The pan-Canadian framework: Setting a price on carbon

air-air-pollution-climate-change-221012This is the second in a series of articles dealing with carbon tax and trading. The first article dealt with the history surrounding the UN treaty on climate change and the various attempts to implement the treaty which eventually culminated in the Paris Agreement. The pan-Canadian framework became Canada’s answer to reduce its overall greenhouse gas (GHG) emissions.

Carbon pricing forms the central component behind any market attempt to reduce GHG emissions other than using strict command and control regulations. Pricing sends a signal to the marketplace that products or operations relying on extensive carbon use can be less economically efficient than other products or operations that use less carbon.

The ability to emit any form of pollution into the environment without restrictions allows polluting entities to externalize those costs. This means that these entities do not have to incur the cost of cleanup while some other neighbour next door, or city or country incurs the eventual cost of that pollution. Sending a price signal essentially adds the cost of the pollution right into the cost of the product or operation itself. Anyone using that product or operation can now compare the cost with another product or operation that does not have such a carbon extensive expense attached to it. The market eventually switches to the low-carbon alternative.

This problem of externalizing costs can be seen in other areas. The globalization of the economy demonstrates this. Lower tariffs allow products that are produced more cheaply elsewhere into the country. The entire economy essentially benefits except for those that used to make the same item but at a higher cost. One group incurs the benefits while a different group incurs the cost such as job loss.

A more concrete example would the Alliance of Small Island States (AOSIS). This 44-member intergovernmental organization comprises low-lying coastal and small island countries formed to address global warming. The existence of many of these states are at risk owing to global warming and rising sea level. The group continues to threaten litigation with climate change related losses at potentially over $570 trillion.

The federal government places carbon pricing as the primary pillar to its pan-Canadian framework. The question then becomes can it legally achieve this goal.

The framework uses two basic mechanisms for this pricing under Bill C-74 which includes the Greenhouse Gas Pollution Pricing Act (GHG Act) and recently passed by the Senate. The first mechanism uses carbon taxation. The Act actually uses the term “charge” instead of tax, but tax seems to capture the concept fairly well also. The charge begins at $20 per CO2 equivalent for 2019 and increases at $10 per year until it reaches $50 in the year 2022.

The federal government’s jurisdiction over the environment can conflict with the provinces’ jurisdiction quite easily. The federal government’s jurisdiction over tax pursuant to s. 91(3) of the Constitution Act however appears quite clear. This section allows the federal government to raise money by any mode or system of taxation. However, the intent behind the GHG Act would be for it to be revenue neutral. The revenues raised would be returned to the provinces to facilitate climate adaptation and innovation in low carbon technology. The GHG Act does appear clear in that it raises revenue. The Constitution Act does not place a condition on raising money through taxes depending upon how the revenues can be spent.

The federal government can pass legislation in order to implement a treaty, but this does not override the provinces’ jurisdiction. The government also has authority under peace, order and good government. Carbon being emitted in one jurisdiction can have negative effects in another jurisdiction, but this would not seem to justify dealing with carbon on a national basis under this type of power.

A number of provinces intend to challenge the federal jurisdiction to place a charge on carbon emissions. Scholars have opined on this situation and came to the conclusion that the feds would likely succeed in any court challenge. Although this delays the inevitable, court challenges also allow a bad situation to continue. In addition, jurisdictions not modifying their economy to align themselves with a lower carbon future, shall soon become less competitive and be left behind by the global economy.

In the next article, we shall be examining how the second mechanism of carbon pricing, carbon trading, integrates with the tax proposal. Read the previous article here.

Gary Goodwin is the chief legal officer for a national conservation organization. He has been working in the environmental field for over 30 years.

Lawyers Daily July 6, 2018

 

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The pan-Canadian framework on clean growth and climate change Thursday, June 28, 2018 @ 8:52 AM | By Gary Goodwin

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The Canadian government now enters the final stages of implementing its Greenhouse Gas Pollution Pricing Act. The Act sets the regime for a charge on fossil fuels and for pricing industrial greenhouse gas (GHG) emissions. This provides a backstop action for other parts of the country that have not taken steps to pass their own legislation to deal GHG emissions. Concurrently, the incoming Ontario government intends to terminate its existing cap and trade legislation.

