Your home’s natural gas furnace is on the fritz. You need heat, so you must replace it.
There are several options: electric baseboards, electric radiant flooring, a heat pump, or direct gas-fired space heaters. It may also be feasible to use your existing wood fireplace or buy a wood pellet stove.
More ambitiously, you could invest in a combined heat and power system or do a complete renovation so your house becomes a passive energy system.
Each option has a different carbon profile as well as different costs. As a responsible citizen, you want to reduce carbon emissions, but homeownership has become expensive in Canada and you have a limited budget.
To help with the decision, an economist would probably turn to the concept of marginal abatement cost (MAC). MAC is simply the incremental cost associated with any option to reduce emissions, measured per tonne of emissions avoided – in this case, by installing a new home heating system.
Ordering the various options in terms of cost per tonne of emissions provides useful information for decision-making in a world where financial resources are limited.
Calculating the costs and benefits of home heating alternatives will show that the expense involved in a full renovation to a passive heating system is prohibitive for most people (unless the government pays for it).
Your decision to choose something else or a combination of other options is apt to be a common-sense trade-off given a fixed budget. This kind of decision-making framework is similar for households and countries looking to reduce their national emissions.
Unfortunately, in Canada, very little attention is paid these days to the cost side of climate-related policy measures – particularly by the federal government, which is spending and regulating with wild abandon in this area.
The positive news is that Canada has imposed a price on carbon – set to rise to $170 per tonne of emissions by 2030. While some people don’t like this, pricing emissions via a tax or some other mechanism is the best way to incent actions to lower them.
However, apart from mandating carbon pricing, governments are also continuing to pile on a mix of subsidies, incentives, product standards and regulatory requirements – all in the name of climate policy.
Since economically efficient steps to reduce emissions will be taken by consumers and businesses as the carbon price moves higher over time, it’s unclear why all of these other policies are necessary. Adopting them promises to raise the overall cost imposed on the Canadian economy in the bumpy transition to a lower-carbon future.
When economists came up with the theory of taxing pollution and other environmental ‘bads’ decades ago, they saw things like carbon taxes as an alternative to regulations, subsidies and other forms of government intervention. But that’s not how things have evolved in Canada.
Instead, we face both escalating carbon prices and a veritable avalanche of other government fiscal instruments, programs, incentives and regulations that, individually and in aggregate, will significantly increase the marginal abatement cost of reducing emissions in the coming years.
Ultimately, consumers, taxpayers, shareholders of Canadian firms and workers will all pay the price for Canada’s cost-insensitive approach to climate policy. That approach features the layering of ever more complex regulations, standards, incentives and subsidies on top of a steadily rising carbon charge.
Most people want to address climate change. For a small country like Canada – which by 2030 will account for perhaps one per cent of global carbon emissions – the challenge is finding a path to achieve the desired outcome without imposing punitive costs on households and industry. Choosing wisely is critical.
A carbon tax is the simplest and most transparent way to put a price on environmentally harmful activity. On the other hand, regulation is the least transparent policy instrument and is much harder for citizens to understand.
Product standards, incentives and subsidies are in-between.
Regardless, all taxes, regulations and government-mandated incentives come with costs that vary significantly across industries, sectors, households and regions. Voters should insist that governments come clean with more and better information on costs as they continue to develop and tweak their climate policy toolkits.
Jock Finlayson is a senior policy advisor of the Business Council of British Columbia. Denise Mullen is director of environment, sustainability and iindigenous relations at the Business Council of B.C.
As published in Troy Media.