0.7% of GDP development aid target = revenue from a $30/tonne carbon tax, numerically and morally

At the recent Carbon Pricing and Environmental Federalism conference in Kingston, Ontario, one thing that was brought up by a couple of speakers (one of them was Matthew Bramley of the Pembina Institute) was the idea that taxes on greenhouse gas emissions, "carbon taxes", are actually a "recovered subsidy", and that, as a consequence, one could argue that it was more fair for the federal government to collect this tax (as opposed to provincial governments).

Let me explain this a bit before getting to my idea. Greenhouse gases are causing climate change, and that will be bad for everybody. Right now, people get to emit greenhouse gases (from burning fossil fuels) for free. But it's really not free because people in the future that will be burdened by climate change will pay the price. In effect, those people are giving a subsidy to the people who pollute for free today.

Money collected from a tax on fossil fuels would recover some of this subsidy. Who should get the proceeds? Well everybody benefits from reduced greenhouse gases, and the federal government would seem to have a better claim to represent "everybody" than individual provincial governments. Therefore, from this point of view it makes more sense that the federal government deserves the money.

Now to my point. Why stop there? We know that people who will really pay the price for climate change are the poor who live (or could have lived) in certain developing countries in the future. Aren't they the ones who are morally entitled to the proceeds of our carbon tax (in whatever form it is implemented)?

If you agree with my point then consider this: a $30/tonne tax on CO2, as proposed by the third year of Stephane Dion's Green Shift plan, would generate about $11b in revenue. That's coincidentally about 0.7% of Canada's $1.6 trillion GDP. Perhaps we should be considering fully funding Lester Pearson's (and the U.N.'s) suggested international development aid target using a $30/tonne carbon tax, and concentrating that aid on development that will prepare future generations to deal with climate change. What a great way to try to settle our debts and respect intergenerational equity.

Carbon Pricing and Environmental Federalism

This weekend I attended the Carbon Pricing and Environmental Federalism conference in Kingston, Ontario. This meeting, organized by Queen's University's Institute of Intergovernmental Relations, brought together many of Canada's experts in the field of public policy on climate change.

Needless to say, Stephane Dion, the Green Shift and the recent election were not far from everybody's thoughts. The mood was a bit somber in this respect as exemplified by Prof. Kathryn Harrison of UBC, a political scientist, who said that with last week's vote, optimistically, action in Canada on climate change will be pushed back by at least ten years. Various people had unkind words for the NDP and the Conservatives for campaigning against the Green Shift with misinformation and scare tactics. More than one person told me that the best use of my time now, as an activist, would be to talk to kids, with the sad implication that changing the minds of older generations, as a whole, was a lost cause (although as a younger person and somewhat of a kid-at-heart, I am not willing to give up so quickly).

Economist Nancy Olewiler (an organizer of the letter signed by 250 economists during the election campaign supporting a carbon tax) of SFU, however, amid her own observations of the difficulties that the fight against climate change faces, did say that we should celebrate one thing: that the recent federal election in Canada was the first Canadian election where pricing policy (as opposed to voluntary initiative or incentives) for carbon emissions was a major issue.

Climate change will be challenging us for a long long time. How to reduce greenhouse gas emissions will be a political issue for a long long time. As long as we have a market economy, the price of emissions, however it is generated, will also be a political issue. And so I think that Canadians will be talking about Stephane Dion and the Green Shift for many years to come.

Stephane Dion put a clear policy forward for carbon pricing as a first step to combat climate change. It was supported by environmentalists and economists. It was roughly in line with the Green Party's proposal, and it was based an old idea going back in the political arena at least as far as a policy proposal by a US Republican party presidential candidate in 1979, John Anderson, and implemented in one form or another in many countries since then.

In my opinion we are indebted to Stephane Dion for bringing some intellectual honesty to Canadian politics. Perhaps his mistake was to be so honest as to call a tax a tax. One of the conclusions of this conference was that, politically, Canadians are not ready for that. Conference participants concluded that we should never again associate carbon emissions pricing with the word "tax", and simply disguise it with names such as, "cap and trade", "public benefit funds", "renewable portfolio standard", or "foreign oil security fee".

I believe that history will show that Mr. Dion should be accorded more respect than he has been receiving from certain (close) quarters in the last week. We need more people like him in Canadian politics.

On the Harper government's plan to purchase mortgage securities

The $25 billion purchase of mortgages announced by the federal government was described as follows:

From the Toronto Star: "Under the plan, the government is buying $25 billion of mortgage-backed securities to ease the liquidity problems of Canada's major banks. Harper described the securities as solid, government-insured investments..."

