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This article was published 4/10/2016 (1404 days ago), so information in it may no longer be current.
Brian Pallister and his new government shut the door on cap-and-trade policy Monday, but they remained committed to a made-in-Manitoba carbon-pricing system. They should be applauded for promising to introduce some form of carbon pricing, because of all the alternative policy approaches, it offers the lowest-cost way to reduce GHG emissions. In other words, it is the best policy approach for the economy.
This file is now heating up in Manitoba, as it is across the country. Optimists might even say that carbon pricing is becoming "mainstream." Four other provinces have, or will soon have, carbon prices; Manitoba is now fully engaged in thinking through the many details and the federal government has indicated its willingness to fill in the remaining policy gaps.
One thing that should appeal to fiscal conservatives is that carbon pricing offers an opportunity to remove some high-cost policies implemented years ago in the name of reducing GHG emissions. One example is the federal and provincial policies encouraging the production and use of biofuels. These policies have modestly reduced GHG emissions, but only at a much higher cost than what can be achieved with a carbon price.
What are biofuels? They are liquid fuels made from renewable biomass such as wheat, corn, canola oil and a range of non-food feedstocks. They are blended with gasoline and diesel to reduce the overall carbon content of transportation fuels.
What are the policies? For several years, governments across Canada — including in Manitoba — have been encouraging both the production and consumption of biofuels. To stimulate supply, governments provide direct cash subsidies to biofuel producers. To support demand, governments mandate fuel distributors to blend their gasoline and diesel with ethanol and biodiesel, respectively; since biofuels are more costly than fossil fuels, these mandates impose costs on consumers.
A new report from Canada’s Ecofiscal Commission estimates that these biofuel policies have led to a reduction of GHG emissions of roughly three megatonnes per year. The reason is straightforward: For every litre of biofuels used, a similar amount of gasoline or diesel is displaced, and the latter creates more carbon emissions than the former. Canada currently produces approximately 730 megatonnes of emissions, so a reduction of three is not huge. But every bit counts; the important thing is to determine the cost of these reductions.
The Ecofiscal report estimates the fiscal cost to taxpayers of the production subsidies and also the cost to consumers of being required to use more expensive blends of fuel. Over the 2012-2015 period, the average combined cost was $640 million per year for Canada. Taking Manitoba alone, the average annual cost was just over $32 million.
The report then estimates the per-tonne cost of achieving the reduced GHG emissions.
For ethanol, the emissions reductions come at an average cost of roughly $180 per tonne; for biodiesel, the average cost is about $145 per tonne.
To determine whether these costs are high or low, we need to compare them with the cost that would be incurred by alternative policies. But which alternatives should be considered?
The obvious choice is to consider the costs associated with a carbon price, the alternative that will soon exist in Manitoba and across the country.
Estimates from other researchers show that British Columbia’s carbon tax, which is currently at $30 per tonne, can reduce a tonne of GHG emissions at an average cost of just over $28; the estimates from Quebec, with a carbon price of about $17 per tonne, would likely be commensurately lower.
So, here’s the bottom line: Canada’s current set of biofuel policies are reducing GHG emissions slightly, but are doing it at a cost several times larger than what is possible with a carbon price. The arrival of a carbon price should therefore signal the end of these high-cost policies.
For good economic and environmental policy, it shouldn’t be enough to be green. We should insist that environmental gains be achieved at the lowest possible economic cost. This principle should resonate with all of us, but especially people who consider themselves fiscal conservatives. If we all agreed on this principle, our current biofuel policies would soon become a thing of the past.
Christopher Ragan is an associate professor of economics at McGill University, a research fellow at the C.D. Howe Institute, and the Chair of Canada’s Ecofiscal Commission.
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