Energy Probe

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.

Two effectively bankrupt provinces—Ontario with its out-of-control debt and BC, home to 1-in-every-4 jobs permanently lost in Canada over the last 18 months—are chasing each other’s tails to increase subsidies to big business. They are competing to see who can back-door the largest subsidies for multi-nationals into the home-owners’ utility bills.  

The multi-national business lobby could not be happier.

In the meantime, the most cost-effective green policies are working out well in Nova Scotia. Big business—as opposed to small companies, which ironically are Canada’s leading job creators, and who are big losers in this play—does not want anyone to notice that. And so far, big business, mainly multi-nationals who pay little tax in Canada, is getting everything it wants out of the Ontario and BC leaders.

Please take note of the key lesson to be learned from the European experience.

When we directly or indirectly pack new industrial subsidies into utility and fuel bills, we shift the overall tax burden from the private sector to households and public institutions (hospitals, schools, universities, social service agencies, not-for-profits) who are not exempt from energy taxation and utility rate increases.

For example, between 1990 and 2007, aggregate real retail energy prices increased only 5% in Sweden, in spite of large published increases in energy taxes—due to the plethora of corporate energy tax exemptions. But mandatory health care premiums increased 35% and payroll taxes increased roughly 1% per annum. At the same time, real unemployment in Sweden—after we shift Swedes on permanent "sick leave" from the "employed" classification to "unemployed"—hovered between 15% and 20% in the pre-global fiscal crisis 2006.

Sweden is not an isolated case. Every European nation that has implemented the measures that have been introduced and are being contemplated in BC and Ontario, payroll taxes and mandatory health care premiums have increased at 3 to 5 times the rate of the direct and indirect energy taxes. This increase was necessary to cover the new public sector energy tax liabilities.  

The net result is that in Denmark, Sweden, etc., government spending has exceeded 45% of GDP for over a decade. This is part of the reason Europe’s fiscal crisis is so much more extreme than Canada’s. That is not to say Canada has done everything right—far from it. Over the last 10 years government spending (all levels) has grown from roughly 22% of GDP to over 35% (pre-recession and stimulus spending).

We appear to be desperate to dig ourselves into the European hole.

Please remember that the Scandinavian nations (Denmark, Norway, Finland, Sweden, with side effects for Iceland and Germany) suffered a full financial system collapse in 1990. Note that Germany had zero-net GDP growth from 1999 through 2005.  Unfortunately, the reforms those nations implemented did not insulate them (with the possible exception of Finland) from the 2008/9 global financial crisis. So, at this time, the BC and Ontario governments are adopting the policies that have been "proved" dominantly by nations who have imposed on themselves two major financial crises in less than 20 years.

Why does this appear to be a good plan to our leaders?