Low-carbon economy will not be made by policy alone

low-carbon economy
Canadians using public transit or opting to walk will be part of the shift to a low-carbon economy.  Calgary Transit photo.

Reversing course on low-carbon economy unwise for Canada, despite US stance

By Glen Hodgson

The transformation to a low-carbon economy has begun.

Much of the public debate has been about the policy framework and instruments for shaping a low-carbon economy. Some of the basic economic fundamentals, such as the role of consumption and investment, and the impact on growth and wealth, have been largely skipped over. Let’s consider more deeply the interlinked roles of public policy and decisions by individual consumers and businesses.

The most obvious policy options for reducing greenhouse gas emissions are carbon pricing and complementary regulations. Climate change is already having an impact on things such as the severity of floods, infrastructure adequacy and urban design, and thus policy will evolve on the mitigation front as well. Even if the United States is backing off climate-change commitments, Europe and China are not, so doing nothing or reversing course is unlikely to be wise policy for Canada.

Research by a number of analysts, including Canada’s Ecofiscal Commission, has indicated that carbon pricing is more effective than alternative rigid regulations in terms of reducing greenhouse gas emissions while minimizing the impact on GDP and the underlying economy. Changing price signals, via a price on carbon, will create incentives for businesses to innovate and consumers to alter their behaviour. The federal and many provincial governments are introducing carbon pricing and other complementary policies, but so far with limited alignment and co-ordination.

Consumers are the backbone of the economy, representing 60 per cent of GDP, and vote every day with their wallets. Some consumers are led by green values, but most consumers will decide how they spend based on the usual factors—a combination of price, quality, specific attributes, service, availability and convenience. Once consumers make a decision, it may last for years or decades—at least for durable goods such as vehicles and fridges, or services such as home heating.

Putting a price on carbon will help to nudge consumers toward buying goods and services with lower embedded carbon costs. That said, we expect there will be limits to what consumers (and voters) will accept as an initial level of carbon pricing, the pace of adjustment over time and the relationship to other fiscal adjustments (such as cuts to other taxes, or targeted spending in their interest). Ontario’s recent attempt to rein in rising electricity rates shows the importance of reading correctly the mood of consumers/voters and their willingness and ability to adapt.

Consumer choice on energy use at home and on personal transportation are specific areas to watch. For example, consumers can lower their carbon footprint through changing their use of private vehicles, public transit and other options such as cycling or walking. Will consumers adapt quickly to lower-carbon alternatives such as public transit (provided adequate transit is actually available)? Will they opt in large numbers for electric vehicles with still-limited driving range and long charging periods, even if the purchase price is heavily subsidized?

Similarly, business decisions will determine the pace and nature of low-carbon transformation. The Conference Board of Canada’s research indicates that massive investment in low-carbon electrification will be required over decades for a low-carbon transition to take place. The combination of public policy and numerous business decisions will determine how quickly electricity production can be decarbonized in all provinces, not to mention the decarbonization of oil and gas production across the value chain.

Underlying business models constantly evolve; innovation, adaptation and long-term investment decisions will shape the decarbonization process. The existing auto industry, based on the internal combustion engine, isn’t sitting idle—smart engineers can and will continue to find ways to reduce GHGs at all stages of production and use. Better hybrid- and electric-vehicle options will continue to be introduced. Competitive market forces will ultimately determine the pathways for reducing GHG emissions from the transportation fleet—guided by mandated standards and carbon pricing.

The financial services industry will play a central role in deciding where to make investment capital available in a lower-carbon world. To date, we have seen little evidence in Canada that investors and lenders treat GHG emissions, and a business’s ability to adapt to carbon pricing and regulations, as central risk factors. But the game is beginning to change internationally as capital markets and regulators educate themselves on the business impacts and risks of climate change, especially for capital assets with a long expected economic life. Similarly, investors will want to satisfy themselves that all climate-related risks can be managed adequately in status quo and new businesses.

So, who will drive low-carbon economic transformation? The answer is all of us—as consumers, voters and influencers, investors, and decision makers in business, society and government. Policy alone won’t make it happen, but the right policies and incentives will help.

This article was originally published in The Globe and Mail on November 8, 2017.

Glen Hodgson brings nearly 35 years of experience and a specialization in macro-economics, international trade and finance, and fiscal and tax policy to his position as the first Senior Fellow at The Conference Board of Canada, effective September 2016.

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