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Fixing Cap and Trade

The Ontario Liberals and Kathleen Wynne deserve credit for bringing in their Cap and trade program, no matter how flawed it is. It does not matter that it is costly, complicated and confusing. It does not even matter that will fail. It is a mess, but it is our mess now and we can fix it.

In fact it is easy to fix. The Liberals could fix it tomorrow if they want to. A bill that is coming to the California legislature shows how.

catrade

From MIT Technology Review

 

California, with the sixth largest economy in the world, is the leader in environmental action in the USA. Ontario’s Liberals copied the California system. Now leading Californian legislators want to revise the bill to make much more like a simple carbon fee and dividend.

The proposal would establish one of the highest prices on carbon in the world, generating billions annually. Most of the revenue from the proposed program would go directly to California citizens in the form of a climate dividend. This almost eliminates any negative economic effect and give the general population a reason to support the program.

The bill would not create a pure fee and dividend system. Rather than just setting the carbon price it proposes a tight “collar” on the price the legislature. That means that California would keep the trade part of cap and trade, but basically drop the cap.

It is messy, but it is a reasonable short-run compromise. The trading system is where all the costs and inefficiencies are – it isn’t needed if you have a simple carbon tax. Unfortunately there are now a lot of people making money trading carbon permits. Once you breath life into an artificial trading system it is hard to kill. Kind of like organized crime, or Frankenstein’s monster.

It is important to understand that the trading system is not what collects most of the money. Most of the revenue is coming from fuel suppliers, who are forced to buy credits. This is really just a tax on consumers collected by suppliers. In fact it is just an expensive way to collect a carbon tax. 80% of the cap and trade revenues come from the fuel tax. 95% of the costs come from the trading system.

The California bill would also set aside money for a separate infrastructure program and the California Climate and Clean Energy Research Fund. This keeps two other groups happy – environmentalists who want money for research and infrastructure, and all the scientists, bureaucrats and politicians who honestly believe they can spend money better than the people who actually pay the tax. They may be right.

A major innovation would be the introduction of border tax adjustments. Imports form jurisdictions that don’t have a tax will have the missing tax added when the enter California. California goods and services will get the tax back if they are sold in jurisdictions that don’t have an equivalent carbon price. This levels the playing field for California producers. We need the same rule in Ontario.

California’s existing system has struggled with low demand, legal challenges, and uncertainty over its authority to operate past 2020. Assemblywoman Cristina Garcia proposed a bill to add 10 years to the life of the program, and to add new restrictions on air pollutants. The bill failed.

The Governor of California is insisting that any change to the new bill needs a super majority, at least two-thirds of the assembly vote. The word here is that 79-year old Gerry Brown sees Cap and Trade as his greatest legacy and doesn’t want any changes before he retires. He would be better leaving a system that actually works.

George Bush’s favorite environmental group, the Environmental Defense Fund, is also opposing the changes. The EDF is an extremely powerful organizations with strong links to industry and a deep commitment to what it calls “market based solutions” — to cap and trade. Other environmental organizations are supporting the amendments.

It is interesting to note that the bill State Senator Bob Wieckowski introduced last month sets a schedule for raising the carbon price. It is almost exactly the same as the schedule proposed by Canada’s Prime Minister, Justin Trudeau.

Ontario could fix its carbon pricing system tomorrow, but there is serious opposition in Cabinet. Inside sources suggest that the the main obstacle is the Honorable Glen Murray. Murray is apparently deeply committed to the cap and trade approach which was popular when he was young. His commitment showed when his Ministry ran an extensive public consultation and then ignored the majority of the responses. Information about the failures of Murray’s baby get to the Premier though Murray.

Cabinet probably doesn’t know that expert opinion has swung from cap-and-trade to fee-and-dividend. They may not find out until Murray retires.

California Proposes Ambitious New Cap-and-Trade Program,” MIT Technology Review, May 1, 2017.

Economists Don’t Support Cap and Trade

My letter to the Editor of the Sudbury Star in response to a letter from Ontario Minister of the Environment and Climate Change, Glen Murray (see: ‘Cap and Trade best – Minister‘).


I do wish the Honorable Glen Murray,  Minister of the Environment and Climate Change would give us the names of the “independent economists” who claim his cap-and-trade scheme is one quarter as costly as a carbon tax and still more effective. As a professional economist I know that cap and trade is going out of fashion among economists. There are many reasons, but the main ones are that it is costly, bureaucratic, and it has not worked well in practice. I would like to know who the intellectual laggards  he chooses to believe are.Minister Murray

Murray is passing off nonsense as the gospel truth. In fact a carbon tax accompanied a dividend that returns the revenue to consumers will work better and cost consumers less than the provincial scheme. I don’t support conservative leader Patrick Brown in general, but on this issue it is Brown who has taken the more economically informed and responsible  position.

