The issue du jour? How protectionism has crept into draft climate change legislation in the United States. How it’s likely to affect Canada. And how best to head it off—before it becomes law, and real damage is done to our economy.

Last week, Page’s round table released a new report on how Canada needs to tackle the issue of climate change. Entitled Achieving 2050—A Carbon Pricing Policy for Canada, it sensibly rejected much of the Canadian federal and provincial governments’ efforts to date—including the piecemeal provincial approach and the federal government’s favouring of “intensity” targets on only the largest emitters.

Instead, Page’s report favours one clear national standard to price carbon across the country. (This is a solution Canadian Business’s editorial board has long preferred.)

Page has been at pains to stress that Canada’s future economic health depends on making these changes—as quickly as possible. And it comes not a minute too soon.

Like Page, everyone who exports energy and manufactured goods to the U.S. should be paying close attention to the wording of draft legislation tabled by Congressmen Henry Waxman of California and Edward Markey of Massachusetts on March 31 of this year.

That’s because the current wording of the new bill, titled the American Clean Energy and Security Act 2009, has major implications for Canada.

Under the segment titled Transportation Efficiency, for example, the bill proposes what amounts to a low-carbon fuel standard across the United States. If implemented in current form, that move would likely cut exports of oilsands syncrude out of the U.S. marketplace.

Worse yet, says Page, is the creeping protectionism embedded in the bill’s current wording—particularly the segment titled Ensuring Domestic Competitiveness. “The gist of the bill is that if any U.S. company complains that this program puts them at a competitive disadvantage, it will become eligible for rebates from the U.S. government that will allow it to continue to compete,” Page explains.

The bill goes on to state that if…

….the President finds that these rebates do not sufficiently correct competitive imbalances, he would be directed to establish a “border adjustment” program, under which foreign manufacturers and importers would be required to pay for and hold special allowances to cover the carbon contained in U.S. bound products.

What this amounts to is new tariffs on goods from countries whose climate change legislation is deemed by the U.S. to be somehow inadequate to its own standards. Explains Page: “This represents both a direct threat for products from the oilsands, and a threat to any Canadian product that represents a high fuel intensity — steel, cement, auto parts.” You can read a draft summary of the bill here.

Page acknowledges that we don’t yet know what kind of an economic hit this legislation is likely to represent. And it’s also important to stress that the legislation remains in draft form. Powerful entrenched constituencies in the United States — ranging from the coal mining industry, to advocates for those on low incomes, to consumer groups, to the Department of Defence—will be working overtime to get these bills changed.

But Page insists that the threat is real. “The protectionist elements of this are really aimed at China,” he says. “Canada’s getting caught in the downdraft.”

In Page’s view, the best way to head off the impact of this legislation is by bringing Canada’s climate change legislation in line with what the U.S. is considering. But that, of course, is likely to mean major economic pain and dislocation for businesses and consumers right across the country. So his report recommends a series of measures to offset that pain.

For example, it suggests the government continue with an idea Alberta is already implementing: that the proceeds from the sale of pollution credits at auction go towards a technology fund. That fund would then invest in technologies—carbon capture and storage, thermal power, energy-efficient technologies and renewables—that can help bring down the carbon content of Canada’s fuels and products.

Another likely offshoot: spiking oil prices, as high-carbon fuels are legislated out of the fuel supply. So Page’s report recommends some funds from the sale of credits be spliced off to help low-income Canadians most at risk from higher oil prices.

As for possible job losses: though the report doesn’t comprehensively tackle job training, Page says his group is closely following initiatives such as the Green Jobs corps currently championed by the White House’s green jobs czar Van Jones (see yesterday’s blog post—Meet Mr. Jones.) “The infrastructure program in the last federal budget should be looking at the green jobs area,” Page says.

Toronto-based cleantech investor Andrew Heintzman has also been watching these developments. He applauds Van Jones’ green jobs training idea in theory, but points out “you can’t put training for green jobs in place without clear markets for those jobs in the first place.” That’s why he’s been investing in cleantech start-ups.

