A top Canadian economist argues that five key policy factors suggest only one party can strike the balance between the environment and prosperity.
We are less than a week from the federal election, and the four main political parties have been pushing their plans to address climate change. Each has a vision for the future and the policies needed to move toward a low-carbon world. And the differences between them could barely be more stark. How can we assess these climate platforms in an objective way given the polarized debate we have in Canada?
Before examining the specific policies, let me state clearly that I am a policy-minded economist, not a political partisan. While most of my professional career has been focused on macroeconomic policy, I have spent the last several years thinking about policies to protect the environment and improve economic prosperity at the same time. Addressing climate change is a central part of that story, and the policy challenge is crystal clear: how do we reduce our annual greenhouse-gas emissions in a sustained way while maintaining the maximum economic prosperity for Canadians?
Five lessons about climate policy
This is a complex policy puzzle, with lots of pieces that need to fit together in a coherent way. But there are some straightforward ideas that can help us cut through this complexity. Here are the five most important things I have learned about climate policy over the past several years.
First, achieving a significant reduction in GHG emissions in any modern economy will take serious policy action. Our entrenched reliance on high-carbon energy means that emissions reductions will not happen easily or automatically. Technological improvements will play a large role in reducing emissions, but these rarely “just happen.” Public policy needs to be designed to push all parts of our economies — gradually but inexorably — toward the development and use of lower-carbon energy sources.
Second, governments have choices for deciding how to reduce GHG emissions. They can use direct regulations to dictate which sectors reduce emissions by how much and with which methods. They can subsidize the production and consumption of a wide range of low-carbon technologies and products. Or they can attach a price (or tax) to GHG emissions across the economy, thereby creating economic incentives for households and businesses to alter their behaviour. Of course, governments can also choose a policy package that contains all three kinds of policies.
Third, governments should be encouraged to consider the lowest-cost methods of reducing GHG emissions. To do anything else is to impose unnecessary costs on families and businesses. We should all recognize that there will be economic costs associated with reducing emissions —how could there not be when our economic development for two centuries has been based on the intensive use of fossil fuels? But to knowingly choose high-cost policies when lower-cost ones are available is to sacrifice resources that could be used for many valuable things, private and public. The cost associated with any given climate policy may sound like a mundane or academic detail, but it is of central economic importance for the country. The negative impact of using high-cost policies may even come to undermine climate action of any kind.
Both the theory and experience from many jurisdictions show that carbon pricing is the lowest-cost method of reducing GHG emissions. A carbon price adjusts market prices to ensure that they include the costs of the associated carbon emissions. It then lets markets play their central function of allocating scarce resources to where they are most in demand. In contrast, direct regulations impose detailed government decisions on private actions, and this inflexibility drives up costs. Subsidies involve governments in the costly exercise of “picking winners” which is famously difficult to do well. In addition, subsidies are often wasteful because they finance activities — such as home renovations or the purchase of new vehicles — that many households or businesses would have done even without the subsidy. I have never met an economist who claims to have found a lower-cost way to reduce emissions than with a carbon price — and that’s for good reason.
Fourth, we need to pay attention to the impact of climate policies on households, especially those with lower incomes. By raising the prices of products based on their carbon content, a carbon price has a proportionately larger impact on lower-income families than on richer ones; in other words, a carbon price by itself is a regressive policy. But this feature can be offset with rebates or tax credits to those same families without weakening the carbon price’s incentives to drive emissions reductions. Designed carefully, a regressive carbon price can be transformed into a progressive carbon-price-and-rebate combination.
Fifth, we also need to pay close attention to the impact of climate policies on the competitiveness of our business sector, especially the “emissions-intensive and trade exposed” part of the Canadian economy. Whichever specific climate policies we choose to implement, it makes little sense to drive our businesses into bankruptcy if the result is simply to shift both GHG emissions and jobs to our rivals from jurisdictions with weaker climate policies. In a world with uneven climate policies, we need to design policies that reduce GHG emissions at home while also preventing this business “leakage” to other economies.
Assessing the climate platforms
With these five lessons in place, how do I evaluate the climate policies from the Conservative, Liberal, NDP and Green parties? The differences are stark.
Let’s begin with the Conservatives. They are not setting an explicit target for emissions reductions. And they don’t want to use a carbon price because they think households shouldn’t have to incur any costs. But by avoiding a broad-based policy, they are missing the lion’s share of the economy’s emissions. Instead, they aim their policy at a relatively small part of total emissions, those by large final emitters — steel plants, cement facilities, oil refineries, etc.
Perhaps surprisingly, their policy actually embodies a hidden carbon price: businesses that don’t achieve mandated (though unspecified) reductions are forced to pay into a fund to finance technological improvements. The Conservatives suggest that those large businesses won’t pass their higher costs onto households, which is wishful thinking. They also seem to think that new and better technologies will be central to achieving emissions reductions — which is partly true — although there is little recognition of the fact that government’s ability to drive such improvements is limited.
