DEMAND SIDE ECONOMICS

Today is the first day of argument in the court proceedings brought by the Ontario government challenging Ottawa’s constitutional authority to impose a carbon tax in this province.  The constitutional question is an interesting one, and it is certainly one upon which reasonable minds can differ.  Unfortunately, the same can’t be said of the public policy arguments against the concept of the carbon tax itself.

The court challenge will focus on the important but decidedly wonkish question of whether a carbon “tax” is within the taxing powers granted to the federal government under our Constitution.  On the actual substantive policy question that the federal carbon tax purports to address, the Ford government has not taken the position that climate change is a hoax, or even that it is an issue that is too intractable to merit legislative action in Ontario.  Instead, they have asserted that it is an issue that is better addressed through “smart” regulation than the creation of a market solution.

And that is fair, although, as Preston Manning has already observed, it is counterintuitive to hear a conservative (or Conservative) government espouse a preference for a prescribed regulatory solution over a solution that puts the creative problem-solving capacity of the market to work.  The problem is that regulatory solutions cannot be anything but the cloaked version of market solutions.  To be effective in reducing carbon emissions, regulations must either make low carbon alternatives less expensive, or incumbent high carbon technologies more expensive.

The Province of Ontario has already tried the former. The Green Energy initiative introduced by the Liberal government of Dalton McGuinty was just that; strategic subsidies that would quickly scale up the supply of renewable energy that would result in a costless transition of the Ontario economy to Green Energy.  The result: the creation of a network of inefficient wind and solar capacity that has added a large long-term cost component onto t a power grid that was already serviced with low carbon nuclear and hydroelectric sources.  No one can seriously propose trying that again.  And if these regulations are created to do the latter, how can they be fairer or more efficient than a revenue-neutral carbon tax?

If we are then left to choose a market solution, there are only two market mechanisms to reduce the burning of carbon: tax it or reduce supply to drive the price higher.  As the Ford government has already realized, taxes that nudge us away from ingrained and popular lifestyle practices are never popular.  Ironically, on this point, Doug Ford can find common cause with the environmental lobby.  It seems apparent that those looking to influence the public policy agenda have already conceded this reality.  Far greater noise and heat has been expended in supply side solutions (opposing pipeline approval or extraction projects) than on demand suppression (decrying consumer behaviour and habits).  Neil Young has never visited Pearson Airport at March Break to join protestors in the shaming of sun-bound airline passengers.  Vilifying corporate suppliers has long been a more marketable PR strategy than guilting consumers.

The only problem is that Canada is not Saudi Arabia.  Our oil sector is the high cost producer.  Making it more expensive to get our high cost oil to market will have no effect on the market price of oil.  At best, all it can do is defer the carbon-intensive extraction activities of producers in Western Canada to a day on which the marginal cost of extracting conventional oil rises closer to that of Oil Sands production.  No Canadian let alone American, European, Asian or African will fill his or her tank less frequently or turn down his of her gas furnace one degree because Oil Sands oil did not make it to tidewater other than those families in Alberta that must do so to stretch their EI cheque.

The Liberal government in Ottawa may have little to recommend it of late, but on this point, they are indisputably right.  Their simultaneous embrace of carbon pricing and ownership and development of the Trans Mountain Pipeline is both principled and farsighted. If Canada is to take a global leadership role in addressing climate change, let it be in addressing demand for carbon by imposing revenue-neutral taxes on consumption.  Undertaking a Quixotic and counterproductive supply-side assault on resource development has and will only unfairly victimize and alienate Western Canada without making any meaningful contribution to reducing carbon generation here or anywhere else.

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