David Popp is professor of public administration and international affairs at the Maxwell School of Syracuse University, and author of the C.D. Howe Institute publication A Blueprint For Going Green.
Governments across Canada are making support for green energy technology a top priority. But they should remember that simply providing subsidies to increase the supply of such tech is not enough. The optimal policy mix includes carbon pricing, to create demand for new tech, combined with government funding focused on developing distant techs not economical for private companies. Subsidizing consumers who adopt new tech is not the solution.
Ontario's Climate Change Action Plan includes up to $375-million of research and development support for low-carbon tech, and billions more for subsidies to encourage use of low-emission tech. Alberta's government is proposing a carbon tax, with some revenue devoted to supporting low-emission technology. Federal policies include the $2-billion Low Carbon Economy Trust to support projects that reduce emissions.
How should governments design such policies to get the most bang for the public buck? There are three principles they should have in mind.
First and most important, incentives matter. Supporting tech development requires more than just investing in new clean tech. Policy must also create demand for them throughout the economy, either through carbon taxes or cap-and-trade markets.
Ontario will begin a cap-and-trade market to reduce carbon emissions in 2017. British Columbia has a carbon tax in place and Alberta is committed to a similar price on emissions by 2018.
Both cap-and-trade and carbon taxes create demand for clean tech through price signals. The Ontario government predicts that gasoline prices will rise by 4.3 cents a litre because of its cap-and-trade system. Monthly housing heating costs will increase by $5. Higher prices encourage consumers to conserve energy and switch to cleaner alternatives. So far, so good, for most provincial plans.
Second, flexibility matters. Both cap-and-trade and carbon taxes offer flexibility. Cap-and-trade rewards innovative firms that discover better ways to reduce pollution. A carbon tax is flexible in a simpler way: Emissions fall as firms with better tech choose to reduce pollution rather than pay.
Well-placed investments in green tech should enhance the flexibility offered by cap-and-trade. Limiting choices reduces the benefits of both cap-and-trade and a carbon tax.
Forcing specific solutions or technologies on consumers puts the government in the business of picking winners. It may also be wasted money. Subsidies to buyers of energy-efficient housing and electric vehicles go to those who can already afford these things. Some of these families would buy energy-efficient housing even without a subsidy.
The third principle is efficiency. A combination of policies – including both cap-and-trade and technology support – reduces emissions at significantly lower cost than any single policy.
But technology support should focus on what businesses and residents are unlikely to do on their own. Governments should focus targeted support, especially in research and development, on emerging tech not yet cost-competitive.
The optimal policy mix can also help families cope with higher energy prices from cap-and-trade or carbon taxes. At least some of the revenue should be returned to taxpayers. Policy makers should follow the lead of B.C., which used revenue from the province's carbon tax to reduce low-income tax brackets and offer tax credits to low-income households.
Cap-and-trade or carbon tax policies offer flexibility that lowers the cost of reducing pollution. Provinces are starting strong with carbon pricing, but must do more to ensure that their technology support is well designed.