Ontario chickens out, chooses cap-and-trade

Like many people, I was encouraged to see the Government of Ontario finally stepping into the breach and taking action on the climate change issue, but I was very disappointed to see them choosing to go with a cap-and-trade system rather than a carbon tax. Prior to yesterday, there were two models out there: B.C.’s carbon tax and Quebec’s cap-and-trade system. Ontario joining Quebec probably represents a tipping point that will push the country as a whole in the direction of cap-and-trade, which is, as far as I’m concerned, a second-best outcome.

How did we wind up here? This is all a consequence of what I consider to be the most important political shift to have occurred in Canada in the past two decades, which is the near-total collapse of moderate conservatism. Indeed, it’s not a surprise that the major spokespersons of the centre-right in Canada – Andrew Coyne, Tasha Kheiriddin, etc. – were lining up today to criticize the Ontario plan. And yet the problem, ultimately, stems from the failure of the centre-right in Canada to control their own political parties. And if they’re looking for someone to blame, they should be pointing the finger at Stephen Harper, not Kathleen Wynne.

Right now, the policy space on climate change can be organized in the following way (starting with positions that involve the least government involvement in the economy, moving down to those that involve the most):

1. The Alberta fantasy. Under this scenario, we just keep on digging up bitumen and selling synthetic oil, investing in new mines, processing and pipeline infrastructure, subject to absolutely no constraints and a carbon price of zero. And people don’t have to pay taxes, because, yay! we’re digging money out of the ground.

2. Carbon tax. The government puts a price on carbon emissions, which raises the price of fossil-fuel derived energy relative to other forms. The price is adjusted until the desired quantity of emissions is achieved.

3. Cap-and-trade. Firms are issued permits to produce emissions. If their emissions exceed the quantity permitted, they must purchase additional permits on the market. If they are under their emissions quota, they can sell their unused permits.

4. The “planning and banning” fantasy. Here the government gets involved in micro-managing the transition, mandating specific technology for emitters, and subsidizing what it considers to be promising technologies.

I think everyone can see why, for people who have a distrust of government, scenario 1 is the best and scenario 4 is by far the worst. But why is 2 (carbon tax) ahead of 3? It’s because cap-and-trade is so much easier for governments to fiddle around with. In particular, it allows the government to play around with the permit allocations, giving specific firms or industries special exemptions, or extra permits. That’s why the NDP supports it (keeping in mind that there is significant alignment of interest between the CAW and the automobile industry – a major beneficiary of these fiddles). It also appeals to some of the worst political instincts of the Ontario Liberal Party, and of Kathleen Wynne specifically, who is constantly going on about how government needs to be a “partner” in all major economic activity in the province – which basically means subsidizing manufacturing in ways both subtle and gross.

The nice thing about a carbon tax is that it’s really hard to fiddle. So while in practice cap-and-trade and carbon tax come to the same thing, in reality they don’t. This is Andrew Coyne’s major complaint today. And yet he fails to note that if you survey the political landscape in Canada, you find that no major political party (with the exception of the B.C. Liberals), is willing to champion option 2. In other words, the centre-right in this country is MIA. Both the Liberals and the NDP are now down into zones 3 and 4 (the Liberals having been pushed there by conservative rhetoric) while the federal Conservative party, not to mention the various provincial Progressive Conservative parties, including Ontario’s, remain resolute champions of option 1 – the Alberta fantasy.

There are two reasons for this. First, conservative political parties in Canada have largely been captured by ideological extremists. One can see this very clearly with the federal Conservative party in Canada – up to and including the Prime Minister – which can best be described as “anti-environmental.” There is simply no one there willing to champion market-based approaches to solving environmental problems. One can see the same thing in the Ontario Progressive Conservative party, where the idea of “promoting a market solution” to a public problem seems to be confused with “doing nothing” or “pretending that there is no problem.” The second reason is connected to the first, and it has to do with electoral strategy. Roughly speaking, the reason that ideological extremists have had such success in controlling conservative parties is that their particular brand of “common sense” conservatism produces a set of incredibly powerful electoral strategies (far better than anything the centre-right can come up with). For instance, the “job-killing carbon tax” sound bite is so powerful that it has taken on a life of its own, effectively tying the hands of the federal government on this issue. (One can see it as well in the current contest for the leadership of the Ontario PC party, where both candidates have locked themselves into supporting option 1, because of the power of the anti-tax soundbite.)

