Bonjour. Thank you for inviting me before the committee.
I will make my presentation in French, and I can take questions in both official languages.
First let me introduce myself quickly.
I am currently a professor in the Department of Economics at the University of Ottawa. I've been interested in the potential economic impact of greenhouse gas reduction policies in Canada for the past ten years or so.
My work in this area consists primarily of building numerical models to stimulate the impact of various greenhouse gas reduction strategies. My work has been published in learned economic journals. It is probably because of my involvement in this line of research that I have been asked to speak to you today. I will therefore do my best to answer your questions about the economic impact of greenhouse gas reduction policies.
Climate change is real, and its effects will be felt more and more each day. No one can credibly deny its existence. Many scientific studies are now focused on proving that this change is anthropogenic, that is, that climate change is to some extent caused by our production methods and consumer habits. These same scientific studies note the need to take adequate measures to reduce the accumulation of these gases in the atmosphere.
While there is agreement on the need to reduce these gases, there is disagreement on what should be done and how fast it should be done. However, most studies seem to agree on the need to take appropriate measures to safeguard the future while protecting the present. Reducing greenhouse gases should take present generations into consideration as much as possible.
In this context, disagreement likely lies over striking a balance between the sacrifices required today and the long-term benefits of change. It must be made clear that the fight against climate change cannot be waged without sacrifices in the short term. This fight will involve tough choices, albeit in the short term. A solid understanding of the repercussions by all actors can only strengthen everyone's determination to stay the course.
Indeed, it is to minimize the cost impact of these choices that economists are involved. It is difficult to say what the economic cost of reducing greenhouse gases in Canada will be. It depends on many factors. Beyond the difficulty in accurately predicting human behaviour, the economic impacts of greenhouse gas sequestration policies depend not only on the amount to be reduced but also on the policy instruments employed and the measures taken by other countries with which we have economic ties.
For now, I don't have any formal results from an analysis of the various policies suggested in the current bill that I can share with you. However, I can briefly go over some of the major findings in the literature on the potential economic impacts of greenhouse gas reduction policies.
The use of market instruments, such as the carbon tax and tradable permits, can allow us to achieve our goal at the lowest cost. Unlike “command and control” policy instruments such as technical requirements, market-based instruments aim to reduce greenhouse gases through market signals, placing tariffs on emissions. This ensures that reductions in greenhouse gases are accomplished by those who realize them at the lowest cost.
The possibility of trading permits among various jurisdictions ensures that reductions in greenhouse gases will be done at the lowest possible cost. While the findings of many studies suggest that the total economic cost reductions in greenhouse gases is relatively low—impact on the GDP, for example—many studies also point to the significant heterogeneity of costs across sectors and regions. Energy intensive industries will likely be most affected by greenhouse gas reduction policies. It follows that regions with a high concentration of these industries will be affected the most. However, some studies show that in a permit-trading system an appropriate allocation of emission permits can weaken the heterogeneity seen in terms of sectoral impact.
Of course, these studies also point to the increase in the economic cost tied to implementing these mitigation measures. Economic literature also suggests that greenhouse gas reduction policies can affect the external competitiveness of energy intensive industries. The size of the negative impact depends on whether similar measures were introduced by foreign economic partners. Again, many research findings suggest that the negative impact of competitiveness can be mitigated through equality, that is, a fair allocation of tradable permits.
Finally, I must point out that in the long term the ultimate solution to climate change lies in technological progress. Fortunately, the use of market-based instruments will send the necessary signals to economic actors to develop the appropriate new technologies. However, the inability of the market to reward businesses for their research and development efforts may require, if only in the short term, the use of subsidies to encourage innovation.
Thank you for your attention.