Any carbon pricing scheme needs to be supported by a well designed border adjustment tax (BTA) so that domestic producers are not penalized. Unfortunately the approach adopted by the province, with its various exemptions,  makes it much harder to introduce  a BTA.

Murray is also misleading the public in saying that $1.9 billion is being reinvested each year. First, because he doesn’t have the $1.9 billion yet – he has to sell all these permits in a market where he is competing with California and Quebec. Most analysts expect Ontario businesses to buy some of  their permits from outside of the Province. That will result in a significant drag on the economy. Second, Murray believes that he can invest the revenues more efficiently than than the people that the tax is collected from. Few economists believe that. Third, there are lawyers, brokers, inspectors, verifiers,  and bureaucrats being paid to run the system. These are nice, very well paid people, but their work would be unnecessary with a simple carbon tax.  Murray has saddled the province with a wasteful  and inefficient system.

Finally, as Mr Murray must know by now, there is no way that he can get to a carbon price that will be effective without returning the money he collects to the people. To be effective the carbon price has to be well over $100/ tonne of CO2. If he returns the carbon tax to the people, carbon pricing is basically free for consumers. FREE! If he doesn’t, the people will resist mightily, and he is going to seriously damage Ontario’s economy.

Dr. David Robinson.

Economist

Members of Greater Sudbury Council: Get this Map for the City – or Resign.

I have been suggesting to various Council members and planners in Sudbury that they need to do one simple thing before they make any more financial decisions. They need to know where their revenue is coming from and where it goes. In other words, they need a map like the one below.

The green spikes on the map show the parts of the City of Lafayette that pay in more than the city spends on them. There is a lot more red, both in area and in volume: Lafayette is going bankrupt.

Sudbury is going bankrupt too – it is running up a huge infrastructure deficit. The city in on its way to the fate of American cities that have had to stop paving their roads. Wait a minute! Didn’t we have a report to council from KPMG in December that the city will never bring all its infrastructure up to standard?

Council members are considering a master plan for the city that doesn’t show which areas pay for themselves and which don’t. If they don’t have that map they are not competent to approve a master plan. They can get the map simply by ordering the planning department to produce it. The planning department can get help from the clever people who made the map for Lafayette. It is easy. There really is no remotely acceptable excuse. Get the map or resign, friends.

And once you have the map, make sure every development satisfies one of two conditions. (1) It can be in the green areas, or (2) it can prove it will generate more than it costs.

Any development that does not satisfy (1) or (2) is being subsidized by the taxpayers in the green areas. That would make the council members accessories to daylight robbery. Of course they are accessories to robbery now, but they keep it in the dark.

Get the map or resign.

And publish the map so you citizens know you have done your homework.

There is more information about the map and what it means at https://www.strongtowns.org/journal/2017/1/9/the-real-reason-your-city-has-no-money

Note to my friends on council: don’t take this too personally – I like to express things vividly so it is hard to pretend you don’t understand. We all know that most City councilors in Ontario are willfully ignorant about where their money comes form and where it goes. You can be head and shoulders above the mob of local politicians if you just take this advice.

Lafayette-The Map

The City Must Die!

Greater Sudbury was a mistake. Mike Harris forced amalgamation on the city and it failed. It is time for council to start de-amalgamation proceedings.

The City of Greater Sudbury is a very recent experiment. It was was formed on January 1, 2001, as recommended by the Report to the Minister of Municipal Affairs and Housing on Local Government Reform for Sudbury. The new City bundled towns and cities of the Regional Municipality of Sudbury with 9 unincorporated townships.

The result was the 24th largest metropolitan area in Canada. By land area, it is the largest city in Ontario and the seventh largest municipality by area in Canada.sudbury-ward-map

The pieces that went into the pie, including the Regional Municipality of Sudbury, were all newly created in 1973 by amalgamating several smaller towns and townships.

The 1999 legislation that did the dirty work was called “The Fewer Municipal Politicians Act.” Ironically it repealed several sections of “The Better Local Government Act” of 1996.

