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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.