Canada West Foundation Blog

By: Shawna Stirrett

Using market-based instruments (MBIs) for environmental protection is a potentially exciting way to manage the tension that sometimes arises between economic and environmental goals. MBIs apply the economic principles of supply and demand to the management of natural resources and they rely on the market to positively influence behaviour.

There are many different kinds of MBIs and some of them, such as deposit refund programs for drinking containers, have a long history in Canada. Other types of MBIs, such as transfer of development credits and resource allocation trading, have had limited uptake in Canada so far.

There is, however, the chance that MBIs will be used more frequently in Alberta in the coming years because of some recent policy changes that have come about with the passing of the Alberta Land Stewardship Act (ALSA) in 2009. This Act explicitly enables the use of market-based instruments for the protection of natural resources in Alberta.

While the theory behind MBIs is solid, the challenge is in the details. It is imperative that market-based solutions are clearly addressing an environmental problem, that they are understandable and accessible to the public, and that they operate within clear regulatory boundaries.

An illustration of how challenging it can be to find the right balance is found in Alberta’s home rebate program for energy efficient new homes. The idea behind this rebate is to incent homebuilders or homebuyers to choose products and designs that will be as energy efficient as possible. This means that if you buy a new home with an EnerGuide rating of 80 or above you will receive a government rebate that ranges from $1,500 - $10,000 on a sliding scale tied to efficiency ratings.

This is a fantastic program in theory because the more that can be done to encourage home owners to reduce their energy consumption the less greenhouse gas will be emitted, the less need there will be for new power generating stations and fewer building materials will end up in the landfills. According to C3 (the organization that administers the rebate program): “Upgrading the energy efficiency of a new home could reduce its greenhouse gas emissions by upwards of one tonne per year.”

The devil, of course, is in the details. The first challenge is that most builders do not know, or do not advertise, the energy rating of the homes they build. If a new buyer wants to find out the rating of their home, they will have to go through a pre-evaluation process. This means sending building site plans with elevations, sections and floor plans; specifications on insulation, doors and windows; mechanical details on the furnace, hot water heater, fireplace and other efficiencies; and information about appliances and lighting systems for assessment.

Not only is this a lot of work, but it will cost homeowners around $300 (if their new house is 1,200 square feet or less, additional footage is charged extra) to have this pre-evaluation done, which will tell them if they might be eligible for the rebate. The fee is non-refundable. There may also be additional charges if the house has solar or geothermal systems attached.

Should they decide to go ahead with getting their house EnerGuide rated, homeowners then have to get a blower door test done—at a cost of $175 for the first hour and $120 for every subsequent hour, and potentially including mileage for the Energy Advisor.

Finally, it is an additional $100 to update the file with the blower door test information, submit the claim to Natural Resources Canada and get the EnerGuide label and report.

A conservative estimate, then, is that a homeowner would need to spend around $600 in order to apply for the rebate that is offered. This is worth it if the house will be rated at the highest level, giving them a rebate of $10,000 or if there is certainty that the house will qualify for a rebate. But what about those who come in at the lowest level eligible for the rebate? They will have spent $600 (not to mention what they will have already spent on high efficiency furnaces, windows, insulation, etc.) in order to get back $1,500. What about those who invest in the pre-evaluation only to find out they are ineligible?

Because of the effort and the amount of money required to get this rebate, this program will have the greatest appeal for those who already care about the efficiency rating of their home and will have designed their home with efficiency measures in mind. In other words, this rebate as currently designed is aimed largely at people who would have made their homes as efficient as possible already and are not motivated by the promise of money back.

The argument could be made, therefore, that the rebate program is not incenting people to buy or build energy efficient homes, merely rewarding those who do.

So what can be done about this? It’s not as though the assessment process can be scaled back. There needs to be certainty that rebate-receiving houses really are as efficient as they say they are otherwise taxpayer money will be thrown away and no environmental benefit will result.