As Canadians enter interesting times with respect to federal and provincial jurisdictions and potential litigation for Ontario companies that have already started down the emissions trading path, we require some context establishing the existing socioeconomic environment. This begins a series of articles looking at how we got to this point, where we are now, and potentially what the future might look like legislatively. As others and Yogi Berra point out, it’s tough to make predictions, especially about the future.

The UN Framework Convention on Climate Change (UNFCCC) created the overall structure for 192 countries that signed and ratified this treaty dealing with GHGs. An important preamble of the treaty recognizes that the parties are concerned that human activities have been substantially increasing the atmospheric concentrations of GHGs. The importance of this should be restated in that although some commentators and politicians question the science behind climate change, we do not hear of any country wanting to withdraw from this global treaty.

We do not intend to debate the reality behind climate change, and we would only recommend self-directed research on this point. We would also recommend relying upon peer-reviewed research which is the “court of appeal” standard when it comes to climate change science. The Intergovernmental Panel on Climate Change is the international body for assessing the science related to climate change.

Historically, the 1997 Kyoto Protocol failed to fully implement the UNFCCC as it did not include the two largest emitters, China and the U.S. The Canadian government itself did not take serious steps to attempt to implement the protocol. With the legally binding obligations, the government needed to withdraw from the protocol to avoid some $14 billion in penalties.

A series of Conference of the Parties (COPs) under the UNFCCC umbrella attempted to re-establish some sort of unanimity on how to proceed further. These COPs finally culminated in the Paris Agreement in 2015. The nature of this agreement as a treaty can be somewhat questionable. President Barack Obama entered into the agreement by executive order and therefore did not require Senate approval required for treaties. This allowed President Donald Trump to provide notice by executive order of his administration’s intent to withdraw from the agreement. The U.S. can only provide notice to withdraw three years after the agreement comes into force for the country. The U.S. can then provide a one-year formal notice to withdraw. The total of all these periods finally culminates in November 2020, shortly before the end of his existing term.

As of June 2018, 195 UNFCCC members signed the agreement, and 178 became parties to it. The agreement aims to limit the increase of global average temperatures to 2 degrees C above preindustrial levels and hopefully to limit the increase to 1.5 degrees C to significantly reduce the risks and impact of climate change.

In the agreement, each country plans and reports on its own targets. The agreement does not contain any enforcement mechanism to compel countries to reach a certain level by any particular date and instead provides a method to globally drive fossil fuel divestment.

Each country determines its own “Nationally Determined Contributions” (NDCs) and that these NDCs should be ambitious.

An important aspect of the agreement includes the International Transfer of Mitigation Outcomes (ITMOS). This allows countries to use emission reductions outside their own jurisdictions. The various heterogeneous carbon trading systems require linkage in order to avoid double counting and other verification issues. The UNFCC can act as a type of global securities regulator, something that Canada was unable to do when examining a national securities regulator.

Under the agreement, Canada committed to reducing GHG emissions by 30 per cent below 2005 levels by 2030. The major strategy to reach this commitment can be found within the pan-Canadian framework. In future articles we will examine its four main pillars which include pricing carbon pollution, complementary climate actions, adaptation and innovation.

As expected, pricing carbon creates the greatest controversy. Exploring the reasoning behind pricing carbon will illuminate the further changes we can anticipate in Canada’s short-term economic future.

This is the first of a four-article series.

The pan-Canadian framework (developed with the provinces and territories and in consultation with Indigenous peoples) will ultimately impact almost all sectors of the Canadian economy. This future impact illustrates areas in which in-house counsel should be strategically reactive, and more importantly, proactive.

The facts, they are a changin

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It was a dark and stormy night. Or rather, the night darkness concealed the source of the intense storms. That seems much better. My wife and I waited for the storm to pass that evening before setting off to walk the dogs. The reflection of the street lights glistened off the wet streets.

