Government regulations to reduce greenhouse gases will come with a hefty price tag

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Appeared in the Financial Post

Drastic reductions in so-called greenhouse gas emissions proposed by the federal government would, if enacted, cost Canadians $60 billion in coming years — at a minimum. Proponents claim that this “investment” would improve public health and the environment, and accelerate development of “clean” energy. But a review of the presumed costs and benefits reveals that this massive regulatory scheme is unjustified on both scientific and economic grounds.

First proposed a year ago, the “action plan,” dubbed “Turning the Corner,” calls for a whopping 20 per cent overall reduction in greenhouse gas emissions (from 2006 levels) by 2020 — a volume the government claims is equal to the combined greenhouse gas emissions of Alberta, Quebec, and Newfoundland and Labrador. In releasing a detailed regulatory framework for industry last month, officials characterized the plan as “one of the toughest regulatory regimes in the world.”

Unfortunately, the government’s calculation of regulatory risks and rewards is not nearly as rigorous. The economic models used to calculate the costs are easily manipulated to obtain prescribed outcomes. For example, it’s unlikely to be sheer coincidence that, by regulators’ reckoning, the costs and benefits of more stringent controls on industrial emissions just happen to be equivalent — about $6 billion annually, on average.

The proposed plan calls for heavy industry to reduce emissions “intensity,” i.e., the level of emissions per unit of production, by 18 per cent by 2010, and two per cent annually thereafter. In addition, all coal-fired power plants that go online in 2012 or later would be required to install “capture-and-storage” systems by which carbon emissions would be trapped and then transported via pipeline or tanker to an underground storage facility.

In many cases, compliance would require replacement of industrial machinery without regard for depreciation schedules. Some manufacturing processes likewise would require reconfiguration. The loss of output and more costly production would likely raise the prices of a variety of goods and services, all of which could be expected to undermine economic growth, job creation and living standards.

The regulations would allow industry the option of essentially buying compliance either through a system of tradable credits, payments into a development fund for advanced emissions technology, or direct investment into certified energy projects. Regulatory flexibility is welcome, of course, but it would not reduce the economic hardships of such onerous emission reduction requirements.

Government officials claim the regulations are necessary to adjust the “price signals” of greenhouse gas emissions. But these prices already have been set by the market and reflect a relative absence of risk. To alter that price by government fiat is to invite economic instability.

To the extent the regulations raise the costs of doing business in Canada, firms would be dissuaded from locating here while domestic companies would have greater incentive to relocate abroad. Higher energy costs also would hit low-income and fixed-income households the hardest because they spend a larger proportion of their earnings on electricity, natural gas, heating oil, and gasoline.

Officials acknowledge that their long-term estimates of compliance cost are “a questionable proposition.” For instance, the government has not calculated the economic impact of the full range of emissions reductions proposed for electricity suppliers, who would face the most significant emissions reduction requirements.

Moreover, the technology necessary to comply with the most stringent controls — the capture and underground storage of emissions —is not yet commercially available and thus the cost cannot be reliably calculated. Nor have federal officials assessed the costs of myriad provincial and territorial regulations that also will govern greenhouse gas emissions and energy efficiency.

Other significant elements are also missing from the government’s economic analysis. For example, officials failed to analyze whether the tens of billions of dollars in regulatory and compliance costs could be spent more productively on other public health or environmental problems. There is also no assessment of how Canada could actually benefit from climate change, e.g., by gaining an extended growing season and larger inventory of arable land.

These are fundamental failings given the tenuous nature of climate change theory, as well as the absence of actual harm from a slight rise in temperature that registers well within the range of natural variability. Indeed, there exists considerable uncertainty about the interplay between greenhouse gas emissions and climate change. Consequently, the government could only evaluate the benefits of air quality improvements, but not the extent to which the regulations would (or would not) mitigate climate change. In fact, officials concede that the proposed regulations would have little effect, if any, on climate change in the absence of equally dramatic emissions reductions around the globe.

According to a backgrounder posted on the Web by officials of Environment Canada, “The benefits of reduced greenhouse gas emissions will materialize over time as Canada and the world's other emitters begin to transition to less carbon intensive economies.”

Simply put, the government of Canada intends to impose on citizens the world’s toughest greenhouse gas regulations without an accurate accounting of either the costs or benefits, and with the knowledge that the regulations would have little impact on climate change but a dramatic impact on the economy.

Officials apparently have overlooked an important lesson of modern environmentalism. That is, wealth creation is a powerful impetus for environmental improvement. Our standard of living and environmental quality are positively linked. Thus, the imposition of costly, ill-conceived regulations such as those incorporated in “Turning the Corner” would actually create more problems for Canada than it would solve.

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