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Ontario Premier Doug Ford speaks to supporters at an anti-carbon tax rally in Calgary on Friday, Oct. 5, 2018.Jeff McIntosh/The Canadian Press

The federal government should proceed with its carbon-tax plan and distribute the revenues to residents in those provinces where the federal levy applies, says a report released Wednesday by the C.D. Howe Institute.

The Toronto-based think tank released the paper as the Ontario government launches consultations on a “made-in-Ontario” plan that would feature an “emissions-reduction fund” to invest in new technology, though it does not say how the revenues for the fund would be generated.

C.D. Howe Institute is the latest business-backed group to wade into the politically-charged debate over carbon taxes. After taking office in June, Premier Doug Ford scrapped the province’s cap-and-trade plan, arguing it is an undue burden on consumers and businesses.

The Ontario Premier has allied himself with Saskatchewan Premier Scott Moe and Alberta’s United Conservative Party Leader Jason Kenney in opposing the federal tax plan. Manitoba also recently cancelled its planned carbon tax.

“The politics of carbon pricing may have changed but the climate change challenge and Canada’s emissions reduction targets under the Paris agreement have not,” C.D. Howe policy analyst Tracy Snoddon wrote. “The economics are also unchanged – carbon pricing continues to be the most cost-effective option for achieving emissions reductions across the country.”

Prime Minister Justin Trudeau has vowed to impose a carbon tax in those provinces that either do not have a carbon-pricing plan or do not meet federal standards with a plan they do have. The federal levy will start a $20 a tonne on Jan. 1, 2019 and increase to $50 in 2022, or roughly 11 cents a litre of gasoline, by 2022. Mr. Trudeau has indicated Ottawa will return the revenue to the provinces in which it is collected.

Ms. Snodden calculates the federal government would raise $3.7-billion next year in five provinces – Ontario, Saskatchewan, New Brunswick, Newfoundland and Prince Edward Island – based on current emissions. In Ontario alone, it would yield $1-billion, and rebating the revenue to individual residents would amount to $532 for a four-person household. That figure will grow over time as the carbon tax increases.

Some business groups worry such an approach will undermine Canada’s economic competitiveness. Both the Chamber of Commerce and the Canadian Federation of Independent Business have urged Ottawa to include small and medium-sized businesses in any rebate plan.

Large industrial facilities will pay the tax only on a small portion of their greenhouse gas emissions in a system that is meant to encourage investments in GHG reductions, but not chase investment and jobs out of the country.

Ms. Snoddon said Ottawa needs to employ a straightforward revenue recycling plan to support its legal argument that the carbon levy is an environmental measure, not an effort to raise tax revenues. The federal government is facing a legal challenge from Ontario and Saskatchewan over its carbon-tax plan.

Ontario’s financial watchdog reported Tuesday that cancellation of the cap-and-trade program will cost the provincial government $3-billion over the next four years, even as it copes with a $15-billion annual deficit. Environment Minister Rod Phillips said that money will now remain in the pockets of taxpayers, rather than go to government.

Mr. Phillips’s ministry posted a notice Wednesday regarding consultations on a “made-in-Ontario climate plan,” which was promised in legislation used to end cap-and-trade. The post suggested the provincial government will focus on measures required to adapt to climate change and the extreme weather that is occurring and is expected to get dramatically more intense.

The ministry said the plan will focus on “improving Ontario’s business climate by unlocking the power of the private sector to finance and drive innovative climate solutions. A key part of this will be setting up an emissions-reduction fund to invest in new technologies to reduce emissions right here in Ontario.”