All down the street, I could see small ridges. Upon closer examination, I could see that there were literally hundreds of night crawlers stretched out perpendicular to the road. The road friction made them stretch out to a tortured length of about a foot and a half. Normally plump, this condition thinned them out considerably. Night crawlers are earth worms on steroids.

Feeling some form of compassion for this Lumbricus terrestris, I started to scoop them up and toss them back on to the grass. Some worms can survive being cut in half but being half squashed flat by a truck did not seem very survivable to me.

Now, under normal conditions worms produce a fair bit of mucus. Adding torrential rains to that seems to add to mucus production as the worm exodus continued. I started to regret my misplaced compassion and tried to distance myself from my emotions. My wife just simply distanced herself.

I assumed the common knowledge that during intense rain storms worms attempt to escape drowning in their burrows. However, they breathe through their skin which needs moisture. So there may be a number of other reasons why they engage in such risky behavior of stretching themselves out on a busy road.

One good reason would be migration. Lots of rain would allow them to move great distances. However, half of them moved from the south to the north, while the other half moved from north to south. But, hey, they’re worms. The grass always seem more organic filled on the other side of the street it is said.

An interesting phenomena occurs when you experience a situation and learn some new facts about it later. I learned that another good reason worms travel is that they want sex. My recollection of the event now includes an added ‘ewww’ quality to it. And what better time to find a mate than when everyone else is stretched out in the same area. We have a beach here that seems to serve the same purpose for humans.

Although worms are hermaphrodite, male and females together, they cannot reproduce solely by themselves. They need a mate. I must have cast aside, and severely disappointed, several dozen night crawlers. Destined now to remain virgins they’re probably bitter. Unless that was going to be their choice anyway, and so that is perfectly ok.

This sex migration behavior can bring down planes. After a rain, worms like to stretch out wherever they can, including airport runways. Worms do not get sucked into turbines, but the birds coming to eat the worms can be. Particularly the flocking birds like gulls which tend to ignore whatever happens around them when they fight over food. So airport authorities tend to use fungicides to reduce worm populations.

Night crawlers contribute to the US current account deficit! Some politician should complain about this. If nothing more than the neat optics it provides. “Congress needs night crawler NAFTA negotiations!” Apparently $20 million of night crawlers are exported to the US each year with little or no USA content. A few years ago, the price leapt from $35 per thousand worms to $80 per thousand. Economics 101. Supply was tight, and owing to inelasticity of demand, prices skyrocketed. Worm futures may not have the panache of Tesla stock, but you would have made a fortune otherwise.

Fact

 

Federal tax reform debates suffer from the Rashomon effect

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The film Rashomon won an Academy Honorary Award in 1952 and is considered now one of the greatest films ever made. The film uses a plot device that involves various characters providing subjective, alternative, self-serving and contradictory versions of the same incident.

One can see the theoretical application of this plot device to the multi-varied perception of the liberal government’s changes to the taxation of Canadian controlled private corporations. Let’s just deal with the one plot device — the sprinkling of income.

The government takes the position that these tax advantages are in place to help Canadian businesses reinvest and grow, find new customers, buy new equipment and hire more people. Not surprisingly, people evidently use these corporate structures to reduce taxes by paying dividends to those family members at a lower tax bracket and not involved in the business. Mea culpa. The government perceives that these people are avoiding paying their fair share of taxes as opposed to investing in their business and maintaining their competitive advantage.

Of course, sprinkling income provides dividends to family members who may not have much to do with the corporation in the first place. The tax policy intended to spread income more among those involved with the corporation.

The government states that when the rules are used for personal benefit, they are not contributing to growing the economy. Rather, such practices undermine confidence in the economy by selectively giving away tax advantages and producing an unfair result.

The Canadian Bar Association takes umbrage to the government’s use of the term “loophole.” Loopholes are inherently legal, but they circumvent the policy intent of the legislation when corporations legally use tax advantages to make professionals more whole as compared to salaried employees. So let’s just call these advantages “loopwholes” instead.

