Much of the public controversy about climate policy in Canada focuses on the perceived advantages and disadvantages of so-called “carbon pricing”. This term refers to the use of taxes, fees and emissions trading systems (i.e., “cap and trade”) to raise the cost to consumers of using energy services produced by hydrocarbons (oil, natural gas and coal). This article argues that the debate over what role carbon pricing should play is a distraction from the far more important questions that Canadians should ask themselves about the measures that governments are taking to reduce emissions in Canada.
Most Canadians are unaware of the over 300 climate measures already being implemented by federal and provincial governments, or of their costs. The existing measures vary both in terms of the policy instrument used (e.g., taxes, regulations, subsidies and others) and in terms of the considerations that should apply to the choice of such instruments.
Ideally, governments should apply five broad standards, or sets of policy considerations. The key considerations relate to cost, effectiveness, efficiency, the degree of complexity, and the balance between government control and individual freedoms.
When one examines the current measures, one finds that regulations and subsidies are different from taxes but only by degree. They all are intended to change the underlying incentives to produce and to purchase. They all involve some degree of political and/or administrative discretion. Carbon pricing is at the centre of the federal government’s current climate policy approach, but the present system departs significantly from the theoretical model that economists use to justify it. Taxes can be portrayed as leaving the decisions of whether to spend or not in the hands of the consumers and producers. In fact, they represent a corruption of the role of prices in a free market economy, where high prices signify scarcity and low prices plenty. In the case of climate policy, the taxes increase the prices of energy services that are often increasingly plentiful and cheap.
It is easier politically to sell subsidies and other actions that allocate advantages to favoured “clean” industries and to “virtuous” consumers. This is probably why they were the favoured climate policy instruments of Canadians governments in the period 1992 to 2002. Only one type of climate policy-inspired subsidy seems to have fallen out of favour due to the experience in Ontario – charging electricity consumers sky-high feed-in-tariffs for renewable energy generation facilities. Subsidies provided through the tax system, however, have the enduring advantage that their cost to government treasuries does not show up on governmental budgets, so they remain largely unseen by the public eye, and therefore more acceptable.
Regulations notionally have the advantage of having a more certain outcome. Though monitoring, compliance and the use of penalties, governments can ensure that emissions will be reduced. In fact, the last fifty years of energy policy in North America were characterized by the consistent failure of government action. Governments have far more often been wrong than right in their efforts to steer the energy economy, and their efforts have produced far more unintended consequences than good results.
The list of problems with the current climate policy approach is a long one. There is no complete national inventory of the programs. There is no assessment of how effective or cost effective they are, individually or as a group, in reducing emissions. There has been no benefit-cost analysis done on most of these programs. There is no commonly-agreed standard against which to judge which measures are cost effective and which are not. For example, no serious effort is usually made to assess the cost per tonne of the emissions avoided and to set an upper limit against which measures will be deemed unjustified. In fact, the prevailing philosophy appears to be that, “It does not matter what it costs, when we are saving the planet.” No one can assess the comparative benefits, costs and cost effectiveness of tax, regulation, subsidy or other generic program measures. Perhaps most remarkably, none of the governments intends to eliminate any of the existing measures.
So, which is a better policy approach to reduce emissions – taxes, regulations, subsidies, or others? There are all harmful to Canada’s economy in ways that we cannot even document or measure. Pick your poison.
It would be far better, of course, to take a new approach – to effectively manage the use of the government’s funds in this area as though the economy and taxpayers’ dollars matter.
About the Author
Robert Lyman is an economist with 27 years’ experience as an analyst, policy advisor and manager in the Canadian federal government, primarily in the areas of energy, transportation, and environmental policy. He was also a diplomat for 10 years. Subsequently he has worked as a private consultant conducting policy research and analysis on energy and transportation issues as a principal for Entrans Policy Research Group. He is a frequent contributor of articles and reports for Friends of Science, a Calgary-based independent organization concerned about climate change-related issues. He resides in Ottawa, Canada. Full bio.