Contributed by Robert Lyman © 2016

Ross McKitrick, professor of economics at the University of Guelph and research chair at the Frontier Centre for Public Policy, has studied and published articles concerning carbon pricing for over 20 years. He recently wrote a paper for the University of Calgary’s School of Public Policy called A Practical Guide to the Economics of Carbon Pricing, in which he set out a few concepts that are well known in the academic literature but are largely overlooked in the public and political discussion.

In recent articles published in the Financial Post, he summarized some key messages from his Guide, which the following quotes indicate:

“First and foremost, carbon taxes are meant to be used instead of, not on top of, traditional regulations. Since Canada has a slew of greenhouse gas regulations, they must be removed before introducing a carbon tax. Otherwise, there is nothing in economic theory that says the carbon tax will remove the inefficiencies of the regulations. It will just increase their costs.

The existing Canadian policy framework includes a host of command-and-control regulations that have imposed carbon dioxide abatement at far more than any reasonable estimate of the appropriate tax rate.

The economic efficiency of a carbon tax comes not from setting a floor price, but a ceiling price. Policies like the federal biofuels mandate, energy conservation programs, renewables subsidies and coal phase-out rules might reduce carbon dioxide emissions, but they do so at marginal costs of hundreds of dollars per tonne. Adding a carbon tax on top of that does nothing to make the overall policy mix more efficient. But replacing those policies with a carbon tax would. In the process, it might also lead to higher carbon dioxide emissions, something that promoters of carbon pricing need to be upfront about.”

If I may supplement professor McKitrick’s message for a non-economist reader, when he writes about “inefficiencies”, he is describing actions that, in economic terms, reduce the efficient allocation of resources in society. In everyday language, these government programs and regulations waste taxpayers’ money and make all of us poorer.

When he referred to a “slew” of greenhouse gas regulations and a “host” of command and control measures, he was scratching the surface. There is not in Canada a comprehensive list of the policies, programs, and regulations that have been implemented by the federal, provincial, territorial and municipal governments to reduce greenhouse gas emissions. These programs and regulations have been building in number, reach and cost since climate change became a noticeable public policy issue in 1988. Today, there are huge bureaucracies established to design, implement, and (less frequently) evaluate these programs and regulations. They stretch like the tentacles of some vast octopus across every aspect of the Canadian economy and touch everyone’s life. As no one has ever established an inventory of the measures now in place or of those under consideration, no one knows how much these measures already cost Canadians. Two things are certain – they cost billions of dollars annually, and they are not going away soon, regardless of the taxes imposed on carbon.

To illustrate, here is a partial list of the measures that have already been implemented or are now being contemplated by the federal and provincial governments.

Electricity Generation 

  • Imposition of caps on GHG emissions from coal-fired power plants
  • Ratepayer subsidies (e.g. feed-in-tariffs) to solar, industrial wind and biomass plants
  • Introduction of time-of-use rates to raise electricity costs when demand is highest
  • Funding of carbon capture and storage in coal-burning power plants
  • Removing regulatory scrutiny over the land use, environmental and consumer cost impacts of renewable energy generation plants (Ontario)

Transportation

  • Raising fuel efficiency standards for cars and light trucks
  • Introducing fuel efficiency standards for heavy trucks and commercial vehicles
  • Subsidizing the production of ethanol and other biofuels research, development, production and manufacturing
  • Exempting biofuels from excise taxes
  • Imposing renewable fuel standards for gasoline and diesel fuel content
  • Municipal preferences for the purchase of biodiesel and electric buses costing three times as much as diesel buses
  • Huge subsidies (up to $14,000 per vehicle in Ontario) for the purchase of electric vehicles
  • Establishing province-wide targets for vehicle manufacturers to sell electric and hydrogen vehicles by 2020
  • Taxpayer subsidies for electric vehicle recharging stations
  • Requiring municipalities to add more cycling lanes at the expense of vehicle lanes
  • Taxpayer subsidies for the replacement of older vehicles
  • Requiring all new homes and townhouses with garages to be constructed with a 50-amp, 240-volt receptacle (plug) in the garage (Ontario)
  • Taxpayer subsidies to businesses that use alternative-fuel vehicles