We can use the Rashomon approach to examine taxes paid in Finance Minister Bill Morneau’s CCPC comparison discussion paper. Susan, an employee, earns employment income of $220,000 and pays her fair share of taxes totalling $79,000. We compare this to our business owner Bob earning a professional income of $220,000 and, through the sprinkling of tax loopwhole-ness, pays only $44,000 in taxes. Susan pays about 36 per cent of her income in taxes while Bob only pays 20 per cent, a $35,000 difference. One could easily think that there is only a 16-per-cent difference, but through the magic of Rashomon, we can see that Susan pays about 44 per cent more in taxes (35/79). If the loopwhole is lost, Bob becomes even more upset as his tax bill would increase 80 per cent (35/44).

The CBA, to the consternation of some members and now some former members, takes a political position against the removal of the tax loopwhole. The main argument appears to be that the loopwhole allows the corporate professional to earn the same amount as an employed individual since a corporate professional does not have paid vacation or an employer pension. The pension argument has an iceberg quality to it since fewer companies are providing pensions in any event, down to around 37 per cent of employees.

In comparing total compensation, HR professionals use a rough guideline that benefits can total 20 per cent of income once you include vacation, health and pensions. If we get back to fun with ratios, we can see that Bob’s tax savings of $35,000 comes close to this 20-per-cent premium ($44,000 normally).

A major argument for allowing professional corporations a tax break is the risk premium. A business owner has no guaranteed income, job security, paid vacation, sick days or retirement program. In addition, the owner must personally guarantee debt obligations and pay the entire cost of the Canada Pension Plan. Therefore, an owner should be entitled to a risk premium. As an example, the risk premium for stocks is arguably about five per cent, but this does not appear high enough for Bob considering the risk.

So, in a straight comparison, Bob should pay less tax in order to have close to the same total compensation as Susan, a salaried employee. Unfortunately, we drifted away from the actual question, dreamed about a logical fallacy and refuted an argument that was never made. The question is not how the tax system should make Susan and Bob have the same total compensation but rather how to limit the tax exemption for what it was intended, mainly using dividends to compensate those involved in the business and to help businesses reinvest and grow.

If we use sprinkling dividends as a loopwhole in order to make Bob’s total compensation the same as salaried employee Susan, we have passed the risk premium over to be paid by Susan by way of tax revenue foregone by exempting Bob. The risk premium should belong to Bob to be mitigated by higher revenue paid by Bob’s clientele or by reduced expenses, not lower taxes at the expense of Susan.

If a tax break is truly yours, then let it go. If it returns, then it belongs to you. If it doesn’t, then it never was.

 

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From a previous Canadian Lawyer Article.

The Open Office and the Hawthorne Effect

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Private and public organizations appear to be drifting towards the open office concept. They intend to decrease costs and increase interaction amongst staff.

We can see the slow evolution from the closed office, to the head high cubicle walls to now the chest high walls. All in the name of integration. We may get back to the day of no walls and simply desks arranged in neat rows and columns. Whenever they show this type of arrangement it always seems somewhat Kafka like; the bleak dystopian future that we are always trying to avoid but seems to be coming for us anyway.

A new study from CTF, Service Research Centre in Karlstad University, Sweden suggests that the more co-workers share a workspace the less satisfied they are and the more difficult it is to have a good dialogue with other staff.

This may have depended on where the studied employees started of course. Anyone with a private office suddenly cast into the open workplace community would be dissatisfied it would appear. Anyone coming right out of school, with no previous experience working in a private office, could well be ecstatic just getting their own private desk instead of one of the communal desks.

Perhaps a staff engagement and satisfaction management technique would be to recall the Hawthorne experiments conducted in the late 20s and early 30s. Here Western Electric in its factories outside of Chicago in the suburb of Hawthorne conducted various experiments regarding productivity. Hawthorne placed the individual in a social context and suggested that performance is influenced not only by a person’s innate abilities but also by their surrounding environment and colleagues.