Heintzman also serves on Ontario Premier Dalton McGuinty’s task force for greening Ontario’s economy. He acknowledges when it comes to finding clear leadership on climate change policy, Canada’s approach has been a bit of a mishmash. Ontario has feed-in tariffs to encourage the use of renewable energy. B.C. has a carbon tax. Alberta’s working with a form of cap-and-trade — capping emissions on the largest polluters and investing the sales of pollution credits into a tech fund. And as for booming Saskatchewan, well, according to an article published this morning in the Globe and Mail, that province’s environment minister Nancy Heppner said recently that it just doesn’t make economic sense for the province to attempt to meet its climate change targets— at least not for this year.

It adds up to a policy of madly off in all directions. And with Canada’s greenhouse gas emissions continuing to skyrocket, it clearly isn’t working.

“What amazes me is that we aren’t further along with this process yet,” Heintzman says. “We’ve known this was coming.”

Pragmatists hope that Page’s recommendations—which some in the oilpatch applaud for their clarity—will help Canada get its act together on the climate change file. For as Page sees it, some form of emissions reduction is going to have to happen in Canada, and it’s going to be painful anyway. Might as well figure out a clear policy now, to help businesses and consumers mitigate the pain—before the economy gets slammed with new green tariffs down south.

Why wait for a few more percentage points to take the gain, as several readers rightfully asked in emails and blog posts? I had said 50% for “silly psychological reasons” as I replied to one reader – i.e. that was the gain that would have offset the Nortel loss in one account.

Over the weekend, I read halfway through Timothy Sykes’ book, An American Hedge Fund, and came across a passage where he similarly held out for a few more points because that would exactly offset his loss on previous trades. His experience highlights the utility of having more objective criteria for buying and selling. He writes:

“I promised myself that I would hold [my short position] until I broke even from the two earlier trades. My paper profit now surged to $27,000, but I still didn’t take it. Within minutes, it turned into a $6,000 paper loss. I couldn’t chance another reversal, so I decided to cut my losses. Unfortunately, the quick reversal scared many other short sellers into trying to cover too … and I found myself chasing the stock higher … and was finally out … with a $28,600 loss.”

Preet Banerjee emailed in with his hedged trade on HOD. When oil was near $140, his mock portfolio bought HOD and several energy stocks to arbitrage the undervaluation of oil stocks relative to the commodity. That turned out well, he reports, and now he is unwinding the trade.

Sure, the U.S. CPI hit an annual growth rate of 5.7% in July. But the main cause of the inflation surge, soaring oil prices, is beating a hasty retreat — as are prices for commodities and foodstuffs (other important contributors). Even rising import prices are going into remission thanks to the recent rise in the U.S. dollar.

Look at how financial markets yawned when the CPI figures came out. Futures on federal fund rates barely moved. Yields on inflation-protected Treasuries (TIPs) fell (the spread of the 10-year TIPs yield over regular 10-year Treasuries yield — a proxy for inflationary expectations — has now collapsed from 2.57% to 2.22% in a little over a month).

Retail sales volumes have been dropping despite the tax rebates issued by the U.S. government. Job losses, falling house prices, and credit rationing are taking their toll. With most rebate cheques already disbursed, retailers are likely to pick up the pace of price discounting in the months ahead, says BMO Financial.

The forces of recession do indeed appear to be in the ascendancy. Japan’s economy contracted at an annual rate of 2.4% in the second quarter, its worst performance in seven years. The eurozone economy shrank in the second quarter, the first contraction since the launch of the euro in 1999. The Reuters-Jefferies CRB index has fallen almost 20 per cent since the peak in July.

The Fed’s latest survey of lending officers shows continuing tightening of credit standards. In the three months ended June 30, total bank credit contracted at an annual rate of 3.7% — the biggest drop in 60 years.

A slowdown in loans coincides with a slowdown in bank deposits — which in turn slows growth in the M2 definition of money supply. M2 had annualized growth of only 2.5% in the three months ended July, compared to 13.2% in the three months ended March, 2008. If inflation is “always and everywhere a monetary phenomenon,” as the great economist Milton Friedman said, then a deceleration in the money supply implies a deceleration in inflation.

In fact, the M2 slowdown implies a drop in economic growth when inflation is taken into consideration. The real money supply (adjusted by consumer price inflation) has contracted at an annual rate of 7.3% in the three months to July 30, “the sharpest three-month contraction since early 1980,” according to Northern Trust.

Indeed, chances are good the stocks could then be the cheapest they’ll get prior to the recovery phase. Declines have gone far already as can be seen from the following price declines over the past year.

FedEx -22%
Ford -40%
Winnebago -60%
AMR Corp. -75%