From the Ottawa Sun: ' "This is a transaction in which the government of Canada, the taxpayers of Canada will not lose money," Harper said. "Quite frankly, because the costs of our borrowing are lower than the value of these mortgages, we'll probably make money when this transaction is over." '

I'm not an expert in Canadian mortgage securities but here's my simple risk-return thinking:

Let's suppose these mortgage securities have an expected return that is slightly higher than the interest rate on Canadian government bonds, as Stephen Harper says.

Now Harper says that the Canadian government can buy the mortgages, financing the purchase at the interest rate paid on Canadian bonds, and earning the difference between the rates of return on the two legs. A profit for Canada?

But wait, these mortgage securities are probably insured (presumably through the CMHC) by the government of Canada! In this case, if anybody but the government of Canada purchases them, it's a purchase of insured mortgages. But if the government of Canada purchases them, there is no insurance any more for the purchaser. In fact, there is no free lunch. If the government expects to make a little money from this investment, it's only because it is taking on the risk of mortgage defaults because it is insuring its own investments.

I hope that the government takes a haricut on the price of these mortgage securities to account for how much the CHMC mortgage insurance is worth, and the fact that the CMHC is the government. If not, Stephen Harper's claims might be false and misleading. Again, I would caution the reader that I'm not an expert in mortgage securities - just knowledgeable enough to be worried about Stephen Harper's plan.

"buying opportunity": not just an insensitive statement from Harper, but unjustified

Anybody who knows financial markets would know that unless you really do your homework, you cannot say when there is a 'buying opportunity'. Certainly it would be wrong to say that, based on a casual application of the (economically unjustified) notion that stocks always bounce back after they go down, there was a buying opportunity back on Tuesday. That's what Stephen Harper did. Professionals who have done a lot of trades will tell that, unless you have done your homework and understand why a market is not being efficient, you won't make money betting on any simple strategy like mean reversion.

Now this post is not just about Stephen Harper. It's about commentators like Susan Riley of the Ottawa Citizen, who wrote, "...his logic is impeccable: stock markets go down, but eventually go back up", and Andrew Coyne who wrote of, "...Harper’s perfectly sensible observation that the present panic on the stock markets presents a remarkable buying opportunity ". Experience trading in the markets will tell you that, unless you figure out why somebody sold a stock down too aggressively, you don't have a better than even chance betting on it bouncing back. Right now, I'd say very few people, if any, really know exactly how bad the financial crisis is, and certainly not casual commentators who are mainly focused on Canadian politics.

Don't tell me that if you wait long enough, stocks will bounce back. If you wait, you have inflation to worry about. Look at the inflation adjusted return on stocks in the 1970's. Moreover, you can only wait until you die. In the long run we are all dead, as Keynes observed. For single stocks, consider an extreme example -- look at Lehman Brother's share price. Is it going to bounce back?

No, Stephen Harper's statement was not a sensible or logical statement that was simply insensitive. It was just wrong. As an economist, Harper should know something about market efficiency and how difficult it is to predict whether a stock price will go up or down. But I guess it was just too good an opportunity to try to express to voters his belief that the economy is probably okay.

Explaining the crisis in LIBOR

A nice article that explains a bit what is going on with the London Inter Bank Offered Rate (LIBOR) is here. LIBOR is an important global interest rate benchmark. LIBOR is high because banks want to avoid lending to one another. They don't know if one of their counterparties is going to be the next bank to become insolvent.

LIBOR is a benchmark that is used to set a lot of floating rate business and consumer loans. When it goes up, as it is right now, loan payments go up.

From that Bloomberg article:

The spread charts and financial acronyms mean real pain for people like Maureen McNally of Trenton, Florida. The monthly payments on her Libor-linked mortgage from Countrywide Financial Corp. have climbed to $769 from about $500.
``I had to give up my cable television, I had to give up my house phones, because I had to cut back completely,'' said the 53-year-old gift processor at the University of Florida in Gainesville. ``I am so disgusted with this whole mortgage thing I never want to own a home again.''
McNally says she's had her house on the market for nine months without an offer.

It's (already) a disaster, not a buying opportunity, Mr. Harper.

A lot of people have already commented but here is my take on Stephen Harper's statement to reporters yesterday (Oct. 7, 2008), "I think there are probably some great buying opportunities emerging on the stock market as a consequence of all this panic" and the statement on the Conservative Party website related to the belated release of their election platform, "The Liberals and the NDP are both a vote for financial disaster" (their emphasis).

Look, it's already a financial disaster (I won't quote somebody else. I'll back that statement up with my past years of experience working in the financial markets). If the Conservatives really believe a vote for the Liberals is going to turn this situation into one, they don't understand what's going on. Maybe they don't want to, or can't. Hey, C's! It's already a disaster guys.

