Christopher Ragan is the director of the Max Bell School of Public Policy at McGill University, served as a member of the federal Advisory Council on Economic Growth and was the chair of Canada’s Ecofiscal Commission.
As the Canadian government develops policies to achieve net-zero greenhouse-gas emissions by 2050, it’s crucial to keep in mind some things we should not do in pursuit of a cleaner environment. Specifically, we should not consider intentionally phasing out Canada’s production of oil and gas, especially since there are far less costly ways to reduce emissions.
It is easy to find many Canadians, including some environmental groups, think tanks and political parties, arguing for the need to eliminate our oil and gas production. Since the oilpatch is the source of more than a quarter of our total greenhouse-gas emissions, perhaps this isn’t surprising.
Even though much of the federal government’s rhetoric points in this direction, it has not yet adopted this goal. But it has proposed a declining emissions cap from this sector, which could end up forcing output cuts if producers find it technically difficult to reduce their emissions.
In response to arguments favouring the phase-out of oil and gas production, I usually ask two questions. What would be the economic cost to Canada of such a policy? Is there a lower-cost way to reduce Canada’s greenhouse-gas emissions?
A few weeks ago the Public Policy Forum released a report addressing these questions directly. The report shows the results of a modelling exercise undertaken by Navius Research, the go-to consulting firm for Canadian governments and non-governmental organizations examining the economic implications of various climate policies.
The PPF-Navius report is based on a complicated economic model, but the basic idea is simple: Consider the economic differences of two policy packages that achieve the same emissions target. One package takes the current set of Canadian policies and adds a nationwide carbon price that rises as necessary to achieve net-zero emissions by 2050. The second package begins with the current set of policies, phases out oil and gas production beginning in 2035 and then adds a nationwide carbon price to achieve the same 2050 target.
With the first policy package, the nationwide carbon price (which also applies to the oil and gas sector) rises until a litre of gasoline costs about one dollar more than today by 2050. This may seem crazy, but it would mean gasoline in Canada 25 years from now that is on par with today’s price in France. Hardly crazy at all, really.
With the policy package that phases out oil and gas production, the carbon price still rises but not quite as far: The price of a litre of gasoline rises by about 90 cents by 2050. But the kicker is on the GDP impact.
Since the phased-out oil and gas production would have generated a lot of income for Canada, the second policy package would be far more costly in terms of GDP. The PPF-Navius report is titled The $100-Billion Difference, because the difference in Canadian GDP by 2050 between the two policy approaches would be about this large – roughly 3 per cent or 4 per cent of GDP at that time. This is the equivalent of Canada’s recession in 2008-09, but one that lasts forever rather than only for a year or two.
Such a permanent decline in income spread across the country would be bad enough. But the story gets worse. Since the lion’s share of Canada’s oil and gas production is in Alberta, the economic impact of the phase-out would naturally be concentrated in that province.
The numbers are staggering. The imposition of an oil and gas phase-out would be akin to permanently eliminating one in every five or six dollars generated in Alberta’s 2050 economy. That’s like having a permanent recession in Alberta of the size Canada experienced for only several months in 2020 because of COVID-19.
What’s the bottom line? Since climate change is real and needs to be addressed, Canada should be committed to achieving net-zero emissions by 2050. But we have options about how to get there. Policies that apply more-or-less equally to all sectors and regions can get us there, and they do so by spreading the economic costs across the country. With this approach, all Canadians are involved in the national project; there is no “us” or “them.”
Policies that are targeted at individual regions and sectors can also get us to net zero, but only by concentrating the costs in some parts of the country and by raising the overall economic cost to Canada. These economic costs matter – and so does our political stability. Any practical policy maker who cares about Canadian prosperity, and who also cares about all regions of the country, should recognize the clear dangers with such an approach to climate policy.
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