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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.


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.