Buildings

  • Introducing much tougher (and more expensive) requirements for fuel efficiency in building codes
  • Ever-more-stringent regulations concerning the energy efficiency of appliances, ranging from dishwashers and clothes dryers to lawn mowers
  • Much increased taxpayer funding of energy efficiency in social housing
  • Providing taxpayer subsidies for apartment building energy retrofits
  • Much increased taxpayer funding for energy retrofits in all public buildings, including offices, schools, hospitals, and museums as well as privately-owned heritage buildings
  • Taxpayer funding of energy audits for pre-sale homes
  • Forcing the retirement of existing wood stoves and wood-burning fireplaces
  • Establishing a “low-carbon content” standard for natural gas
  • Banning the use of natural gas furnaces (proposed)
  • Much more restrictive land use planning to force development into denser patterns and integrating climate change as a priority consideration in land use planning

Industry

  • Industrial targets for energy efficiency improvements
  • Taxpayer subsidies for the use of renewable energy and high efficiency technologies
  • Establishment of “service standards for the use of alternative fuels in energy intensive industries
  • Taxpayer subsidies for retro-fitting of agri-food industry low-carbon technologies and companies engaged in food and beverage production
  • Taxpayer subsidies to First Nations communities, including large taxpayer and ratepayer subsidies to build electricity transmission lines to small, remote aboriginal communities
  • R&D tax credits for high efficiency and low-carbon technologies
  • Accelerated capital cost allowances for investment in high efficiency or low-carbon capital improvements

Almost every one of these measures has a large budget and a supporting bureaucracy.

Many programs or regulatory measures are of a type funded by two or three levels of government in a duplicative and uncoordinated way. There is no federal-provincial-territorial committee to ensure coordination and avoidance of duplication. Governments at all levels are falling all over themselves to be “green” with no agreement on what should be addressed at which level of government or common standards as to which measures are most effective.

The failure of the federal government to coordinate and to develop a strategic approach to coordinated management of climate change regulations and programs has been documented several times – specifically, in the audits of the Commissioner on the Environment and Sustainable Development (a branch of the federal Auditor General agency) in 1998, 2000, 2001, 2005, 2006, 2011 and 2012. As stated in the most recent (2012) report:

“The federal government has not created effective governance structures for managing climate change activities designed to meet greenhouse gas (GHG) reduction targets. Our reports identified weaknesses in horizontal governance, accountability, and coordination.”

 “Environment Canada has no overall implementation plan that indicates how different regulations and federal departments and agencies will work together to achieve the reductions required to meet the 2020 target. The Department has not provided an estimate of the emission reductions expected from each sector or a general description of the regulations needed in each of the described sectors. The regulatory approach does not identify which specific industries within each economic sector the regulations will target, or how these regulations will contribute to reducing greenhouse gas emissions.”

 With respect to the long list of federal programs and regulations, the Commissioner found that Environment Canada had failed to exercise responsibility with respect to determining the cost of the measures.

“Environment Canada does not know how much the regulatory approach will cost the Canadian economy… Environment Canada has not conducted a comprehensive analysis to estimate the combined cost of the sector-by-sector approach to regulating greenhouse gas emissions. Nor has it estimated the impact on or costs to the Canadian economy of aligning its approach with the United States, or examined whether this is the most cost-effective option. These analyses are important in order to establish whether Canada faces proportionately higher costs than the United States in adopting an aligned regulatory approach.”

In theory, every one of the programs and regulations implemented by the federal and provincial governments has been subjected to a rigorous cost-benefit analysis. With some exceptions, such as the regulations applying to fuel efficiency for light duty vehicles, it is difficult to find these. A central issue in cost-benefit analysis of greenhouse gas emission reduction measures is the valuation of the marginal benefit of emissions reduction, sometimes referred to as the “social cost” of carbon. The programs have involved no common test as to the value of a tonne of carbon dioxide avoided, or a check as to whether this value is realistic in terms of the alleged damage caused by greenhouse gas emissions. There is no evidence that the methodologies used to calculate emissions reductions to be obtained are credible. In other words, more often than not, the approach taken has been to say that it does not matter what it costs, because we are “saving the planet”.

There are few published reports that measure the performance of these programs and regulations in attaining their stated objectives; most of those that have been evaluated this way and have proven embarrassingly ineffective or expensive for the results achieved. The federal ethanol mandate is one example. Doug Auld and Ross McKitrick published a study showing that greenhouse gas reductions from corn ethanol production cost between $400 and $3,300 per tonne. The Ontario Green Energy Act cost $4 billion per year to eliminate 8 million tonnes of emissions; that equates to $500 per tonne.  Subsidies for electric vehicles cost more.

The fundamental objective of all these programs and regulations, to reduce greenhouse gas emissions, will be duplicated by the proposed carbon pricing and cap and trade systems. We will all be paying twice, if not three or more times, to achieve the same questionable objective.

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