“Comments on Ontario’s cap and trade plan are due in three weeks, on July 24. However, the policy context has changed dramatically since Ontario’s discussion paper was drafted, and is continuing to mutate quickly. Canada has done so little for so long that our climate policy has laid us wide open to the serious protectionist provisions in the 1500 page US House of Representatives Bill HR 2454, the American Clean Energy Security Act. That likely means that Canadian rules must match American ones.”

As we’ve already discussed here, the U.S. bill calls for reducing our Southern neighbour’s greenhouse gas emissions by 80 per cent by 2050. It also includes a cap and trade system, and a requirement that utilities get at least 15 per cent of their electricity from renewable fuels.

More worrying for Canadian companies, the bill targets a range of sectors from the cement industry to steel producers and could end up giving the U.S. government the power to block the entry of energy intensive imports from countries that do not meet U.S. standards. With these proposed border adjustments and the prospect of other countries imposing carbon tariffs, Canadian exporters will have no choice but to come up with effective carbon reduction strategies to stay competitive in their industry.

First and foremost though, Canada will have to ensure that its targets, enforcement mechanisms and its reporting rules are consistent American ones.

The interplay between climate change and trade issues promises to be a hot topic in the years ahead.

According to Rubin the current global economic downturn was caused by high oil prices, more so than defaulting mortgages, just like in four of the last five world recessions (the 1998 Asian meltdown being the exception). Why? Japan and much of Europe had already entered into recession before the financial crisis hit.

For Rubin, the real story of this recession lies in the energy patch, even now that low oil prices have disrupted much of the exploration that fueled Alberta’s economy only a short while ago. But as soon as the global economy recovers (when remains a mystery), you can bet oil prices will quickly follow, exacerbated by the fact that there’s been no increase in the world’s oil supply.

I raise this because, if Rubin’s right, we’re missing a golden, once-in-a-lifetime opportunity to pass a carbon tax now, while oil is cheap. Indeed, we saw this week further indications that implementing a cap-and-trade system in the U.S. will be a tough sell. The Obama administration is already suggesting that it is open to the idea of auctioning only a portion of the emissions allowances issued, instead of the whole kit.

No doubt the back-and-forth debate about the merits of precise targets will have an impact on how Canada proceeds with its own plans to reduce carbon emissions.

But more importantly, it sheds light on the principle shortcoming of a cap-and-trade system. It’s a political nightmare to get it implemented.

A highly regulated cap-and-trade system lacks the simplicity and adaptability of a carbon tax that would shift the burden of taxation from income to carbon emissions.

What’s more, cap-and-schemes are rarely equitable. The trouble with giving away free permit allowances, generally allocated for purposes of political expediency, is that they can easily produce windfall profits for polluters at the expense of consumers, little of which will fill government coffers.

And here’s the real tragedy. Rising oil will hurt consumers — badly. It seems counter-intuitive, but by adopting a well calibrated gas tax, phased in over the next few years, consumers would respond in anticipation by purchasing more fuel efficient vehicles, thereby shielding themselves somewhat from exposure to higher oil prices and runaway inflation. Not to mention that governments would then have the means to build cleaner transit infrastructure and capacity.

If there ever was a time to put forth policies that would see our energy bills rise, it’s is when oil prices are low. Why let the opportunity pass?

Ontario seems to be taking a lead in consultations aimed at designing a greenhouse gas cap-and-trade system. In December the province released its discussion paper on the issue. Gowlings gives a good breakdown of the details.

A copy of the discussion paper can be found here. Comments will be accepted until March 3, 2009, following which consultations will continue in 2009 on a sector-specific basis with industries likely to be affected, to guide the development of the system. It’s expected that the framework will be announced as early as 2010.