The experiment attempted to show how the surrounding environment increased productivity. In one factory they improved the overall lighting and kept another factory as a control group. Productivity increased in the first group. As time went by, they added additional improvements to working hours and health breaks. Productivity increased again. Productivity continued to increase even when they returned the lighting to where it was originally.

The experimenters concluded that it was not so much the change in conditions that mattered, but rather the fact that someone cared about the workplace environment and gave them an opportunity to discuss the changes beforehand.

Staff engagement and an opportunity to have an impact on the workplace remains key in job satisfaction.

 

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#openoffice

 

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Bitcoin Bubble Bubble

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Toil and Trouble Tantrum

No one alive, outside of the Canadian Senate, lived through The Tulip Mania bubble of the 1600s. These bulbs were newly introduced into Europe and commanded exorbitant prices. As more people bought into the scheme, the higher the price. A rare type of tulip went for 1000 guilders in the 1620s and for 10000 guilders just before the bubble burst in 1627. This was enough to purchase one of the grandest homes along the most fashionable canal in Amsterdam and 10 times as much as the annual salary of a skilled craftsman.

A typical bubble runs counter to normal economics. Whenever the price of an object goes up, traditional theory suggests that the demand should go down. But with a bubble, the price only continues to go up with demand. The asset price deviates from the intrinsic value. The main criteria feeding this price increase is the feeling that the price will only continue to go up. Even back in the 1600s, FOMO, the fear of missing out, reigned supreme.

Closer to the last few decades, you don’t have to look farther than the dotcom era or the financial crisis to see examples of what was referred  to as irrational exuberance. This term was coined by Edward Greenspan in a 1996 speech and later used by Robert Shiller as a title for his book. The 2005 edition warned of the housing bubble burst.

This brings us to the latest potential bubble. Bitcoin. Unlike houses which can produce rents, stocks that can produce dividends and bonds that can calf off coupons, this cryptocurrency does not have any intrinsic value since it does not claim to the assets of any company or government and does not generate income.. And unlike bitcoin, you could actually handle a tulip bulb and grow a flower. If you didn’t mind expending all the value of your investment in the hopes of growing more bulbs after several years.

Bitcoin’s value appears to be in situations where people think, or hope, it will increase in value. And as we all recall, from Rudy Giuliani, hope is not a strategy. For our purposes, hope is not a sound financial strategy.

More people share the notion that Bitcoin is a fraudulent bubble. And others, who likely have a major stake in the game, say that that a million dollar bitcoin is not out of the question. There are only a limited number of bitcoins that can be mined, so its rarity will drive value. Apparently New York taxi cabs used to be worth a million, but with the advent of Uber, the value has dropped down to something over $300,000. So there are other cryptocurrencies that can come on stream as there is no real impassable economic moat preventing other currencies coming on stream at some point.

Bubbles have been likened to a type of virus. People get infected and the virus can then spread at an exponential rate, until everyone develops an immunity. That immunity is when there is no one else to sell to and the price drops. Sometimes radically.

So we have seen the value of bitcoin rise up 2000 per cent in the past 12 months to $25,000 CDN and drop down to close to $8000 and recover to almost $12,000. Apparently bitcoin ticks all of the boxes for a bubble including a fivefold surge in trading volumes over the last five years, lack of financial regulation and the launch of related financial instruments such as futures.

You can see the five stage of the bubble when you look at any bitcoin chart; displacement, boom, euphoria (the greater fool theory), profit taking and a bit of panic. History does show the occasional bull trap. This is where prices start to slightly increase and people buying the dip, or those experiencing FOMO begin to pile back in. With declining volumes as the price increases, it seems a lot of people are now operating under the ‘fool me once, shame on you. Fool me twice, well I’m just an idiot’ principle. Or something like that.

If you have made your money on the way up, good on you. Personally, I don’t think this will end well for those coming in late.
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Daily Prompt: Tantrum

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<a href=”https://dailypost.wordpress.com/prompts/bubble/”>Bubble</a&gt;

The Cookie Conundrum

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Where would we be without social media? Physically, we would still be in the same coffee shop and talking to each other instead of passing or posting messages to one another. I wrote a short column on one of my favorite topics. Those little pieces of code known as cookies. There was some legal stuff in there that I edited out.

