On December 6, 2009, expect Obama to announce that the US, Japan, South Korea and China have agreed to announce national GHG targets before the summer of 2012 and to implement common domestic "cap and trade" systems. (None of the national targets will be legally binding, but the national leaders will downplay that reality.)

India will likely not announce a series of national targets, but will appear to be a part of the group.  Exporting nuclear reactors (based on technology India stole from AECL in the late 1970s) is the centerpiece of India’s new trade plan, and the US/Japan/South Korea/China GHG market collaboration potentially creates a new market for India’s proprietary nuclear reactor technology that is essential to the successful execution of India’s new economic development strategy. The parties are not willing to negotiate their individual national GHG targets with each other or other nations. They have agreed that each can set its pwn national target on its own terms, and each will announce its target sometime before 2012.  None of the other partners will announce any target or domestic implementation plan until AFTER the US Congress passes Climate Change legislation.  Congress is now targetingg passage of the US cap and trade bill by spring 2010.

On December 6, or so, the collaborating nations plan to announce their commitments to implement common domestic "cap and trade" systems that will largely be based on or derived from the final US cap and trade law, by or before the end of 2012. US "Cap and trade" is nothing more (or less) than a global quota-based supply management regime that covers the combined energy, building products and food markets. In US-style "cap and trade" each nation converts a series of annual national  GHG targets into a new currency – a unique series of "vintaged" quota units. Each party in this carbon-importing nation cartel will  then rule that DISTRIBUTORS (domestic producers AND importers) of key carbon-based products )will be obliged to remit sovereign GHG quota units to their governments equal to the GHGs arising from the production and consumption of those regulated carbon-based products that are SOLD (as opposed to produced) within their boundaries. The key regulated products will be: petroleum products, natural gas, electricity, cement, aluminum, iron & steel, pulp & paper, wood products, beef, pork, grain, rice, glass and industrial chemicals, which account for over 85% of the global GHG inventory.  Coal will only be regulated indirectly through the electricity sector coverage.  GHGs arising from manufacturing sector consumption of coal will not be covered by any carbon-importing nation’s GHG cap.

Distributors of the regulated products will be obliged, under the regulations, to remit/surrender domestic GHG quota units to their home governments covering the GHGs arising from the production (including foreign production emissions for imported products) and domestic and petroleum product suppliers will be obliged to hold and then surrender GHG quota covering both their supply chain (domestic and foreign) and customer end-use GHGs.  In every one of these nations, GHGs arising from the domestic production of regulated products that will be exported WILL BE EXEMPT from the obligation to surrender GHG quota to their governments. (The carbon importing nation cartel will suggest that domestic GHGs arising from the production of exports are "liabilities" for the importing nations, not the exporting
nations.)

Then, each government in the carbon-importing nation cartel will freely allocate 85%+ of its early vintage national quota supply to DOMESTIC PRODUCERS (including exporters) of the regulated carbon-baed products. There will be NO FREE QUOTA allocation to importers of the regulated products, but imports are equally required to remit quota to the national governments.  Therefore, as soon as the domestic implementation regulations are in full effect, Any US, Japanese, Sout Korean or Chinese importer of Canadian electricity, natural gas, petroleum products, pulp & paper, wood products, aluminum, iron & steel, glass, beef, pork, grains, rice or industrial chemicals will have to acquire GHG quota covering the Canadian supply chain GHGs AND any domestic GHGs arising from the consumption of Canadian products in their markets, which GHG quota may only be acquired from either competing domestic producers of regulated products or government quota auctions.

The quota allocations and fact that the domestically regulated parties will be carbon-based product DISTRIBUTORS (not producers) in the carbon importing nation cartel comprise a system that generates new revenues and subsidies and significant global competitive advantage for producers of the carbon-based products wiho operate facilities and pay taxes in the IMPORTING nations, which revenues are essentially EXPROPRIATED from the owners of production assets in the exporting nations (i.e. Canada). This is a key economic reality that is not reflected in most of the carbon market analysis that has been published by Canadian or US academics to date. To date, most of the academic and government-sponsored analysis of different GHG control options assumes that the market value that attaches to GHG quota comes out of the air.  They deem it an economic "windfall" for which there is no balancing liability. However, in every quota-governed market, 100% of the market value that attaches to quota is directly expropriated from the production assets whose output cannot be sold without quota. 

