Quebec creates its own state-sponsored environmental problems

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Appeared in the Financial Post, April 3, 2023
Quebec creates its own state-sponsored environmental problems

The Chair in Energy Sector Management at HEC Montreal recently came out with a report showing that industrial greenhouse gas emissions (GHG) due to energy consumption in Quebec had fallen only 3 per cent between 1990 and 2020. Seeing this as a disappointing performance, multiple pundits and politicians have called for more government interventions on top of those that already exist.

However, the report also offers a clue that this disappointing performance is due to government meddling in the economy, not a lack of intervention.

Normally, there’s a built-in incentive to cut these particular GHG emissions since they’re tied to energy consumption. Finding more energy-efficient production methods means lower costs for firms and thus more profits. This is why, when we look at the industry-by-industry breakdown of emissions, we see that most are actually falling (e.g. pulp and paper products and manufacturing respectively saw reductions of 52 per cent and 33 per cent), stable (e.g. construction) or increasing from very low starting points (e.g. chemical products).

There are, however, two notable exceptions: agriculture (+12 per cent) and the steel industry (+13 per cent). Both saw large increases in energy-consumption-related GHG emissions.

These two industries are also heavily subsidized and protected from competition by the provincial and federal governments. And when you subsidize something, you get more of it. You also numb the incentives to cut costs and improve efficiency as managers devote more time and effort to convincing politicians to dole out special privileges.

The steel industry has been, since the 1960s, the recipient of important provincial government largesse. In fact, in 1968 the government of Quebec created a Crown corporation for steel-making (Sidbec), which it privatized in 1994 due to the high cost of subsidizing production. Even after privatization, the government continued to offer tax credits and direct subsidies.

The agricultural sector is also, and has historically been, heavily subsidized. Special provincial tax credits, direct subsidies, tariffs and price supports abound. This is on top of federal support. As a result, many more farms remain in existence, even though consolidation and opening up to foreign trade would actually bring food more cheaply to Canadian consumers. If these governmental aids to agriculture were removed, many of these less efficient farms would close or perhaps be absorbed in larger, more efficient farms. Millions of acres could return to the forest. That process would mean that, as forests expand, large quantities of GHG could be sequestrated thereby reducing Canada’s net emissions—a result consistent with the literature showing that agricultural liberalization (notably the elimination of subsidies) has a strong potential to reduce GHG emissions (conditional on how liberalization is enacted).

These examples speak to how governments are much better at creating environmental problems than they are at solving them. The two above-mentioned sectors have been heavily subsidized for decades. How much lower would GHG emissions be today if they had never been subsidized?

When people express concern about environmental issues, they speak to the idea that there’s a cost to economic activity that’s imposed on citizens. Polluters, on the other hand, do not pay that cost so they do more of the activity that has a cost for everyone else but them. Proposed remedies such as carbon taxes are meant to reduce that cost.

The flawed assumption is that this cost can only be reduced by government intervention. Wrong. If the government subsidizes GHG emissions, they will increase. Thus, imposing taxes on carbon could reduce GHG emissions just as well as eliminating subsidies and other aids to industries. In other words, a “first, do no harm” approach might be economically superior.

As such, pundits who claim that more government action is needed to deal with GHG emissions are wrong. Curtailing the state’s involvement in the economy might be a better option. After all, why should we trust the pyromaniac to stop a fire?