These days when discussions turn to the health of the economy, the topic is sometimes viewed through the relationship between economic activity (proxied by gross domestic product or GDP) [1]and emissions of greenhouse gases (GHG). The two tend to be closely linked because energy is central to everything humans do, from eating to space travel to the production of goods and services. It is an unbreakable co-dependency. For many decades, there was an ever-rising emissions trajectory as the global population increased and industrialization accelerated. At a time when so many are pressing to reduce reliance on fossil fuels, the challenge is to use the least amount of energy to do the most possible work — in a world where reliable flows of energy are critical and the need for highly energy dense fuels (primarily fossil based) remains widespread in modern economies.

Reducing GHGs is an important international goal. One of the holy grails in the conversation about how to do this is to identify ways to decouple GDP from emissions. Despite positive trends in certain jurisdictions, achieving a fulsome decoupling won’t be easy, as confirmed in recent research.[2]While trend analysis suggests a handful of countries may be close to achieving a “perfect” decoupling of GDP from the use of carbon-based energy, closer examination reveals that this is largely a result of mainly one-time transitions in the electricity sector, an issue that BCBC has explored before. Transitioning away from fossil fuels in the production of electricity offers limited “upside” for Canada (and almost none for B.C.), inasmuch as we are already a long way down the path to a carbon-free electricity system.

The intuitive logic is correct when thinking about GHG emissions — that economic structure matters. For example, decoupling is more difficult for economies that have comparative advantages in natural resource and manufacturing industries. This is evident in Figures 1 and 2, showing the pro-cyclical[3]relationship between emissions and goods production in Canada and B.C. — meaning that GHGs increase during times of economic growth and decline during downturns.

Figure 1: Canadian output of goods and services compared to GHG emissions, annual % change

Figure 2: B.C. output of goods and services compared to GHG emissions, annual % change

It is also clear that both Canada and B.C. have made steady progress in lowering the kilograms of GHGs per dollar of GDP. We have reduced energy intensity by almost 40% since 1997 (Figure 3) — for Canada, matching the world on this measure since the 1990s.[4]This is a positive story. However, the flat slope of both lines suggests that future progress is likely to come in small increments and at a higher cost, including foregone economic output.

Figure 3: B.C. and Canada, Tonnes of GHGs per $1,000 GDP, 1997-2017

Of course, the pace of GHG reductions may be influenced in significant ways by the development and deployment of disruptive technologies. Let’s hope so, since policy interventions unrelated to advances in technology are sure to come with a steeper cost.

Accelerating the contraction of the B.C. and Canadian industrial sectors is another way to lower GHG emissions, driven by aggressive carbon pricing and increasingly costly additive regulations. Neither of these policy approaches tends to consider baseline energy systems (i.e., the relatively low carbon intensity of many of our currently produced goods) and what competing jurisdictions are doing to protect their own domestic industries. To date, B.C. stands out not only in North America but globally for more or less completely ignoring this wider competitive context when setting the province’s climate policies.

In a future paper, we will take a deeper look at the relationship between GDP and GHGs in the goods producing sectors that make up the lion’s share of exports for both B.C. and Canada.

[1] Gross domestic product is the market value added of goods and services within a country during a specific period and is generally accepted as an overall grade on the economic report card of a country or region.

[2] Gail Cohen, João Tovar Jalles, Prakash Loungani, and Ricardo Marto. The Long-Run Decoupling of Emissions and Output: Evidence from the Largest Emitters. IMF Working Paper, WP/18/65.

[3] There is a strong and inelastic cyclical relationship between production-based emissions and output. Canada’s production-based emissions to output elasticity is calculated to be 0.5; if it is less than 1, it is inelastic and means that changes are more difficult and expensive.

[4] World Bank https://data.worldbank.org/indicator/EN.ATM.CO2E.PP.GD. (Data is from 1990 to 2014.)