Do you know what your webmaster is busy baking?

Karma. I may have been a scoundrel in a previous lifetime. As penance, I voluntarily reviewed ten webpage privacy statements from five prestigious law firms, four somewhat intrusive social media organizations, and one highly regarded national magazine for lawyers in Canada. Did I say well written? That too.

Cookie policies range from the buried deep within the privacy cookie jar to the flashing K-mart end of aisle cookie sale. Cookies refer to the little malleted crumbs of text file code that websites place on users’ browsers that land on the organization’s webpage. These cookies do not contain any coding themselves, so they cannot transfer any viruses or other types of malware. But like real cookie packaging, you must read to the bottom of the ingredient list to determine what your system ingests.

Cookies come in two major flavors. Session cookies store information about user page activities so that users can easily pick up where they left off. Think of them as celery cookies. Light and non-fattening.

Compare these to persistent cookies which store user preferences. These websites allow the user to customize how information presents itself through site layouts or themes. These more fatty chocolate laden type of cookies adhere to the fatty midsection of your browser.

Cookies cannot be executed nor are they self-executing, but like real cookies, they can be insidious.  Or at least the information on them can be used maliciously. Similar to your personal profile, your browser history can show where you have been and what you have been consuming.

The cookie continuum provides a range of uses for various organizations.  The responsible and ethical approach entails clear descriptions of how cookies are deployed on their site. The privacy policy for the various law firms are conservative and straightforward. For legally trained individuals at least.

Canadian cookies delight the user. Most websites track usage, but some of the Canadian sites merely indicate that they ‘may’ attach cookies. This lite approach appears more like a digestive biscuit cookie. Good for gumming and easy to absorb.

US firms use Twinkie like cookies which look innocent and light, but the fat and sugar consumed have ‘persistent’ lasting effects.  The cookie policy for one large law firm broadcasts the use of cookies similar to the exclusion clause you learned about in law school. Red ink with arrows.  Here users see a banner ad at the base of the webpage warning about cookie usage. The banner clearly states that by using the website, the individual consents to the use of cookies.

These persistent cookies act like the classic Pac-Man game and capture information such as your operating system, browser software, IP address, and the full uniform resource locator. They do then load on the full calorie cookie which allows a number of features such as accessing secure areas of the website, analyzing information and tracking how you share content from the law firm website via social media or email, using sharing buttons provided by AdThis for example. Cookies always extract a cost.

Although the cookie usage seems somewhat invasive, you may be asking what does the Canada Anti-spam Law say about this. For certain types of programs, such as cookies, you are considered to have express consent without requesting it, so you can distribute (attach) cookies to users.

The Facebook Cookie policy portrays a sense of permanence likened to real cookies laced with trans-fat to extend shelf-life. Here, cookies provide for authentication, security, and advertising. The cookies allow Facebook to deliver ads to people who have previously visited a business’s website, purchased its products or used its apps. Fortunately the cookies allow Facebook to limit the number of times you see a particular ad. You can innately appreciate the benefits of seeing ads you would be interested in, but at some tipping point, the ads can come across as stalking. Do you want people looking over your shoulder to know what products or services you were researching the night before?

Cookies help businesses understand the kinds of people who like their Facebook page or use their apps so that they can provide more relevant content and develop features that are likely to be interesting to their customers. Ultimately, cookies help store preferences to provide customized content and experiences.

This ‘pull’ type of marketing experience benefits a potential client interested in receiving certain advertisements for relevant products. Perhaps seeing a sale on litigation services would finally convince that reluctant client to file that civil lawsuit?

Law firms have room to move up the cookie continuum to provide a more individualized website experience. Admittedly, clients may prefer not to open up their browser in a coffee shop and receive updates on the developing law of criminal fraud, but those showing interests in mergers and acquisitions may prefer to see a website customized on that basis. Cookies with sprinkles could be the next big thing.

Mallet

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