Alberta ‘business’ group recommends several fatal economic errors

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Appeared in the Edmonton Sun, March 30, 2022
Alberta ‘business’ group recommends several fatal economic errors

The Business Council of Alberta recently released a report on supporting a “low-carbon industrial strategy.” It’s a serious document aimed at improving energy and environmental policy, but the conscientious economist must raise two objections: 1) low-carbon and 2) industrial strategy. Each of these two problems is by itself sufficient to doom the thing as a misguided initiative, and for it to have two such strikes against it is very bad indeed.

The first problem with a low-carbon agenda—or for that matter a high-carbon agenda or a medium-carbon agenda—is that no economic principle supports a quantity target for carbon emissions. Emitting greenhouse gases makes sense whenever the benefits exceed the costs including environmental costs. Noticeably absent from this cost-benefit equation is any reference to the existing quantity of emissions.

If there are economic activities where benefits exceed the costs, then those activities represent a social improvement. The optimal level of carbon emissions in Alberta is whatever results from all the activities with higher benefits than costs. It’s impossible to say beforehand what that level will be tomorrow, next year or in 2030. Setting an emissions target is therefore misguided, whatever the target.

Unfortunately, the business council compounds this error by supporting a target where the evidence suggests far higher costs than benefits. Its low-carbon target aligns with the federal government’s Paris Agreement commitments, and the report also references an effort to limit the global temperature increase to 2 degrees Celsius above pre-industrial levels. The optimal levels of emissions and global warming, however, are almost certainly much higher.

A journal article by Bjorn Lomborg in 2020 estimated that on average, hitting the Paris Agreement targets would mean incurring something like $9 in costs for every $1 in environmental benefits. As for the 2 degrees target, during his 2018 Nobel Prize lecture, economist William Nordhaus produced a chart titled “Temperature trajectories in different policies” with the optimal case showing a 4 degrees increase by the year 2150.

The “low-carbon” part of the low-carbon industrial strategy is therefore badly flawed for at least two reasons. The “industrial strategy” part is yet another problem. The business council calls for the Alberta government to impose a carbon tax aligned with Ottawa’s plan, but its recommendations for an industrial strategy run contrary to the economic rationale underlying the tax.

The point of the carbon tax is that it’s supposed to make people pay for the environmental costs of their carbon emissions. That’s it. If people reduce their emissions, then fine. If instead they prefer to continue emitting carbon—because even after accounting for the tax, the benefits still exceed the costs—then by paying the tax, they compensate society for whatever environmental harm they cause, and that’s also fine.

After the carbon tax is implemented, there’s therefore no place for the government to step in with further intervention, let alone a grand “industrial strategy.” Yet this is exactly what the business council calls for by recommending increased grants for technological research, higher spending to attract foreign investment in low-carbon industries, preferential tax treatment for carbon-reducing capital asset purchases, funding to train Indigenous workers, and so on.

The policies recommended by the Business Council of Alberta, if implemented, would be an expensive mistake. At bottom, the fatal economic errors with its report begin in the subtitle, which reads: “Policies to Support an Alberta Low-Carbon Industrial Strategy.” No such strategy should be supported.

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