The Pan-Canadian Framework on Clean Growth and Climate Change-The Ontario Controversy

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The federal government created an eloquent solution to the problem of carbon emissions and climate change. Their backstop GHG Act allows the provinces to create a number of homegrown solutions in order to deal with emissions within their own jurisdictions.

Ontario created perhaps the best and most integrated solution to the problem of emissions. The Ontario Climate Change Mitigation and Low-Carbon Economy Act, 2016 (the Ontario Act) established a standard cap and trade system described in the earlier article. In addition, the system integrates with the Western Climate Initiative (WCI) which provides access to an even greater market to buy and sell the most cost effective carbon credits.

The Ontario system compared a number of policy alternatives in its Five Year Climate Change Action Plan. The most cost effective alternative used the existing cap and trade system integrated with WCI. The policy concluded that the existing system would result by the year 2020 in a carbon charge of $18 in 2016 dollars.

We previously described how the federal government uses a solid constitutional ground to establish a national carbon charge. Ontario intends to argue against this ground with all available resources. This would provide great relief to Saskatchewan in its intent to also contest the GHG Act. The other provinces may follow suit, but from a risk management perspective Ontario and Saskatchewan businesses would be prudent to prepare for the federal carbon tax of $20 tonne in 2019 and establish the necessary processes and infrastructure now.

The Ontario government appears to be in the enviable position of avoiding the political cost of pricing carbon and can throw the entire responsibility on the federal government. Instead of businesses and consumers facing a potential Ontario based $18 cost per tonne of carbon by 2020, they will have the federal government’s $50 tonne instead. Interestingly, the Ontario government would be receiving greater revenues under the federal system.

The federal system would also be revenue neutral, but the Ontario government would not be as constrained in the use of the revenues. They still might model the innovations and adaptations outlined in the Ontario Climate Change Action Plan, but there is no indication that they plan to do so. Indeed, the funds could go directly back to the entities paying the tax. The carbon pricing signal would be lost, and Ontario would have lost a tremendous opportunity to invest in other innovations to shift into the low carbon economy.

However, Ontario regulated entities purchased $2.8 billion worth of credits already. Ford appears to be pleased that companies would not have to incur these costs in the future. The costs under the carbon tax would be even greater. The federal government would likely not be in a position to reimburse Ontario businesses the cost they have for purchasing credits that may extend as far as 2021. These revenues would have likely gone to the Ontario government and a portion to the WCI. The revenues generated in Ontario would have flowed mainly towards funding the various emissions reductions programs.

WCI does not provide information as to whether Ontario was a net purchaser or seller of carbon credits. An estimate by Ontario’s auditor general Bonnie Lysyk estimated that in 2016 that Ontario businesses would have to pay $466 million for WCI facilitated allowances.

Under section 33 of the Ontario Act, the Minister may retire emission allowances from circulation or may cancel Ontario emission allowances in accordance with the regulations in such circumstances as may be prescribed.  A less confrontation approach would simply be to conclude the Ontario Cap and Trade program naturally. Businesses would likely have no further need for these emission allowances since the province would no longer need to cap the level of emissions coming from the regulated industries.

Effective July 3rd, 2018 the provincial government revoked the cap and trade regulation, prohibiting all trading of emission allowances. Their Carbon website does not provide any further helpful information. The GreenON rebate program will be wound down, but the program will honor arrangement where contracts were signed before June 19th, 2018 for work to be completed by October 31st, 2018.

Ontario contemplates formation of a fund to invest in emission reduction technologies. With the dismantling of the Ontario Cap and Trade, The federal government intends to review the $420 million transfer to Ontario under the Low Carbon Economy Leadership fund.

Since the federal carbon charge is a separate type of system, we would anticipate business having to pay and collect this amount commencing January 1st, 2019. We would also anticipate the carbon tax running concurrently with the no longer required but already purchased carbon credits by Ontario regulated entities.

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The Pan-Canadian Framework on Clean Growth and Climate Change

arid-climate-change-clouds-60013This is the third article dealing with Canada’s legislation on climate change.

 

As previously discussed, Canada’s GHG Act contains two mechanisms for pricing carbon. The first involves straight taxation. The second mechanism uses cap and trade.

In a cap and trade system, the government sets carbon emission caps on the regulated sectors. The government then issues certain emission allowances by an auction process. Those businesses purchase the allowances to allow for a certain amount of carbon emissions. If the business exceeds those levels of allowances, then it has to pay a charge on the excess. However, if it is able to reduce its level of emissions to below the level of allowances, it can trade those allowances to other businesses requiring them. The government in charge of the cap and trade system then simply reduces the amount of allowances issued for each time period. The economy then reduces its overall carbon emissions.

