Toward the end of last year, the Prime Minister embarked on his usual round of exclusive interviews. The news was not good. He told the Globe and Mail exclusively that Canadians should brace themselves for the impact of pending federal regulations on greenhouse gas emissions, warning that “mandatory reductions impose costs. Those costs are real in the short term. There is no way to avoid them. None.” He told the Toronto Star exclusively that the implementation of the regulations in the new year would bring home “the reality that you cannot reduce greenhouse gas—you cannot mandate it—without there being some economic cost in the short term.” Similarly bleak advisories were issued in exclusive interviews with the CBC (“very real costs”), and the Canwest News Service (“there is no way to do this without imposing costs on our economy in the short term”).
Well, now it’s October, in the middle of an election campaign, and Stephen Harper no longer wants to talk about the costs of his environmental plan. Indeed, he never even mentions his plan. Rather, he wants to talk about the other guy’s plan: the Green Shift that Stéphane Dion has made the centrepiece of his platform. Or, as Harper prefers to call it, the carbon tax, ignoring the offsetting cuts in personal and corporate income taxes in the Liberal plan. At every stop along the campaign trail, he assails the plan as a “risky scheme,” a “permanent tax on everything” that would plunge the Canadian economy into a recession. At the very least, he suggests, we cannot take the chance, in a time of “global economic uncertainty.”
The message appears to have hit home. The Liberals have been steadily losing altitude throughout the campaign, and while Dion’s personal unpopularity is undoubtedly a factor, the Green Shift/carbon tax has by all accounts been a major contributor. More significantly—and remarkably—no one has thought to ask the Prime Minister about the costs, and the risks, of his own plan. It has become a cliché of political commentary that “no one understands” the Liberal plan. But is anyone even aware of the Conservative plan?
It wasn’t that way in 2007, when the Conservatives released, to much fanfare, “Turning the Corner”—a “regulatory framework” for industrial greenhouse gas emissions, updated in a “final” regulatory framework last spring. Then, the Conservatives were anxious that everyone should know about their deep commitment to the fight against global warming, previous efforts having failed to impress this adequately on the public mind. The plan would require a select group of heavy industries—electricity, oil and gas, mining, metals, pulp and paper, and the like—to reduce their emissions “intensity,” that is emissions per unit of output, by 18 per cent within two years, with further reductions of two per cent annually required after that. The goal: an absolute reduction of 20 per cent in Canada’s emissions by 2020, 65 per cent by 2050.
The plan has many parts, but at its heart is the notion of tradeable emissions credits. Or in shorthand, cap-and-trade: firms that reduced emissions by more than they were required would earn credits on the surplus, which they could sell to other firms on the open market. Firms that found it too expensive to meet their targets could make up the shortfall out of these credits. Or they could buy them overseas, through the Kyoto Protocol’s Clean Development Mechanism. Or they could pay “contributions” into a green technology fund, starting at $15 for every tonne of carbon dioxide (or its equivalents) they were over their limit: a carbon tax, by another name.
But whatever the “compliance mechanism” industry adopts, have no doubt: you will pay. As the document puts it, “a portion of the costs associated with these investments and changes in operations will be passed on… in the form of higher prices”—just as the PM had warned. “Canadians can therefore expect to bear costs under the regulatory framework that are not trivial.” An accompanying press release notes this could mean “noticeable price increases for consumer products such as vehicles, natural gas, electricity, and household appliances,” adding “there will be a period of adjustment for all Canadians.”
How noticeable? How much adjustment? No one seems to know. To be fair, there’s no way anyone could. The final final regulations haven’t been released yet, let alone implemented. But even if they were, it is in the very nature of cap-and-trade that the costs are indeterminate. The price of the credits will be set by the market, in the usual way—by the intersection of supply and demand. A carbon tax is the reverse. The price of carbon is known in advance: $10 a tonne to start, rising to $40 by year four. How much emissions will fall as a result can only be guessed at—a point the Conservatives are quick to make.
But if the question is which plan is economically “riskier”—in the sense of uncertainty about its cost—the answer is clear: the Conservatives’. We know how much the Liberal plan will cost. We’ve no idea what the price of the Conservative plan will be. Well, we can guess: the government forecasts the market price of emissions credits in 2010 at about $25 a tonne, rising to $65 a tonne by 2018— not far off the cost of the Liberal carbon tax.