The Conservative climate plan is unlikely to achieve much in the way of emissions reductions, which is not surprising since there is little of substance in their plan. Though leader Andrew Scheer claims that he believes in the need to reduce GHG emissions, his climate policy betrays those words. Canadians can be excused for thinking that the Conservatives don’t really care about this issue.
Things look quite different with the platforms from the NDP and the Green Party. Both parties promise to be very aggressive at reducing GHG emissions over the next few decades, the Greens even more so than the NDP. They both openly endorse the use of carbon pricing, and the Greens would like to see the carbon price rise well beyond $50 per tonne after 2022. Both parties speak of the need to help workers transition away from fossil-fuel sectors toward greener ones, and this is sensible.
But both parties’ plans are quite lacking in the details of how they would achieve their aggressive targets. Both parties also suffer from some unrealistic assumptions about policymaking in the Canadian context. For example, the NDP wants to reduce the competitiveness protections currently built into the Liberals’ carbon-pricing system, but this would generate some serious challenges in sectors of the economy with many union workers. How would these challenges be viewed by the labour wing of the NDP?
For the Green Party, their promise to phase out all fossil fuel power by 2030 would require replacing roughly 20 percent of Canada’s electricity generation within a decade. This might be technically feasible (though highly costly) but given that electricity generation is wholly a provincial jurisdiction, how would a Green federal government achieve this outcome?
There is no doubt that the NDP and Greens are serious about wanting to reduce GHG emissions. But the lack of policy detail, and the unrealism in several parts of their platforms, makes it all appear a little too theoretical. Do they not recognize the complexity of federal-provincial negotiations in this country? Do they not understand the importance for Canadians’ well-being of protecting the competitiveness of our businesses?
This brings us to the Liberals, whose climate plan is mostly illustrated by the policies they have put in place over the past few years. The Liberals are clear about wanting to achieve Canada’s Paris targets of a 30 percent reduction in GHG emissions (from 2005 levels) by 2030. At the core of their plan is provincial carbon pricing applied across most sectors of the economy: the federal carbon tax appears only as a “backstop” policy in provinces without their own carbon price. If the federal backstop kicks in, as it now does in Saskatchewan, Manitoba, Ontario and New Brunswick (and will soon appear in Alberta), any revenues raised by the tax are guaranteed to stay in the province. Their commitment is to raise the carbon tax to $50 per tonne by 2022, but they have given no indication yet of how much higher the tax will go.
The Liberal plan considers the impact of the carbon tax on households, offering rebates through the income-tax system to all households, rich or poor. These rebates protect the “real income” of families while still allowing the carbon tax to incentivize emissions reductions. A similar part of their policy package, though more complex, is aimed at the large final emitters, designed to protect their competitiveness if they are selling their products into markets against rivals from jurisdictions with weaker climate policy.
The main problem with the Liberal plan is not that it lacks ambition or realism; it is that it lacks enough policy punch to achieve its objective by 2030. To achieve the Paris target, the Liberals will need to raise the carbon tax beyond 2022, or introduce more policies of some different kind, or some combination of the two. In the interests of minimizing costs and maximizing Canadians’ overall prosperity, they should rely as much as possible on the carbon tax to reduce emissions. We will all pay the price if they decide not to do so.
In sum, the Liberal plan is designed to reduce GHG emissions significantly, and to do so by emphasizing the use of a broad-based carbon price. By preferring provincial carbon pricing, and by ensuring that any federal carbon-tax revenues remain within the province, the plan avoids some potentially lethal political pitfalls. And it deals seriously with the impact on households and the need to protect business competitiveness.
Making tough choices
Striking the right balance between environmental protection and economic prosperity is difficult in any modern economy. In Canada, this difficulty is magnified by the complex nature of our federation and jurisdictional boundaries, our openness to international trade in most sectors of the economy, and our current economic structure with a significant reliance on natural resources. All of these elements need to be built into any successful climate plan.
When casting their ballot, each Canadian voter needs to think about a range of issues, which ones matter most to them, and which political party can most be trusted to represent their interests on these issues. This is always a tough choice — especially for those who do not align themselves closely with political parties.
How about my vote this year? As I said above, I am not a political partisan. I tend to look for good policy, independent of the political labels. At the same time, I have spent so much time and effort working on climate policy over the past few years that it is almost impossible for me not to base my 2019 vote mostly on this issue.
The truth is that in the upcoming election, my view is that only the Liberals have a climate plan that strikes this balance in a practical and realistic way. It is not a perfect plan: they will need to do more, and they certainly need to do a better job of explaining it to the Canadian people. But only the Liberals are offering us a solid foundation on which to build our nation’s climate policy for the coming decades.
Do you have something to say about the article you just read? Be part of the Policy Options discussion, and send in your own submission. Here is a link on how to do it. | Souhaitez-vous réagir à cet article ? Joignez-vous aux débats d’Options politiques et soumettez-nous votre texte en suivant ces directives.