The difficulty with a national cap and trade system would be the federal government’s potential lack of jurisdiction to issue such a system. The government’s solution involved creating the first mechanism, the carbon charge, which clearly falls into its ability to legislate. The cap and trade system becomes merely an add-on. This flexibility for the carbon charge then would justify this second mechanism.

The GHG Act allows the provinces to implement their own tax system or cap and trade system. The provincial systems must plan to achieve a certain level of emission reductions in order to be comparable to the same results that would have been achieved by the federal system. If the planning objectives are comparable, then the federal system does not apply. This achieves the ‘backstop’ type of legislation where the provinces retain sufficient authority to develop their own homegrown process for emission reductions.

A cap and trade system possesses numerous pros and cons. For example, this system shows historical success. The sulphur dioxide trading system reduced emissions to alleviate acid rain impacts. The system produced actual and substantial reductions in sulphur dioxide over a short period of time.

The European Union Emissions Trading System for carbon initially appeared to be substantially less successful. The government issued far too many emission allowances which substantially reduced their value. Businesses did not have to modify their operations in order to meet their emission caps. Presently, the EU’s $38 billion annual carbon market now seems to be operating the way intended and carbon prices have more than doubled in the past year.

A cap and trade system can result in real reductions of carbon emissions. Meanwhile, a carbon tax can simply be paid by a business as a cost of doing business instead of it trying to reduce its emissions. However, the B.C. carbon tax systems does appear to have resulted in an overall reduction of emissions from 2008 to today’s date. Ontario’s recently introduced cap and trade system required time to prove itself.

Ontario’s first 2017-2020 compliance period allowed some eligible capped emitters to receive emission allowances free of charge. This was to make the transition easier and make the system manageable for companies with competitors in jurisdictions without a carbon price. Allowances were not to be given free of charge to fuel suppliers/distributors, electricity importers and electricity generators. The rate of allowances was to be decreased over time at a rate of 4.75% per year for combustion emissions starting in 2018.

Partnering with other cap and trade systems can result in even greater savings. Ontario signed on with the Western Climate Initiative. This Initiative includes California and Quebec. Other governments had joined in, but dropped out of the Initiative. Nova Scotia recently indicted its intent to join.

The theory of comparative advantage shows that where a country has a lower opportunity cost, it can produce less expensive emission credits and this can result in a greater economic return for all countries involved. This allows countries to specialize in emission credits where they have comparative advantage.

Being involved with international trading provides organizations with the ability to source the least expensive emission credits. This somewhat resembles a free trade agreement where funds leave one jurisdiction and emission credits come back. Some politicians criticize such an arrangement which drives investment out of the country. However, business have the ability to source the least expensive emission credit to reduce its expenses and meet its overall emission cap.

Ontario recently indicated its intent to withdraw from the Initiative. Its agreement states that it has to provide one year’s notice. The Initiative then blocked Ontario businesses from any future auctions of emission credits. This prevented these business from dumping all of their credits and negatively impacting the value of credits.

 

In the next article, we shall examine the Ontario situation.

 

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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

 

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;

Nudging your Client

people-office-group-teamImagine you outline to your client the possibilities of two court actions where he is the plaintiff in one case and the defendant in another. Legal fees are no longer a cost consideration. In the first case, you advise that he could settle and receive $70,000 or have a 90% chance of the court awarding him $80,000. In the second case, you advise that he could settle and pay $70,000 or have a 90% chance of the court deciding he should pay $80,000.  If he was like most people, in the first case he would settle for the $70,000. In second case he would likely go to court and risk paying $80,000. People prefer sure things when it comes to gains, and take risks when it comes to avoiding losses. Lawyers explaining the consequences of a certain legal action should be prepared that a client may be prone to more risk taking to avoid a loss.

This simple example captures a substantial portion of Kahneman’s book Thinking: Fast and Slow in addition to Thaler’s book, Nudge. Kahneman and Thaler separately won the Nobel Prize for work in their respective fields. The Obama administration successfully incorporated the concept of ‘nudges’ into their policy work. These theories on behavioral economics can contribute substantially towards the practice of law and the attraction and retention of clients.

Kahneman separates our thought process into a simple dichotomy of System 1 thinking, fast, and System 2 thinking, slow.

System 1 thinking explains why people feel losses twice as much as they feel comparable gains. Fast thinking comes into play when you stand up to object to a line of questioning without knowing why, when you sense a brief misses something, or when you believe that there really is a tiger outlined in the grass just ahead. Regardless of your personal circumstances, fast thinking comes in handy to avoid being eaten. Figuratively or literally.