The name of the Act pretty well goes a long way to explaining why the Harris government thought amalgamation was a good idea: The goal was to get rid of politicians. Objective number one was “less government resulting from fewer municipalities and fewer politicians.” Apparently politicians are a big cost. Taken to its logical limit, the ideal and cheapest system would be a dictatorship.

Politicians are a cost of course – a cost of a democracy. Local politics is the training ground for provincial and federal politicians. Local politics is where people get involved in managing their own affairs. “The Fewer Municipal Politicians Act” set out to tear up the roots of the democratic system.

Besides a dislike for local politicians, the Harris government had a surprising faith in big government. Objective three was “efficient service delivery, including reduced overlap and captured spillovers.” The government thought larger organization would be cheaper to run. They believed in what economists call “scale efficencies.”

Numerous studies have looked at whether there are or are not economies of scale in local government. Most of the studies suggest that rather than saving costs, amalgamation increases costs. A recent study of towns and cities in New Your State, for, example, found that very small communities have higher average costs because of their size. It also found that that larger communities have higher average costs because of their size. According to Lawrence Southwick, author of Economies of Scale in Local Government: General Government Spending (2012), the sweet spot is “somewhere between 4600 and 25,200.” Sudbury is not in the sweet spot.

James Cuddy’s recent study for the Northern Policy Institute found in fact that all but one expenditure increased after Sudbury’s amalgamation. Data was not available to show whether services increased or decreased, nor for whom they increased or decreased. The growing infrastructure deficit suggests that costs would have increased a lot more if city council had been not been running down the capital stock.

If Mr Harris had been driven by data rather than ideology he would not have forced amalgamation on the region. The evidence showed that amalgamation would inevitably increase the cost per capita of governing the people for the Sudbury region.

The Harris government had three other objectives in forcing amalgamation. It wanted “an accessible and accountable representation system.” Amalgamation was effective in reducing accessibility.

The government wanted “growth and development.” Amalgamation was irrelevant for this goal, and clearly failed to achieve this goal for Sudbury. The final objective, “municipal self sufficiency by delivering municipal services funded by municipal sources” was really about downloading costs to the municipality. That was a success. Amalgamation was a smokescreen for downloading.

The evidence is now in and we know the experiment has failed. The City of Greater Sudbury is not more efficient than the separate community governments. It is also not more democratic.

To be fair, Harris and his crew probably believed that getting rid of a whole level of government would be an improvement. Prior to amalgamation, each town and city in the regional municipality had its own mayor and council, and provided many of its own municipal services. The Regional Municipality also had a regional council and chairman of its own, and provided certain region-wide services. It may have seemed obvious that a two-level system couldn’t work as well as a single-level municipality.

The problem is that to manage local affairs Harris replaced a level of largely volunteer politicians with a level of highly paid city employees who were much farther from the citizens they served. The part-timer who mowed the soccer field before the Thursday game became an employee of the central city who mowed the field Monday morning at 9 am.

No one has ever presented any evidence that overall services improved in the new city. No one even tried to collect the data. Amalgamation was driven by ideology.

And it has failed. It is time to cut the city up into natural communities with their own councils. It is time to recreate a regional council to deal with shared services and to allocate the costs of regional roads. It is probably time to dismantle the regional school board as well. The Conservative vision of big, cheap government has failed.

I’m calling on City Council to begin de-amalgamation. The goals are clear: to reduce costs and to improve democracy the City of Greater Sudbury must die!

Populism and Electoral Reform in Canada

Preston Manning told conservatives today that the way to prevent US-style anger and resentment from corrupting Canadian politics is to listen to the people who have real grievances – to give them a voice and engage them in the political process. Notice that giving people a voice and engaging them in the political process was a major argument in favour of proportional representation. Is Manning a supporter of proportional representation?preston-manning

I am reading a piece at the Project Syndicate website called the Anatomy of Populism. The essay brings together much of the best thinking on Trump’s populist appeal and the growth of populist movements in many countries. The consensus seems to be that Manning is right: people who feel left out are vulnerable to demagogues who intensify the divisions in society. It can be seen as disease of democracies: elected politicians have a hard and time-consuming job just governing, but if they are governing then they are simply not there listening to the people they are supposed to represent.

When Mr Trudeau breaking his promise on electoral reform he essentially said he didn’t want to give certain sectors of society a voice. Although he got elected by criss-crossing the country convincing people he was listening, in practice he chose to exclude the voices of some Canadians from the political process.

The result is that groups expressing minority views may try to take over mainstream parties. Harper succeeded in Canada and the Tea Party succeeded in the US. Trudeau’s decision is laying the groundwork for a Canadian Trump. Trump , in my view, is laying the groundwork for what is increasingly being described as an “illiberal democracy.”

