Will Politicians Or Experts Win Ontario’s Cap-And-Trade Battle?

Sometimes, if not most of the time, a policy sounds really good on paper. But once implemented, it does not work as intended and produces poor results. Experts then say: "Politicians didn't enact it properly, it wasn't exactly what we recommended." But once a policy has been adopted, don't try to get rid of it even if its effect is not what was promised.

The Institute for Competitiveness and Prosperity (ICP) seems to fall into this trap while looking into the proposed cap-and-trade scheme that will be implemented in Ontario in January 2017. They contemplate five "myths" about cap-and-trade, but have to resort to an ideal mechanism to debunk those so-called myths (The blog constitutes a sneak peek at a research paper to be launched on Wednesday.)

In this, they are proving naïve.

In the first assertion, the myth that cap-and-trade will kill the economy, the ICP counters by saying that "cap-and-trade will have a small effect on the economy. If the system is designed optimally, we find that C&T will only have a minor effect on Ontario's GDP growth rate. As a result, the average annual growth rate is predicted to fall from 2.08 to 2.05 percent (between 2015 and 2030)." I have underlined the fact that the system needs to be designed optimally because that seems extremely unlikely.

The Western Climate Initiative that Ontario pledged to join is already in effect in Quebec. So, as good neighbors, we can point to some significant design shortfalls such as the exclusion of agriculture and other economic sectors, the generous allowances to various businesses that might have more to do with their political savviness than with a well-thought-out economic design, the blunders with the revenues collected (here, here and again here), as pointed out by Quebec's Auditor General in 2014 and again in 2016, etc.

In short, not your usual optimally designed system — far from it.

This fundamental flaw in the IPC's analysis is obvious in other arguments as well, especially in the fifth assertion, which attempts to debunk the idea that "the government can do whatever it wants with cap-and-trade revenues." It's the money grab argument that is heard a lot against cap-and-trade and carbon taxes. At least, this time, the blog states that:

"The critics' concerns are legitimate. [Cap-and-trade] revenues can be used for projects that would have been funded through general revenues, such as public transit investments. Consequently, the program allows the Ontario government to free up general revenues for other purposes, such as paying down provincial debt. Since public funds can be 'shifted', [Cap-and-trade] improves the government's ability to balance the books."

Or for any pet project the politicians can think of, I might add.

Of course, the Ontario government pledged that this will not be the case and that all revenues will indeed tackle GHG emissions. But Bill 172 included what the IPC describes as "vague language." Therefore, they say, "the government technically cannot do 'whatever it wants' with the revenues." Yeah, well… practically, they can. So the money grab argument holds.

There might be an ideal cap-and-trade mechanism that will address climate change by nudging consumers and businesses away from carbon intensive goods and services. As explained in Chapter Two of an MEI Research Paper, this dreamy cap-and-trade will be transparent, it will be efficient, it will limit the impact on the economy, and it will be fiscally neutral, giving all revenues back to taxpayers by lowering personal income taxes as well as corporate income taxes.

Ontario's plan falls way short. So one can expect that today's supporters of the policy are going to be counted as opponents in a few years. Experts seldom win against politicians because the former seek a well-designed policy while the latter seek re-election by pandering to special interests most of the time.

Youri Chassin is Economist and Research Director at the Montreal Economic Institute. The views reflected in this op-ed are his own.

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