Most economists accept the following facts:
1) The single most important action in a Canadian Climate policy is pricing carbon.
2) Prices give a signal
3) The signal must be clear and STRONG
4) The only clear signal is a HIGH price
5) “High” means over $100/tonne
6) The only way $100/tonne is politically acceptable and economically harmless is if the tax is returned to consumers
7) Ideally we need a global carbon tax but we won’t get there soon
8) A carbon tax is superior to a cap and trade system
9) Canada has committed unilaterally to a carbon price
10) Canada can unilaterally impose border tax adjustments
Taken together there is really only one strategy available: A $100+ carbon tax combined with a dividend returning all the revenue to consumers and a system of border tax adjustments. Nothing else will work. I have illustrated the alternatives in the figure below. Feel free to reproduce it.
Economists have accepted the notion of revenue neutrality, but have not all recognized the implication of a high tax rate. At $100/tonne or $200/ tonne the income effects of the tax is enormous. To keep consumers at the same level of purchasing power the money has to go back to them. Cute schemes for recylcing the money through corporate taxes or environmental investments are harmless at low levels of tax and politically and economically impossible at a high level. Only what the Citizens’ Climate Lobby call a “Fee and Dividend” that returns all of the fee to consumers will be accepted by the public.
Based on experience with Cap and trade as well as theoretical research it seems clear that cap and trade will never work well. The assessment by the Ontario Auditor General is that Ontario’s version will cost billions and achieve 20% of its goal. Ironically, most of what is achieved will be the result of the part that is really just a hidden carbon tax. Canadian policy analysts have been polite about Ontario’s decision to go with cap and trade because of a widespread belief that any system is better than no system. This will prove a disasterous error if cap and trade makes it impossible to an effective carbon prices.
The trouble is that with cap and trade it is exceptionally hard to get to a high price and very hard to introduce border tax adjustments. In other words, cap and trade is a trap – a dead end that will prevent us getting to an effective carbon price.
I am hoping that we will soon see research on backing out of cap and trade – kind of like the kind of stuff you see on the web about getting your truck out of a mud hole.