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Never mind that the same people would be opposed to a carbon tax even if the Americans already had one. Never mind, too, that the costs of the regulatory and subsidy schemes offered as substitutes are many times higher than even the most ambitious carbon tax proposals (see: coal phase-outs, below). Let’s just take the argument on its face. Can a country impose a carbon tax on its own, trade freely, and stay competitive? Or does one of the three have to go?

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Let’s go back to that earlier generation of pessimists. Why were they wrong? Because the impact of a change in policy cannot be assessed by simply comparing costs at a fixed point in time. That’s true for many reasons — when you change one thing, much else changes — but the biggest is the exchange rate: indeed, there is no way to compare costs between countries without it.

Exchange rates may jump about in the short run, of course, for all sorts of reasons. Still, other things being equal, if a country experiences a generalized increase in costs — a carbon tax, a.k.a. “the tax on everything,” would fit that definition — demand for its exports will drop, and with it demand for its currency, leading it to decline in value. Thus a good priced in Canadian dollars will cost less in American dollars — offsetting some or all of the original cost increase.

Yes, at any given exchange rate some industries will be able to compete, while others will not. That’s not a bug, it’s a feature: where it costs more to produce a thing in Canada, we would do better to buy it from others, offering in exchange the things at which we excel. But it is impossible that a whole economy should find itself unable to compete for long: if it were, the exchange rate would depreciate until it could.