An illiberal democracy is a governing system in which, although elections take place, citizens are cut off from knowledge about the activities of those who exercise real power because of the lack of civil liberties.

So Conservative hero Preston Manning is lining up with many of the most thoughtful small “L” liberal thinkers of the day while our Liberal Prime Minister is preparing the ground for a populist revolution. As my mother used to say, “Who’d have thunk it?”

https://www.project-syndicate.org/onpoint/the-anatomy-of-populist-economics-by-brigitte-granville-2017-02?utm_source=Project+Syndicate+Newsletter&utm_campaign=0a7d552f82-op_newsletter_anatomy_populist_economics_2017_2_24&utm_medium=email&utm_term=0_73bad5b7d8-0a7d552f82-105048481&barrier=accessreg

 

I’m a Northerner: I Get It.

From the Sudbury Star: ‘I’m a Northerner. I get it’ — Sudbury MPP

I loved Glenn’s empathetic line about the pain caused by the high cost of electricity. He went on to promote (and take credit for) some good and showy ad-hoc policies to reduce the pain for lower income Ontarians.

1297642412922_originalNot cutting off electricity for poor people in winter is good. It should have been our policy long ago. It is just a politically-motivated very temporary patch, however. It doesn’t solve the real problem – the same poor people will be in the same position next year and they will probably not even be able to pay for their electricity once winter ends.

The policy shifts a debt from some consumers to the local electricity distribution companies. The unpaid bills have not gone away – they been temporarily hidden in various public accounts.

That suggests that Glenn doesn’t really “get it” at all. The electricity alligator will be back to bite him once the snows disappear.

Electricity rebates for low income households are another patented Glenn Thibeault touch. These rebates are a generous transfer to poorer Ontarians, something most of us probably agree with. What Glenn doesn’t seem to get is that they are costly to manage and inefficient. It is not a good way to subsidize poor people, it actually undermines the electricity pricing system, and it discourages carbon-reducing changes. Their only virtue is that they may reduce the political pressure on Glenn and the government. Glenn may feel the pain but, when it comes to developing good policies, he doesn’t really “get it.”

The right policy – and I did explain this to him during the election campaign (please ask him whether he remembers.) is to sell electricity at its true cost. Give poor people money if they need it, but don’t use the electricity system to do it.

Naturally politicians are afraid to charge the real price for electricity, and they are right to be afraid. Governments have fallen because consumers don’t want to pay the real cost of electricity (or health care or roads).

Even so, the electricity pricing system is seriously warped. For example, the province has a part-time excess of electricity at the current prices. That means the prices are too high. It almost certainly means that the government-negotiated producer prices are too high. Past governments made some bad deals, as it turns out, although at the time they may have seemed pretty good. Any normal business would have to take the loss and reduce its price to sell the surplus. Supplying electricity is not a normal business, however.

For many years the Province forced the electricity system to collect money to pay off debts incurred by previous governments. A decision 17 years ago to divide Ontario Hydro into several different companies resulted in a multibillion-dollar stranded debt and a new charge that’s still on all electricity bills.

This “stranded debt” stemmed from the 1999 breakup of the province’s giant electrical utility, which had $38.1 billion in debt, mostly from building nuclear plants in the 1970s and ’80s. Major mistakes were made by previous governments – primarily huge overruns in building nuclear plants that were caused largely by political dithering and changing plans. These losses would normally be written off in a private business – the company would go bankrupt, shareholders would lose value and a new buyer would begin selling electricity without the debt. The province can’t just go bankrupt and make the debt disappear.

So rather than simply add this stranded debt to other provincial debt, finance ministers decided to the exploit their monopoly power and collect the debt from electricity consumers. It made a certain kind of sense, since the debt was incurred on behalf of electricity consumers. Justified or not, however, the stranded debt has been one important cause of excessively high and distorted electricity prices. (The charge was eliminated for households in 2016, but will continue for others classes for a while)

Debt is debt. It doesn’t matter which debt account it is recorded in — except for one purely political fact: the debt is partially hidden in the electricity system. That means rather than paying for the debt out of taxes, the province could pay indirectly by making consumers pay through electricity charges.

That was a mistake economically. It meant electricity prices were too high, we lost some manufacturing jobs, poor people suffered unnecessarily and it was much harder to shift from fossil fuels to electricity, which we must do and will inevitably do.