When carbon-importing nations cover all domestic SALES with the quota regime and freely allocate quota to domestic producers only, the lion’s share of the value of quota in those end-use markets will reflect an equivalent reduction in the value of the foreign assets that produce carbon-based products for export to those markets.  (This reality is evident in all existing quota-governed market, including Canada’s dairy, chicken, turkey markets and municipal tax license markets. It was also highly evident in the recently phased-out global garment and textiles quota-covered markets.)

The sole objective of US-style "cap and trade" is to effect a wealth transfer – through the quota market – to the world’s energy, building product and food importing nations at the sole expense of the largest exporters of those commodities. The US government successfully achieved such a wealth transfer when it unilaterally used domestic quota allocations to manage the phasing out of lead in gasoline (see case study attached), CFCs and HCFCs in refrigerants and to protect US biofuel producers at the expense of foreign suppliers under the US Renewable Fuel Standard (law since September 2008).  But the key to successfully implementing this wealth transfer is to ensure that the regulated product importing nation is a price-setter, not a price taker.

In each US "cap and trade" precedent,s (leaded gasoline, CFC and HCFC-based refrigerants, biofuels) US demand for the regulated products so dominated global demand that the US remained the commodity price-setter after introducing their domestic quota allocations. US phaseout, entities that legally exported leaded gasoline to the US during the phase out financed almost 100% of US refinery modification costs (through their purchases of the US lead allowances/quota required for market entry) and that less than 30% of the foreign suppliers allowance acquisition costs were passed through to US consumers as price increases.  Over 70% of the cost of US leaded gasoline allowances/quota was born in the form of reductions in export sales margins and tax revenues for the exporting nations.  But US negotiators have long since assumed that a cartel of carbon-importing nations must be established, the member of which will be committed to implement a common quota system design, to ensure that the carbon-importing nation cartel will have sufficient global market power to set and not take prices.  US negotiators are confident that if the US, Japan, South Korea and China act in concert, they will become energy, building product and food price-setters, not price takers. India will support the initiative and will be a net beneficiary from the forced decline in global oil prices.

US advisors anticipate that the carbon importing nation cartel will have the power to drive the global price of oil down to $35/bbl. and that global capital investment in value-adding manufacturing will shift from commodity exporting nations (those nations that will be perpetually short of GHG quota) to importing nations (whose domestic producers will be perpetually long in quota supply).

The carbon-importing nation cartel member nations have no intention of cutting their carbon-based energy, building product or food imports in the short or medium terms. They do anticipate, however, that the successful launch of their cap and trade cartel will cause a massive  evaluation of exporting nation energy, building product and food production assets (including oilsands production facilities), as economic rents shift from these production assets to importing nation-issued GHG quota units.

Once existing investors in Canadian carbon product manufacturing assets write down the value of in Cda’s production capacity (as economic rents shift from the production facility owners to the quota holders), importing nation quota-holders will acquire the Canadian assets at deep market discounts. After the existing investors write off their expected returns to capital, the new owners of the Canadian carbon-based production facilities will profit will supplying Canadian energy, building products and food to their home markets at signficantly reduced prices. The foreign-owned Canadian assets will legally "transfer price" exports, operate a breakeven and pay minimal or no taxes in Canada.

Canada can easily turn the tables on the carbon importing nation cartel with 4 rather simple domestic regulations that we could, conceivably, make law within a few months.  The regulations will serve the combined purposes of: (1) competently and efficiently regulating GHGs in Canada to ensure Canadian compliance with our previously-announced commitment to cut national GHGs to 80% of 2006 levels by 2020, (2) form the foundation for efficient and successful defences against the protectionist nature of the carbon importing nation cartel’s strategy at both the WTO and (more importantly) IN US COURTS, and (3) show the rest of the world how to efficiently achieve environmental protection without the element of trade protectionism.

It is in Canada’s best interest to implement these 4 regulations as a pre-emptive strike, before the US Congress passes their trade protectionist cap and trade bill in the spring os 2010. I am of the opinion that 3 of the 4 essential Canadian initiatives can be passed by regulation (no new legislation is required) and 1 is a 2010 Federal Budget item that should easily garner all-party support.

The problem is that it is not apparent that Canadian federal and provincial policy-makers understand how essential it is for Canada to: (1) launch this pre-emptive strike and (2) lead a global debate regarding the true nature of US-style "cap and trade".