Friday, October 12, 2007

The 2% solution? Looks more like the 2% problem.

Glenn Hubbers believes he's found a reason why Canada should be forced to meet Kyoto targets. Even though Canada is only responsible for 2% of the world's greenhouse gas emissions and meeting Kyoto targets would only reduce that number by 0.6% (30% of the 2%), Glenn Hubbers believes it's still important.

To further explain his opinion, he uses this analogy, comparing Canada (a country with high per capita emissions) to a high interest credit card which better be paid off first despite the relatively low balance.
Consider this analogy. If you are in debt, say you owe $3,000 on a credit card at 18%, another $10,000 on an unsecured line of credit at 10%, and then have your $150,000 mortgage locked at 6% for 5 years, and you find yourself with a bit of extra money, which debt do you pay off first? The entire financial industry would advise you to pay off the highest interest rate loan, regardless of the relative balances that you owe.
True, but at the same time, paying off a high-interest credit card doesn't mean neglecting other debts. If a financial adviser suggests that you skip a few payments on a $150,000 mortgage to pay off a $3,000 credit card - then you must be his mortal enemy, because nobody would suggest that to a friend. Yet Kyoto, which leaves out such major contributors as China and India, proposes just that.

Then, according to the analogy, the guy actually finds himself with a bit of extra money. Where did Glenn Hubbers see the extra money? I don't see any. I see $467Billon Federal Debt, over a million Canadians unemployed (with a few more millions overworked and underpaid) and our industrial sector being hit extremely hard with the cheapening US dollar. Thus, looking back at the analogy, the guy is not suggested to use some of the extra funds to accelerate debt repayment. He's actually suggested to cut back on essential household expenses just to get out of debt faster.

Moreover - Kyoto, which doesn't factor in Canada's population growth (from 27M in 1990 to somewhere near 34M by 2012), could be compared to a financial plan which recommends a family to cut spendings by nearly 1/3 without even considering how many children they have. How many families would like that kind of planing?

What a financial adviser would recommend in this situation is to consolidate all the debts into a single $163,000 mortgage and use the difference in the minimum monthly payments (in this case it would be approximately $200 a month) to accelerate the debt repayment, getting the client out of debt few years earlier. Surprisingly enough, that pretty much resembles the Conservative government approach to emission cuts. Instead of starving Canada's economy to meet unachievable targets in just 4 or 5 years, the government focuses on measures that would encourage energy-efficient technologies, combat air pollution and achieve better results on a long run.

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