Fast thinking includes intuition. Although, thinking with your gut can be dismissed as superficial, Kahneman recognizes that experts glancing at a situation can reach a correct conclusion simply based on continuous experience.

Intuitive thinking guides the halo effect. Someone’s reputation, and ego, could proceed them. Or exceed them. This may give this person an aura of invincibility in that they have won so often they will likely win again. If you, or a court, provides that person the benefit of doubt, a halo so to speak, then you should dissuade yourself of this notion. Rest assured, the rest of the day has not yet been written. Anything can and will likely happen.

Information immediately available primes system 1 thinking and feeds into the ‘anchoring’ concept. Kahneman provides the example of a panel of German judges asked to roll a weighted die that came up with three or nine. The judges were then asked to provide a ruling on a certain fact situation. Although it should not have mattered, judges rolling a nine more often gave higher sentences that the judges that rolled a three.

System 2, slow thinking represents the traditional lawyer mind; collecting facts, analyzing those facts, and providing a researched opinion.  Relative to fast thinking, slow thinking generally has to be dragged into the thought process if the mind feels that fast thinking ‘has got this covered’. Slow thinking eats Doritos while watching TV. I prefer the term ‘critical thinking’ as slow thinking suggests something negative.

Understanding how prospective clients think can impact how you market your law firm. Imagine yourself a prospective client landing on your firm’s website. The website asks if you want to allow cookies in order to enhance your website experience. Being like most people, you sort of realize that cookies attach to your browser benignly. But you read something about them somewhere and your overall impression leans towards not allowing cookies. You congratulate yourself on being prudent, but your web experience becomes muted. The law firm suffers an opportunity cost.

Continuing your search, you land on another site that clearly, but not alarmingly, states that a small piece of code, a cookie shall be added to your web browser. Once again, you don’t know anything more about cookies than you did five minutes ago, but you proceed regardless. Your web experience becomes far more customized, and the law firm discovers substantial information on future clients’ interests.

Most clients intuitively refuse to accept cookies given the choice. The critical part of the mind would not examine the situation since there did not appear to be an immediate need. A client merely advised of cookie use would likely proceed, confident in the notion that someone vetted the cookie usage for them. The concept of providing a default cookie option nudges the client into a better result.

One would think that providing a range of options provides greater satisfaction than fewer options. However, Thaler says that having too many options leads to greater stress and reduced satisfaction. Therefore, providing a default option increases the probability that a correct choice is being made.

Thaler euphemistically refers to this as libertarian paternalism. People make better decisions by the correct arrangement of choices. The person in charge of this arrangement becomes the choice architect.

A lawyer becomes a choice architect in numerous ways. In speaking with a client and laying out their options, the phrasing of options definitely impacts the client’s choice. Although two handed lawyers, on one hand this and the on other that, may feel that they want to leave the choice of options strictly to the client, one should determine what level of guidance the client requires. Normally they would want the lawyer’s best recommendation.

Thaler parses apart the various tools that a choice architect has into five main aspects: Incentives, mapping, defaults, feedback, expect errors and structuring complex choices. For example data visualization and mnemonics of legal information can illustrate the difference between complex choices. In retaining clients, understanding the process behind making decision choices increases your value proposition defined as the benefits relative to the costs. By making the correct choice easier, you have channeled your client to the correct choice. You have reduced not so much the monetary cost to the client, but the stress cost of making that decision.

In making an intuitive choice, clients want to know what other people did in similar situations. Thaler found that a need to conform easily influences peoples’ choices. Clients could operate on this basis to decide how to proceed on a case for example. They would rely more on what friends and other people have done in a similar situation. Therein lies the importance of stories. Relating other individual’s stories can add additional comfort to clients and make the decision easier. Adding stories to your advice makes a client’s choice easier.

To demonstrate this, Thaler identifies greater compliance in hotels where people are advised the guests before them selected the economical option of not insisting upon having towels replaced daily. People like to be part of the crowd as this makes their decision making easier. Your law firm stories should reflect how generally others have proceeded.

Explaining these concepts should be incorporated in to continuing professional development for all lawyers. As a final example, do you think it is more likely that the number of lawyers in Canada is between 60,000 to 70,000 or 70,000 to 80,000?

As you can see from the above paragraph, we have provided some anchoring information along with some anchoring information in the very first paragraph. The federation of law societies lists one hundred and seventeen thousand lawyers practicing today. When people rely upon their intuition, they can be swayed by other factors. These innovative concepts require greater examination and incorporation into today’s law practice particularly in cases where they might operate to your client’s detriment. Did you feel the nudge?

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Mnemonic