The federal government has two major, opposing policy options to deal with today’s macroeconomic debates over inflation and Ottawa’s response to the COVID-19 pandemic. One would threaten momentum toward the critical net-zero emission transition, while the other would bolster it. The threat is that the federal government will start to use “cupboards are bare” rhetoric and reintroduce fiscal austerity, which would stall the net-zero transition. The better policy approach to manage inflation and scale-up the zero-carbon solutions is actually more strategic public investment focused on managing supply and demand, building resilience and promoting equality.
At the beginning of the pandemic, the primary macroeconomic concerns were unemployment and recession, and the proposed solution was stimulus. This led many to suggest combining policies to boost economy-wide demand with greenhouse gas (GHG) emission-reducing solutions. Almost two years ago, I wrote that both the macroeconomic situation and the net-zero emission transition called for stable public investments to define a new pathway for productivity and innovation, which would not be achieved through boom-and-bust spending.
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Now, talk has turned to the perceived dangers of inflation. Price increases are being driven by sector-specific bottlenecks and rigidities that fail to match supply with demand. We’re discovering that markets are not as adaptive as some people thought. Seeking to rectify these sectoral imbalances with fiscal austerity creates a risk of putting the economy into the recession that Canada has been trying to avoid over the last two years. It could also reproduce the failed response to the 2008 global financial crisis, when governments neglected their responsibilities to direct economic activity toward a long-term pathway for technological innovation and productivity and instead quickly cut public investment.
The present economic situation calls for more targeted public investments led by industrial strategies to clear supply-side bottlenecks and manage supply-demand mismatches. Longer-term policies should also aim to build resilience against future shocks that can drive up prices, cut off critical supplies and prevent adaptation to change. We must also help those people who are most vulnerable to increases in the cost of living.
Each of the following economic policy priorities dovetails with what is also needed at the current stage of the transition to net-zero emissions.
Greening supply and demand
We are at a stage in the green transition when policy needs to support the rapid scale-up of zero-carbon solutions. This is a change from previous decades when policy was primarily focused on R&D to produce novel technology and find niche markets for emerging technologies. Scale-up requires large-scale production of zero-carbon solutions and their timely delivery to the majority of the population, rather than just the early adopters. This requires a more strategic co-ordination of both demand and supply sides concurrently. Focus must be placed on the entire value chain that incorporates manufacturing, transportation, logistics and business models. Therefore, clearing bottlenecks, lowering prices, ensuring access to materials and technology and improving productivity are challenges for both climate and macroeconomic policy.
Take building retrofits as an example. We cannot easily scale-up the current method of retrofitting each building individually using only technologies widely available in today’s markets. The method of deploying retrofits must become much more productive – meaning lower in cost, faster in speed and higher in value, both in comfort benefits as well as in energy and GHG savings.
Innovative solutions such as prefabricated walls, greater use of digital technologies and robotics and integrated project delivery are all possible. The energiesprong model, originating in the Netherlands, has achieved 50-per-cent cost decreases through economies of scale and a market reshaping mission.
Achieving these improvements involves co-ordination of both the demand and supply side. On the demand side, similar building types or neighbourhoods are aggregated together to create large-scale single projects. This large-scale demand is then used to leverage significant changes on the supply side. This can include new manufacturing processes and creation of specialized equipment, as well as new business models that take financial and performance risk away from building owners. Non-profit and independent organizations called market development teams take on the task of co-ordinating demand and supply sides to transform the retrofit process.
This is an example of supply-side innovations that can alleviate problems with contractor shortages, inaccessible equipment and high-cost construction materials while achieving dramatic emission reductions. It requires the creation of new institutions for supply-demand co-ordination. It is also critical that public investments are large enough (e.g., $5 billion to $10 billion) to trigger the economies of scale on the demand side that enable transformations within supply chains.
There are several other sectors where a much more strategic management of supply and demand is required for zero-carbon solutions to scale. This includes finding Canadian opportunities within electric vehicle supply chains, the expansion of transmission grids to support renewable energy and electrification, finding high value uses for hydrogen and preparing agri-food sectors for more sustainable diets.
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In recent months, we have seen that extreme weather events induced by climate change are also responsible for supply-chain disruptions and price increases. Climate change-driven inflation is likely to be a real phenomenon in the coming decades.
Nature acts as a buffer to protect us from climate impacts while also pulling carbon out of the atmosphere. Protecting and restoring biodiverse forests, floodplains, seagrass and salt marshes can protect us from the fires, floods and storms that have disrupted supply chains this year. This priority also requires public investment. The Green Budget Coalition has recommended that the federal government make new investments in natural infrastructure and protected areas.
Canada must also invest today to increase its resilience against economic bottlenecks over the long term by securing more production and knowledge assets within its borders. For example, Canada’s abundance of clean hydroelectricity and policies to make electricity even cleaner presents an advantage in the production of “green steel,” which could have a secure market through public procurement, building codes that consider lifecycle emissions and global trade deals. Canadian companies could also find niches in areas such as intelligent buildings and batteries, but public investment needs to be ready to scale-up these companies within Canada before foreign investors buy them out.
Leaving no one behind
Price increases negatively impact those with lower and fixed incomes the most. There is a danger that cuts to public investment will leave on their own those people most vulnerable to increases in the cost of living. This is also an important concern for climate policy because carbon pricing will increase the price of fossil fuels, and unequal access to low-carbon solutions could exacerbate inequality.
Natural gas home-heating prices are rising during this period of inflation and carbon-pricing policies will make fossil-fuel heating more expensive. Yet, the federal government has not introduced an energy-efficiency program accessible to low-income Canadians. The existing policies rely on grants that are awarded after upgrades are made or loans obtained that require low-income households to take on debt burdens. To break down low-income barriers, successful programs must provide turn-key upgrades at no cost to participants. Targeting support to low-income Canadians now will reduce emissions and help low-income households weather price increases.
Ensuring access to public transit, electric and hybrid used cars, and electronic bikes are other examples of public investments that help Canadians most vulnerable to inflation.
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Federal budget will be a fork in the road
The upcoming federal budget will be a fork in the road for Canada’s net-zero emission goal and our pandemic response. The stimulus rhetoric in the early pandemic was dangerous due to its short-term outlook. So are today’s suggestions of a new round of austerity in response to inflation.
Significant public investments are still required in today’s macroeconomic environment and to achieve net-zero emissions. Public policies need to be more strategic and targeted, with a focus on monitoring and managing supply and demand to quell inflation and to scale-up zero-carbon solutions.
The major lesson we should learn from this period of inflation is that markets are not as adaptive or resilient as we thought, and that supply chains are easily disrupted by unexpected events. Extreme weather from climate change and growing inequality will only enhance these vulnerabilities, which is why public investment is also needed to promote resilience and equity.
A new round of austerity could put Canada’s climate goals out of reach while doing little to alleviate the current period of inflation. A focus on productivity, resilience and equity is a better response to inflation and is essential to launch an unprecedented scale-up in zero-carbon solutions to achieve net-zero emissions.