It appears that a few key federal policy advisors finally understand the very dangerous trade implications of both US- and EU-style cap and trade. The styles differ, somewhat, but are equally protectionist in orientation.  

But it also appears that many federal policy advisors and makers still don’t get it.  And I do not see any evidence that this understanding has penetrated the non-political civil service employees on whom the policy makers depend for detailed regulation and policy drafting. It does not matter how committed the elected federal officials might be to any course of action if the bureaucracy elects not to cooperate.  

While I am happy with recent apparent progress at the political level, I would not go so far as to say that I see evidence that the feds are "girding for a trade challenge".

Of course, this message could be telling you more about what I don’t know than it tells you about what I do know.

But as long as the feds are not so "girding", they are failing to serve the interests of Canadians. Please note that the threat of international trade disputes dampens private investors appetites. A prudent federal strategy would be to implement, as soon as possible, a small set of market-based regulations that:

• do not include any quota allocation-based cap and trade rule, but

• include accelerated depreciation and other tax measures that at least level the playing field for Canadian investors relative to the current US reality.

• include product standards (fair-not-CA LCFS, RES, fair-not-exactly US CAFE) that allow for over-compliance credit banking and trading and which

• in and of themselves put Canada on track to compliance or near-compliance with our stated 2020 target.

Canadian officials should get this basic regulatory package gazetted and opened up for public input within three months, and then explain that while they remain hopeful that the US and Canada will succeed in the joint development of a fair and freely traded GHG allowance market, we have concerns about the highly protectionist nature of the current US Congressional and European proposals. Putting an initial set of four core regulatory measures in place serves the market notice that they can invest in Canada without trade dispute risk–even if Canada has to challenge US-style cap and trade at the WTO and/or in US courts.

Canada should already have challenged the US Renewable Fuel Standard by now. I am amazed that there has not been action on that file already.

This approach does not oblige the federal or any provincial government to either oppose or go to the wall endorsing quota-based supply management for carbon markets ("cap and trade") at this time–so no one has to appear to back down from previously held positions. But it positions Canadian policy makers to take control of the North American GHG regulatory and market-making agenda while creating a modicum of needed near-term certainty for investors in Canada’s green energy economy.

Please, also remember that the feds do not have the constitutional authority to impose a quota-based supply management market regime on the provinces. A pre-requisite for any Canadian adoption of US-style "cap and trade" is the full and up-front provincial approval of the entire scheme. I imagine it will soon become apparent to Canadian taxpayers that only the provinces can lay the foundation for any Canadian form of "cap and trade" and that continued provincial fed-bashing in this regard is disingenuous. Ontario and other provincial leaders need to get ahead of this one sooner rather than later.  

The risk is high that continued fed-bashing for their lack of progress imposing a quota-based supply management regime on provincial carbon-based commodity markets will result in a major backlash for provincial proponents of that notion in the not-too-distant future.