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Chamber of Commerce Confusion: Dither, Don’t Fix

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It is hard to be so right and so wrong at the same time. Twenty of Ontario’s Chambers of Commerce have finally realized that the provincial Cap and Trade policy is a bundle of mistakes. Congratulations for noticing.carbondioxide

Unfortunately the best advice that the Chambers could come up with is for the province to do nothing until the province has a better version of Cap and trade. There is no better version. Cap and Trade will not work. It will also be expensive to implement and will hurt Ontario’s economy. It can’t be fixed.

The problems can be fixed, however, by converting the half-baked Cap and Trade system into a proper carbon tax. Instead of going backwards, the Chambers should do a little bit of studying and propose the only approach that will actually work.

There is no way that we can back away from pricing carbon. That would be a crime against humanity. We know that people are already dying from the effects of climate change and we know that we will not be able to prevent millions more from dying. The Chamber’s are right to point out the problems that the provincial plan will cause for some people in Ontario. They need to take seriously the cost of further delay and inaction for the rest of the world and for our own children.

What we want is a nearly painless way to price carbon, and we have one. It is called a Carbon Fee and Dividend.

Carbon Fee and Dividend is simple, cheap to implement, effective and it solves almost all the problems that the Chambers are complaining about.

The Chambers want the province to defer implementing Cap and Trade until they have more details worked out. I am calling on the Chambers to stop giving advice until they understand the alternatives.

It doesn’t take a genius to see that if you put a high tax on all hydrocarbon fuels you encourage people to shift to other sources. You also encourage the already blindingly fast technological innovation that is underway. I assume that the Chambers understand this much.

It also doesn’t take a genius to see that if you then gave the money collected back to consumers they would be able to buy just as much as they could before the tax. I am pretty sure the Chambers haven’t figured this step out. Economists have a name for this kind of restitution: it is called a ‘compensating variation.’ It compensates consumers for the loss of purchasing power brought on by the tax.

It is impossible to compensate perfectly, of course – If you simply give everyone the same sized dividend check each month, most poor people would end up with a bit more money than they paid in carbon taxes. Richer people would lose a bit. This is not a serious imperfection. Most of us approve of small transfers to the poor.

There is one big problem left, but it has an easy solution as well. If we put a tax on and Donald Trump doesn’t, that will hurt our industries. How can our exports compete? Won’t cheap imports destroy our domestic industry and steal our jobs?

It doesn’t take a genius to see that we need what are called “Border Tax Adjustments” or BTAs. When something comes into Canada from a country that does not have a carbon tax we just add the tax to the price. We level the playing field. When Alberta ships oil to the states, where they don’t have a carbon tax, we give the company back any tax we collected. We level the playing field with a BTA.

The principle is so simple. Canadian consumers pay a tax for any carbon emitted in producing what they consume, no matter where it comes from. They get the tax money back. We don’t tax the carbon content of what people consume in other countries.

A Carbon Fee and Dividend combined with BTAs is both effective and painless.

It did take a genius or two to figure out that BTAs are perfectly legal under our international trade agreements. We can go ahead and impose BTAs now if we want to. The only real condition is that everybody producing the same product in Canada has to face the same effective carbon tax rate. That’s what is so important about Trudeau’s commitment to have a minimum rate for the whole country.

So there is a better system that the Chamber does not seem to understand. Let’s hope they do their homework before they say any more. There is a real danger that they will delay action and delay will kill people.

The good news is that the province can convert its Cap and Trade system to a carbon tax fairly easily. The reason is that the most effective part of their system is already a carbon tax. When the Province sells permits to the gas distributors or fuel companies it is really just collecting a tax on consumers.

In fact 90 percent of the problems and 90 percent of the waste in a cap and trade system comes from the small part of the system that is set up so big emitters can trade permits. In fact the province only needs to back out of the trading system. It may have to buy back any permits it has sold, that that would not be a net cost. In fact the province might make money by backing out because the price of permits tends to fall.

So the Chambers were right to knock the provincial Cap and Trade scheme. They were wildly wrong to think it can be fixed. Since we have a better system available and it is actually easier to implement than any Cap and Trade scheme, the Chambers really need to finish doing their homework.

I am calling on the Chambers of Commerce of Ontario to propose a solution. Instead of calling for a step back, lets see the Chambers ask for a step forward. Call for an effective carbon tax, a 100% dividend for consumers, and BTAs. Don’t dither any longer: fix the problem.



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