In other words, the reason that option 2 winds up being a political orphan is that the people who champion this sort of an approach can’t win elections. Indeed, the Liberal Party of Canada started out supporting option 2, and got slaughtered by the Conservatives for it. (Indeed, there are striking similarities between the Conservative treatment of carbon taxes in Canada and the Republican approach to health care reform in the United States, where Mitt Romney wound up disavowing his own health care reform plan, because there was so much mileage to be had from demonizing “Obamacare.” As a result, conservatives in both countries have wound up taking positions that put them completely outside the space of reasonable policy disagreement, largely for reasons of electoral strategy.)

The irony is that, by insisting on getting option 1 – and by painting themselves into a corner with their rhetoric – what conservatives are winding up with is option 3. In fact, what they’re winding up with is even worse: First, they are getting a provincial patchwork rather than a more efficient national system. And second, they are getting cap-and-trade, a system that is more open to government meddling in the economy. It’s almost as though, what they need to learn to do is compromise, and speak out in favour of option 2. Unfortunately, in order to get option 2 onto the table, someone on the right in this country would need to figure out how to control — or even influence — Stephen Harper, and apparently no one is able to do that.

I understand that it’s no fun being a moderate. But seriously, someone on the right in Canada needs to step up to the plate. Is there any politician in Ontario — not a journalist, a politician — willing to stand up to the government and say, “we should have a carbon tax instead”? Because so far all I’ve heard from the opposition has been the same old fantasy, that all taxes are evil, and that we should be doing nothing about climate change.



P.S. It’s probably worrth noting that policies 2 and 3 also have sub-variants:

              2a. ..and the revenue is used to reduce taxes with negative distortionary effects, such as income taxes

              2b. …and the revenue is used to finance public services

P.P.S. Can people please stop citing the stupid statistic that Canada produces only 2% of global emissions, as if that were exonerating? That is a gigantic quantity, when you consider the fact that we make up less than one half of 1% of the world’s population.

P.P.P.S. Brad Wall has recently made it clear that the Alberta fantasy is also the Saskatchewan fantasy. But, you know, so what?


Ontario chickens out, chooses cap-and-trade — 6 Comments

  1. Interesting – I’m not so sure I agree. One point that you haven’t noted is: Alberta actually has a carbon tax. It’s an extremely weak one. I think the choice of policy instrument is not the most important issue, really. Simply implementing a carbon tax rather than cap-and-trade would not automatically be a better choice. And I think there is a lot of merit to having a politically-defensible policy in place that is more likely to last into future government mandates. Frankly, I’m happy to have any carbon pricing mechanism in place – hopefully it will improve over time.

    This policy was introduced in response to a report saying that Ontario wouldn’t meet it’s emissions reductions targets unless new action was taken. So I think there is a legitimate desire on the part of the government to meet the targets. They wouldn’t introduce what is bound to be a politically-unpopular tool unless they had a genuine desire to meet Ontario’s goals (unless they just did it to get closer to Quebec, as the Globe seemed to be suggesting this morning).

    • Heather – look at the details of the Alberta “carbon tax”. It looks a lot more like a cap and trade system, without the trading. It only applies to certain large emitters (oil production, I think), and they have a threshold below which they pay nothing. Consumers and I think most commercial emitters are exempt.

      I understand the instinct – better a second best solution that has a chance of being put in place, than a better solution. However, I also worry that this approach will lead to years in the wilderness of cap and trade, wasting time, resources, and setting up a structure that includes influential finance and legal people who will come to depend on this market, and then it will be the only option, and not do a very good job of solving the problem.

      Will we wake up in 20 years and wonder why we wasted a huge amount of money, time and effort on a solution that doesn’t work? With most of the money going to incumbent industries, traders and lawyers, instead of to offsetting taxes on labour or paying for public services?

  2. My first question regarding any of the posible schemes is: if you are a manufacturer currently located in Ontario, is this not simply another reason to move production to Mexico, or even the southern US, both of which have no carbon pricing schemes or unions?

  3. In theory, a restriction on quantity, while allowing price to vary, and a change to price, while allowing quantity to vary, should have the same effect: higher prices and less pollution. In principle, you could get to the same point either way.

    Politically, cap-and-trade has the huge advantage of being non-transparent. People will pay more for carbon-intensive stuff, but the government’s finger prints will be less obvious.

    Substantively, cap-and-trade schemes are easier to game, and we actually know less about the “right” total amount of emissions than we do about what we are willing to pay to decrease the risks of global warming.

    So carbon taxes are better policy, but worse politics.

  4. don’t u think a carbon tax that’s near to accomplishing its purpose will degrow developed economies? RGDP growth is low, as it is