings allocation, and asset replacement, Goulding says annual available funding totals $14.2 billion against an annual need of $29.0 billion. This means there is a potential shortfall of $14.8 billion.
“While we are in no way suggesting that the province will choose to fund it, this shortfall represents 7.2 percent of the 2023 provincial budget, which was $204.7 billion,” says Goulding. “This suggests the need for a strong focus on least-cost planning, retaining optionality in system buildout, and sober thinking with regards to the expected pace of heating and transportation electrification. The funding gap can potentially be overcome, but it will be much more difficult to do so if thoughtful planning is not deployed.”
To determine this potential funding shortfall, Goulding uses the high-level estimates from the Independent Electricity System Operator’s “Pathways to Decarbonization” report to the Minister of Energy, which aims to decarbonize the province’s electricity system by 2050. He then subtracts current committed federal and provincial funding, or taxpayer-funded initiatives, from future cost estimates and converts the difference to net annual incremental funding – assessing it relative to the 2050 net zero target date and industry cost.
Under an extreme adoption scenario, which anticipates higher levels of transportation and heating electrification and is likely closer to “Pathways” assumptions, Goulding finds that annual available funding for Ontario’s net zero goals totals $19.0 billion against an annual need of $25.1 billion. This results in a smaller shortfall of $6.1 billion.
The author says this projected shortfall is likely smaller due to assumptions like the higher cost recovery levels because of the greater adoption of electrification. This, in turn, represents only 3 percent of the 2023 provincial budget, but assumes available federal funding would double.
“Budget constraints for clean energy investments are real, and need to be considered in policy design,” says Goulding.
His other recommendations include developing a handbook of policy tools ranked by the levelized cost of carbon abatement for the Ontario government and assessing how to synchronize initiatives to maximize abatement at least cost; considering how to stage investments to enable sufficient optionality to take advantage of future cost declines; and having the “Pathways” report followed by an integrated system plan to examine how nuclear and other resources will work together.
Further, he recommends that as transportation and heating electrification loads increase, electricity tariffs need to be carefully assessed to assure these loads are paying amounts consistent with their system impact. Achieving high levels of electrification, he notes, will require a suite of policies that will need to be sustained and enforced. Finally, he says there is the potential for significant stranded costs if investments are not granular and lack optionality.
“It is important to recognize that notwithstanding the magnitude of the challenge from climate change, resources are finite. The fact that a resource is zero emitting is not in and of itself sufficient to justify buying it; we need to know that it fits within a least-cost, long-run approach to addressing the issue,” concludes Goulding. “While the cost gap identified here is not insurmountable relative to provincial budgets, better planning and additional funding will be required. Even if no additional funding is forthcoming given Canada’s relatively high tax burden, thoughtful planning can help move Ontario closer to the 2050 target.”
For more information contact: A.J. Goulding, Adjunct Associate Professor, Columbia University School of International and Public Affairs; and Lauren Malyk, Senior Communications Officer, C.D. Howe Institute, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org