B.C. Business Matters:
Denise Mullen >>
The Myth and Reality of a Clean Economy and Jobs
Clean Energy Canada (CEC) recently released a document titled “A Clean Economy and Jobs Plan for British Columbia,” which purports to show the BC economy will continue to thrive if the province’s carbon tax is steadily ramped up and a long list of additional regulations and other measures are introduced to further reduce carbon emissions in the province. The report boldly proclaims that BC’s economy will benefit from the proposed aggressive tax and other carbon abatement initiatives. Its modelling concludes that 270,000 jobs would be added to the provincial economy over the next 10 years – rising to 900,000 more jobs by 2050. Are the CEC’s analysis and projections plausible? Count us skeptical.
In reality, the GDP and job growth figures outlined in the CEC report are basically what could be expected to happen in BC over the next 35 years under any “normal” scenario: real GDP growth of around 2% per year, and approximately 25,000 additional jobs each year. These numbers reflect averages over the past two decades. So the CEC report is arguing that BC can introduce a suite of aggressive climate policies and regulations without affecting overall economic growth or prosperity. While it is true that higher rates of taxation on emissions or expanded regulations would not kill economic or employment growth, it is essential to understand some of the challenges with the CEC modelling exercise and the nature of the assumptions used.
One of the biggest shortcomings in the report is that a full picture of the “business as usual” projections compared to a scenario where the proposed “deep greenhouse gas reduction” policies are instituted is absent. In trying to evaluate the impact of policy changes, the standard modelling approach is to prepare a “base case” using assumptions about population growth, energy prices, other commodity prices, external economic growth, and so on. Then, a second scenario is developed, using the same assumptions, but adjusting carbon prices and imposing other additional abatement policies. This procedure allows economists and other researchers to isolate the effects of the proposed “deep reduction” policies. In an exercise involving long-term projections with significant policy changes, being able to isolate and examine projected impacts on different sectors of the economy, particularly trade-exposed sectors that have a limited capacity to absorb higher domestically imposed costs, is the only way to properly evaluate the validity of the results.
While the CEC report does mention a “reference scenario,” there is scant information on the impact of its proposals on different BC industries. Instead, emphasis is placed on the cumulative job numbers over the projection period noted above. Overall economic growth is estimated to average 2.01% per year through 2050, as compared to a “base case” forecast of 2.07%. Given the inherent uncertainty about long-term forecasts, compounded by the additional uncertainty over the consequences of significant policy changes, one may wonder about the wisdom of reporting growth figures two and three decades into the future to the second decimal place.
Need to Focus on Export Industries
The lack of discussion of the province’s export sector is an especially problematic feature of the CEC report in light of the fundamental importance of the export base to economic growth, jobs and prosperity for a small regional economy like British Columbia. Although limited, there is some reference to specific industry impacts. Under the aggressive abatement policies scenario, the numbers coming out of the model point to a decline in forestry jobs of 3,800 by 2050, compared to the “business as usual” projection. But without a clear presentation of the base case results, it is not clear if the projection accounts for a real contraction in the overall size of the forest industry due to the pine beetle, which may result in a ~20% reduction in forestry jobs over the next decade – and this is apart from the effect of any shifts in provincial climate policies. The results also show 4,200 new manufacturing jobs by 2050. Again, without any details around the base case projection, it is impossible to understand what the model is saying about the impacts of the proposed suite of carbon reduction policies on the manufacturing sector, which plays a big role in generating export earnings and driving value-added economic activity in BC. Presumably, the modelling has manufacturing jobs in the wood products industry (and perhaps refining and smelting) declining but being more than offset by growth in other manufacturing segments over time, but we don’t really know.
The report also says little about the interconnections between industries that ENGOs love to disparage – mining and energy in particular – and growth in the knowledge, technology and manufacturing sectors in terms of their use of raw material inputs as well as the demand that energy and other resource-based industries create for locally-provided services such as transportation, engineering, environmental consulting and remediation, finance, law, accounting, executive search, etc. In our view, a (much) smaller primary industrial sector would produce significant negative spinoffs for many parts of BC’s diverse services sector. But this is not taken into account in the CEC modelling. Of interest, the modelling posits significant and steady growth in employment in government-dominated sectors like health care, education and social services. Yet no attention is paid to the risk that adopting much more stringent made-in-BC climate policies could lead to a shrinkage in economic activity in the industries that now supply the bulk of the province’s exports and thus help to generate the financial resources that government depends on to pay for public services and programs.
Impact on Households
Households are a significant part of the model and figure in the CEC’s plan to reduce carbon emissions. Here, some of the assumptions and anticipated responses of households need closer scrutiny, especially with respect to the net costs to consumers from the energy efficiency and transportation proposals in the CEC report. CEC claims that, despite large increases in energy costs stemming from a much higher carbon tax and new regulations, a typical household in BC will save money from investments in energy-saving technologies leading to reduced energy consumption.
