The David Suzuki Foundation and the Pembina Institute recently released an analysis of the economic impact of greenhouse gas targets on economic growth in Canada. The report advocates the adoption of a punishing “price on carbon,” which would act as a tax on virtually everything. The report also calls for a series of other expensive policies designed to reduce carbon emissions. The authors argue for the implementation of a policy bundle designed to cut emissions by 40 per cent by 2020, which they estimate would cost well over $200 billion in lost productivity over the next ten years.
The report’s analysis can be questioned for a few important reasons. For example, it relies on an optimistic view that the Canadian economy will quickly adapt to new regulations and that government investment and oversight will efficiently enable the development of renewable sources of energy. These are just two reasons that the proposed policies may actually be even more expensive than the report’s models estimate.
Despite these issues, the authors are at least honest by unequivocally stating that aggressive greenhouse gas reduction policies are expensive and would considerably slow the rate of economic growth in Canada if enacted.
For years, the quality of the policy debate surrounding climate change has been lowered by the “something-for-nothing” crowd ( which the Suzuki foundation was once a part of). They claimed ambitious greenhouse gas reductions could be achieved with virtually no adverse consequences for economic growth. Describing the notion that there is a significant trade-off between emission cuts and economic growth as a “myth,” groups such as the Environmental Defence Fund, Greenpeace and the Green Party of Canada have sought to minimize the economic costs associated with aggressive action on greenhouse gasses.
The notion that large greenhouse gas reductions can be achieved at little or no cost is obviously attractive, which is why advocates of tighter regulations and emissions caps promote it. This strategy is designed to make their preferred policies appear more palatable. The Suzuki/Pembina report, commissioned by the Toronto Dominion bank, confirms this notion is a fantasy, and that in there is no free lunch when it comes to emission reduction policies.
This reality comes as no surprise to most adults who realize that most decisions involve the calculation of tradeoffs between competing goods. More hours spent at work can mean more money, but less time spent at home with the family. Ice cream is delicious, but too much of it will make you obese. Most decisions that we make, in our personal lives and in public policy, require us to make tradeoffs between two or more things that we like. Carbon pricing is no exception to this general rule, and the unalterable fact is that aggressive greenhouse gas emission reductions can only be achieved at the cost of significant economic growth.
The cost of aggressive emission reduction, as estimated by the Suzuki/Pembina report, is very large. The authors state that, due to slower economic growth between now and 2020, the Canadian economy would be 3.2 per cent smaller in that year than it would be if Canada pursues “business as usual” policies. Canadian gross domestic product is projected to be more than 1.8 trillion dollars by 2020. This means that the emission reduction policies described in this report would lead to approximately 50 billion dollars in lost economic activity in the year 2020 alone. That’s an average of about $1,400 of lost production for every man, woman and child in Canada, every year, in perpetuity.
Alberta and Saskatchewan would be especially hard hit. The proposed policies are projected to reduce the size of Alberta’s economy by 12 per cent from what it would otherwise be in 2020. Saskatchewan would lose 7.5 per cent of its annual economic productivity. Although he says it “can be done,” TD chief economist Don Drummond says that the proposed policies would create the “biggest fiscal shock in Canadian history. ”
Clearly, there are large economic costs associated with aggressive greenhouse gas reduction policies However, the report argues that Canada should proceed with aggressive greenhouse gas emissions reductions despite this eye-popping price tag.
Many reasonable people, this author included, disagree with moving ahead with the report’s policy proposals for a variety of reasons. For example, the unintended consequences of such policies are impossible to predict. The likelihood of unpredicted adverse effects from such a dramatic shock to the energy market makes the proposed policy bundle unacceptably risky.
Furthermore, the policy bundle includes strict command-and-control style regulations on vehicle emissions, building codes and appliance manufacturing. Such policies represent an unfair and inefficient approach to emission reduction and produce hidden costs to consumers which are not accounted for in the report’s modelling. Lastly, even if the cost estimates are exactly right, the benefit of the policy package – a reduction in global greenhouse gas emissions of less than one percent – is not worth hundreds of billions of dollars worth of lost economic activity.
Despite its ultimate support of policies that are ill-advised, this report at least lays out a starting point estimate on the cost of policies intended to curb greenhouse gas emissions.
By eschewing the strategy of tempting Canadians with promises of “something for nothing,” and instead arguing for caps on emissions on the grounds that they are simply worth the enormous costs associated with them, Suzuki and Pembina are at least honest. The authors deserve credit for helping to move the policy debate away from dubious promises of a “free lunch” and towards an honest evaluation of the costs and benefits of proposed carbon reduction policies.