Subsidies for green power are another politically motivated charge that should probably not be added to the bills, whether they were good policy or not. The subsidies were part of a plan to promote new industries, not a necessary cost of supplying electricity. They should have been charged to the Ministry of Industry and Innovation, or whatever it was called a the time.

Today Glenn’s politically motivated relief for consumers are actually slowing down the process of adapting to the 21st century. They won’t solve the problem of high electricity prices and they won’t solve – or even really help the problem of poverty in Ontario.

It isn’t enough for Glenn to show he understands our pain. He has to show he understands the system he is supposed to run. So far, it doesn’t look like he gets it at all.

http://www.vox.com/2016/5/10/11643864/global-warming-spiral-temperatures

 

Justin Trudeau’s Electoral Reform Betrayal – and his Stupid Justification for It

I actually felt injured when Justin Trudeau reneged on his electoral reform promise. I’ve tried to figure out why this particular broken promise felt like a betrayal when other broken promises, lies and stupid mistakes I have seen over the years just annoyed me.

In part it is because, even though I voted for – actually ran for – another party, I had drunk the Koolaid. I was suckered, at least a bit, by the promise of a different kind of politics. I was also taken in by my own optimism about this country of ours.trudeau-voting-jpg-size-custom-crop-1086x731

We have one of the most successful countries in the world. We have a political system that works better than most. On many, many occasions Canadians have acted in way that inspire admiration and even trust in the goodness of other people. I don’t think Canada or Canadians are perfect – I have worked for opposition parties for much of the last 50 years.

But I expected integrity from the members of our new parliament because I see this country of ours as a place where people value honesty, generosity, inclusiveness and fairness and I thought that the revitalized Liberals reflected some of the character of the country.

Mr Trudeau kept his promise to undo Harper’s plan to raise the age of benefits for seniors. That was a a bad decision, I think, and politically motivated, but it was a promise kept.

It certainly appears he is on his way to bringing in a national price on carbon. That is an important and correct decision that took some political courage. Now I wonder if Mr Trudeau has the guts to push that policy ahead. The liberal party ate a previous leader who had similar ideas. Trudeau has shown now that he will cave under party pressure. To genetically engineer a metaphor, the wolves will be gathering in the back rooms.

The promise to end the first-past-the-post system was a good promise. It would have made our system just a bit more democratic. In truth we have a very limited form of democracy with seriously outdated institutions. Electoral reform wouldn’t have fixed those problems. But it would have given us a sense that we can make the system better. The Real Message in the Trudeau turn is that changes that threaten anyone with power are going to be left for the next generation.

Mr Trudeau seemed willing to run the risk of getting a system that wasn’t quite the system he wanted, and I admired that commitment to democracy. When it came to action, however, he put in a genuinely flakey performance and then reneged on his promise.

And then he justified the betrayal with obviously stupid arguments. He began telling Canadians that proportional representation would give us a system in which radical minority parties would hold the balance of power – Kelly Leitch would have a party, and Canadians wouldn’t like that. We would give a platform to morally unacceptable voices and get a dysfunctional government.

Perhaps he didn’t notice that the USA, with a solid two-party system and clearly unproportional voting just got a distasteful and dysfunctional government. I happen to think Canada got a distasteful and dysfunctional government under Harper. I know that the Germans elected Hitler with a system like we have now.

Perhaps he didn’t realize that as the center party, the Liberals would probably control most future governments. As the most politically bisexual party, they would be able to form coalitions with either the Conservatives or the NDP. Furthermore, proportional representation would be most likely to split the Conservatives into several parties. The Kelly Leitch Party would be a godsend for the Liberal Party under proportional representation.

Trudeau’s arguments are nonsense. They are not supported by the data, and not endorsed by the majority of political theorists. They are the kind of self justifying nonsense a little boy might go for when caught in a lie.

I do feel betrayed by Mr Trudeau. It will take quite as while for me to trust anything he says. I won’t be the only one with trust issues going forward, and that is not good for any government. Oddly enough, Conservative governments have set the standard by carrying through on election promises. Mike Harris did a lot that I thought was wrong. So did Mr Harper. But they did earn a reputation for keeping their promises. Mr Trudeau threw away that trust this month.

He also threw away my trust in my local MP, Paul Lefevbre. Paul is now saddled the label of `party hack’ because he has to defend a leader who breaks his promises. The circle of people who will talk honestly to Paul got a bit smaller and Canadian democracy got a bit weaker, all because Mr. Trudeau broke a promise he should have really tried to keep.