Note how the Conservatives are lumping the Liberals and NDP together so that they can criticize the Liberal Party on economic management. From the Financial Post, Stephen Harper said, "The Opposition proposes raise taxes. In particular, and look at the stock market today -- where the big hits are on energy and commodity prices. And the Opposition proposes carbon taxes. The Opposition proposes to raise taxes on companies in the energy business and other commodity businesses." They have to add in the NDP's plan to cancel planned business tax cuts. They can't simply criticize the Green Shift any more, especially with the publication of the open letter from 230 economists supporting a carbon tax as the best way to fight global warming.

Look, nobody is blaming the financial disaster on the government. This is an international problem, but it is a disaster. Hey, C's! It's already a disaster guys.

The questions Canadians should be asking themselves as they head to the polls on October 14th are, "Who is going to acknowledge the economic crisis as more than a buying opportunity on the stock market? Who has economic management experience? Who will, given that a recession is a near certainty, also look out for the vulnerable members of our society?". That would not be the Conservative Party.

Harper and energy prices

Yesterday, Stephen Harper was quoted in the Globe and Mail saying, "What I worry is this is just the tip of the iceberg if we get a carbon tax on energy." If he is implying that higher energy prices are bad, I have this to say:

Let's forget about taxes (and the fact Harper is yet again ignoring the shift in the green tax shift) for the moment. Hasn't Mr. Harper noticed how much the price of oil and the Canadian dollar have dropped as this economic crisis progresses? That's real dollars lost to Canada as a whole because we are net exporters of oil.

If Stephen Harper only cared about the Canadian economy, especially in the short term, he should be worried about lower energy prices. That would make Canada poorer. If the worst predictions, like those made by bank economists yesterday, come to pass, we might enter a depression where low commodities prices and not high prices would be part of the problem.

But, apparently, he may not care about the economy because he has an election to worry about.

Listening to the markets is not fear-mongering

The Conservatives have been accusing Stephane Dion of "fear-mongering around the economy for his own gain". I used to work in the financial markets and one of the fundamental things you have to know there is that market prices contain information. Nobody has to "fear-monger". Prices in the stock and bond markets make it clear that there is a serious risk of global recession.

Almost everybody is used to following the stock markets, but almost nobody follows something called the interbank offered rate (e.g. LIBOR, the rate set in London). This is the rate that banks use as a benchmark to charge each other for loans. LIBOR is also a reference rate for businesses and consumers borrowing money and is a critical number in the international money markets. What is unprecedented is that difference between ('risky') LIBOR and the interest rate on ('riskless') US treasury securities has exploded and halted a lot of financing of business activity around the world. The stock market drop is nothing compared to what is going on in LIBOR. Do not think that this stock market decline is the same as any other you've seen in your lifetime.

Canada is not the master of its own fate as to the question of whether or not there is a recession. All of that depends mostly on the U.S. economy. Our choice on October 14th is whether or not to acknowledge the possibility of a serious recession, how ready we want to be for it and for protecting our most vulnerable fellow Canadians.

Conservatives have been saying that there is no serious financial crisis amongst Canadian banks. That may be true. But even if the world's financial problems do not impact the Canadian financial system, the slowdown in the world's (especially the U.S.'s) economies will impact (or already have impacted) Canada's economy - and that means job losses. We should be getting ready to take care of each other.

Doing nothing is the risky option. Not admitting the real possibility of a painful recession makes it worse. The choice between a Conservative government and a Liberal government is even clearer.

Conservative candidate fabricates "facts"

(gosh, if the Conservatives are going to manage Canada's economy, maybe plagiarism isn't so bad, at least not as bad as acting on purely fabricated "information")

Have a look at this posting by Conservative candidate Brian Abrams in Kingston and the Islands. I took the screen shot in the early morning hours of Oct. 1, 2008. Look at the very bottom where he attacks the carbon tax by using that "fact" the German unemployment rate is 12%. The number immediately struck me as high. In fact, you can easily check online that the German unemployment rate was 7.6% in September and 7.7% in August. Brian Abrams just made up his unemployment number out of the blue.

The link is here but who knows how long it will remain uncorrected.

You know if Mr. Abrams is elected and if the Conservatives are returned to power, he may very well become a cabinet minister. Harper's bench is not very deep. Anything could happen.

With the economic storm clouds gathering, it would be a lot safer to send one less "economic fact fabricator" to Ottawa. Vote for Peter Milliken in Kingston and the Islands!

If Chantal Hebert says so too...

I thought Stephane did well in tonight's French language debates, but I can't trust my own objectivity. In the discussion segment during the subsequent CBC/Radio-Canada news broadcast, Chantal Hebert also said that Dion did well, so, it must be true :-)