That’s not entirely coincidental. Remember that supply-and-demand graph from Economics 101? You can fix the price, as the Liberals propose, and let supply and demand adjust. Or you can fix the supply, as in the Conservative plan, and let the price rise. It amounts to the same thing. So you would expect them to cost about the same, for the same amount of reductions. The only way the Conservative plan could cost less than the Liberal plan is if it reduced emissions less. As indeed is the plan: while the Liberals also target 20 per cent reductions in emissions by 2020, that’s from 1990 levels, the original Kyoto reference point. The Tory reductions are measured against 2006 levels—22 per cent higher than the 1990 benchmark.
Moreover, there is virtually no chance of meeting even the more relaxed Tory timetable. The government itself concedes that, of the required 150 megatonnes (Mt) of reductions in emissions, just 60 Mt would come from the industries participating in the cap-and-trade scheme: not surprisingly, since they account for only a little over half of Canada’s emissions. The rest would be made up out of a grab bag of regulatory and subsidy schemes of a kind that have been tried—and have failed—before. Simulations by Simon Fraser University’s Mark Jaccard, considered Canada’s leading expert on the economics of climate change, suggest current government policy would result in reductions of about 120 Mt by 2020 from projected levels, i.e. from the levels to which they would otherwise have risen. But in absolute terms, emissions “are unlikely to fall below current levels,” meaning we’re on track to overshoot our target by something like 200 Mt.
In sum, the Conservative plan is just as costly (per tonne of emissions reduced) as the Liberals’, twice as complicated (emissions trading markets are, as Europe has learned, fiendishly difficult to design: just the task of ensuring credits are based on “real, incremental, verifiable” reductions would take several pages to explain), and probably half as effective. (Not that there’s anything wrong with cap-and-trade. But to get anywhere near our targets, we’re probably going to need both a carbon tax and cap-and-trade, as indeed the Liberals propose.) The Tory plan has, however, proved unassailably superior in political terms. The very thing that makes the Liberal plan less risky economically—the costs are known up front—makes it more risky politically. The Conservatives have succeeded in implying, without quite saying, that the choice is between a costly scheme and no costs at all. They’ve hit the political sweet spot: enough of a plan to say they have a plan, but not so much as to get in anyone’s face.
The Liberals have achieved the exact opposite (the sour spot?): a plan that is not radical enough to be the game-changer they had hoped, but costly enough to annoy just about everybody. True, Dion’s failings as a salesman haven’t helped. And yes, their timing could have been better, pitching a plan to raise fuel taxes just as oil and gas prices were setting all-time records—to say nothing of the turmoil now convulsing the world financial system. But the plan’s design was flawed from the start. The Liberals never have told us how a federal carbon tax would apply in provinces that already have one, while flirting, foolishly, with imposing tariffs on countries that have none. Most disastrously, they did not cut income tax rates by anything near enough to make a difference, economically or politically—certainly not enough to support claims of revenue neutrality. The tax cuts, such as they were, have long since been forgotten.
It should be mentioned that the Conservatives have had helpers: the New Democrats, whose environmental policy is a similar mix of cap-and-trade and subsidies, and who, like the Tories, have successfully demonized the carbon tax, while pretending their own plan will cost no one but a handful of “big polluters.” As Laval University economist Stephen Gordon has written, it is an alliance between those with “a visceral hatred of taxes” and those with a “visceral hatred of corporations.”
But it is the Conservatives who have been the demagogues-in-chief in this affair. Among the long-term costs will be Conservative credibility. The same Conservatives who have told us for years that prices, in a market economy, are to be preferred to regulation as a means of changing economic behaviour, suddenly forget their economics when it comes to pricing carbon. The same Conservatives who have long insisted that tax rates are critical to incentives seemingly cannot comprehend the logic of shifting taxes from income to carbon. And the same Conservatives who have long lectured us that “corporations don’t pay taxes, people do”—that any costs imposed on business will inevitably be passed on, usually to consumers—would rather we forgot they ever mentioned it.