“By 2040, energy expenditures are less in the deep GHG reduction scenario and this difference grows larger by 2050. Net of carbon costs, each household saves $1,800 ($52/year) on energy between now and 2050 if BC pursues deep GHG reductions rather than keeping current policies.” (p.38)
Much of this saving arises because the figures are “net” of carbon costs, based on the expectation that the escalating carbon tax “can be recycled back to households through income tax cuts or other transfers from the government.” To realize the anticipated reductions in energy consumption, households must also invest in energy-saving technologies. The report projects that, between now and 2050, each BC household will spend an additional $4,000 ($115 annually) on more energy-efficient technologies and goods, including vehicles. Conceptually, it is difficult to understand how this very modest incremental investment outlay by households would deliver such sizable energy cost savings. One reason for the relatively low amount of investment per household is because the report assumes that households would make energy savings upgrades even with current carbon pricing policies. To estimate the incremental capital cost for a typical household, the report constructs a “counterfactual scenario.” It is assumed that a representative low-energy household would have purchased a hybrid car by 2030. This keeps the incremental cost for purchasing an electric car under the aggressive carbon pricing scenario down to $2,700. Although it is not explicitly laid out in the report, there seems to be a similar assumption about heat pumps. The incremental cost for a new heat pump is listed as $1,100. But high efficiency heat pumps can cost as much as $12,000. The report also assumes that upgrades to housing envelopes are part of required maintenance, so the incremental cost of improved insulation is pegged at zero.
While many of these assumptions relating to energy-related investments by households are questionable, the biggest issue in this area of the modelling is the fact that it is based on two “archetypal” households (low- and high-energy consuming households), which both are presumed to adopt some of the best and most advanced energy-saving technologies available. It is more likely that a truly “representative” household, encompassing both low- and high-energy consuming households, would make a more diverse mix of energy-related investments, rather than adopting the best possible energy-saving technologies (such as electric cars and 250% efficient heat pumps). Empirical evidence on actual household behaviour broadly supports this point.
Action by Other Jurisdictions
An even more problematic assumption in the CEC report is that other North American jurisdictions will follow BC’s aggressive actions to reduce carbon emissions, with little delay.
“While BC may be a leader in climate policy, we assume it is not acting alone. For our economic modelling, we assume other North American Jurisdictions...are enacting similarly stringent policies.” (p.9)
As of late 2015, and despite some commitments to advance carbon pricing in North America (and the world), we judge it unlikely that other North American jurisdictions will reach the current BC rate of US$23/tCO2e (CDN$30/tCO2e) anytime in the foreseeable future. And they certainly won’t do so within the six years during which CEC proposes that BC add a further CDN$48/tCO2e, or ~US$36/tCO2e, to its current carbon tax, lifting it to ~US$60/tCO2e (CDN$78t/CO2e).
Carbon prices in the California and Quebec cap and trade markets have been in the US$10-12/tCO2e range since 2013. There is empirical evidence to suggest that fluctuations will remain within +/-10% unless both governments intervene in allowance markets and set ever increasing floor prices – and at this point there is no sign of that happening. Thus, if BC were to increase the carbon tax at the rate recommended by CEC, the carbon price gap between our province and these other jurisdictions that have legislated carbon limits would likely widen to as much as US$48/tCO2e.
Why does this matter? Fundamentally, the CEC report does not recognize the reality that BC is a small sub-national economy where exports play a large role in determining real GDP and income. BC has no ability to influence the globally-traded prices of the goods and services it produces. Therefore, any domestically-imposed input taxes (e.g., a higher carbon tax) will diminish the return on capital in most trade-exposed BC industries, thereby making investing in British Columbia facilities and operations less attractive for firms in these sectors. Under any realistic assessment, following the CEC playbook would cause BC to experience what is known as “carbon leakage” – investment (and jobs) shifting to jurisdictions with lower carbon-related costs and less stringent regulatory requirements.
The CEC report does not adequately consider the implications of its recommended policies for BC’s trade-dependent economy, nor does it recognize that most of our existing export industries are quite energy-intensive and cannot pass on higher input costs to their customers. In addition, the report pays little attention to the wider global context facing BC’s export industries. In this regard, several of BC’s leading export industries have competitors outside of North America (e.g., Australia and Latin America for mining, Australia, West Africa and Qatar for LNG, and parts of Europe, Russia and many emerging economies for pulp and paper). These other jurisdictions would likely enjoy an even greater competitive advantage vis-à-vis BC if energy costs are quickly pushed higher here. Given that about 80% of the province's merchandise exports come from resource-related industries and other energy-intensive manufacturing industries, and that these sectors are among the most exposed to energy price increases, the suite of carbon pricing and other policy measures advanced by CEC could substantially undermine the economic viability of substantial portions of BC's export economy.
Taken together, the lengthy list of assumptions relating to costs, household behavior, and the pace at which other jurisdictions implement more stringent carbon polices, coupled with the inadequate discussion of domestic industry impacts, suggest that the conclusions of the CEC report should be treated very cautiously. While a higher BC carbon tax may make sense over the long-term, the province would be wise to refrain from taking steps that further increase energy and other business operating costs here until there is persuasive evidence that most other Canadian and U.S. jurisdictions have embraced and are actually implementing stronger carbon pricing policies.
 Clean Energy Canada prepared a summary report titled “A Clean Economy and Jobs Plan for British Columbia.” This is a summary of a more detailed and technical report, “A Plan for Climate Leadership in British Columbia: Forecasting the Benefits and Costs of Strengthening British Columbia’s Greenhouse Gas Policies,” prepared by Navius Research.