One potential solution is increased system integration around this issue. Would it be possible, for example, to require homebuilders to assess and disclose the EnerGuide rating of their homes, much like auto manufacturers are required to disclose the fuel economy of their vehicles? This would enable consumers to quantify the efficiency levels of new homes and this information, in addition to the rebate program, could lead to preferential selection of homes with higher efficiency ratings. In this way, builders would acquire greater experience and expertise in efficiency measures, one of the main barriers to consumers (the cost and the time of finding out the rating of their new home) would be reduced and substantial improvements could be made in Alberta’s environmental performance.

As this example demonstrates, the idea behind MBIs is good and they have the potential to enable environmental protection in an economically sustainable way. Getting the details of a market-based instrument right, however, is imperative if the tool is going to be effective at solving environmental problems and motivating people to change behaviour.

A detailed look at the role of market-based instruments within the Alberta context is covered in a forthcoming Canada West Foundation report entitled: “The Invisible Hand’s Green Thumb: Market-Based Instruments for Environmental Protection in Alberta.”

By: Robert Roach, VP, Research

While the recession has affected countries throughout the globe in the past few years, Canada’s economy has done reasonably well. Yet, things are not all that they seem. Like a frog in a pot of warm water, Canadians have not yet realized the danger. A rapidly changing global economy is heating up the water in the pot.

The Boiling Frog Dilemma: Saving Canada from Economic Decline by Todd Hirsch, Senior Economist, ATB Financial and Robert Roach, Vice President of Research, Canada West Foundation, outlines ways that Canadians can get out of the pot before the water boils—and not only survive, but thrive, in the global race for good jobs.

Canadians need to become much more creative and this means a revolution in education and how creativity is harnessed in the workplace. Canadians need to embrace risk and stop lamenting the good old days when more things were made in Canada. They need to see the potential in lodging themselves at the top of the global value chain as the world’s designers, managers, educators, investors and creators. Canadians need to integrate their business practices with environmental stewardship, see the world as their oyster rather than a threat, and be much better neighbours to one another at home.

It is individual Canadians who need to change their own attitudes and habits. Governments can’t do it for them. The Boiling Frog Dilemma envisions new Canadian entrepreneurs who will move Canada from being largely invisible to totally indispensible in the global economy of the 21st century. The new entrepreneur puts into action the argument that nothing generates economic wealth except the power of ideas.

Read Rob and Todd’s op-ed in the Calgary Herald “People, not tax credits, will power the economy.”

To order The Boiling Frog Dilemma: Saving Canada from Economic Decline, visit www.toddhirsch.com

By: Robert Roach, VP, Research

In an article in today’s Globe and Mail, John Ibbitson argues that "One question will define national politics in our time: Are Western Canadians prepared to sacrifice for the sake of the nation, now that Ontario is less able to help?"

In addition to incorrectly implying that western Canadians chipping in to help the rest of the country is a new phenomenon, the question is the wrong one to ask.

The question Canadians should be focused on is how to ensure that the nation successfully adjusts to the evolving global economy. It is a mistake to start with a negative question that assumes the need for "sacrifice"—whatever that means—or puts pressure on the nation’s fault lines by immediately assuming that regional wealth redistribution is the solution to central Canada’s problems. This is the old way of thinking and this is not the time to bring it back.

The West knows what it is like to have its interests and economic prospects ignored and how damaging this is to the country and its potential. It will not, therefore, make the same mistake that central Canada has made in the past and be blithe to the blight of the other regions.

The West gets it—all regions benefit when all regions are heard and respected. The West will do its part, as it always has.

Ensuring Canada’s prosperity will happen naturally as the western economy continues to provide jobs and returns on investment. It will also happen at the political level through the equalization program, a strong tax base in the West that helps fill the national treasury, and by ongoing efforts by Canadians to ensure strong regional representation within the national government.

Ultimately, however, the economic recovery of Canada's industrial heartland will depend on the efforts of individual Canadians and their ability to harness the changes happening at a global level.

By: Shawna Stirrett

In November 2011 the Canada West Foundation in partnership with the National Round Table on the Environment and the Economy (NRT) conducted a series of roundtables about developing a low-carbon growth strategy for Canada with particular emphasis on the opportunities and risks facing the West.

You can read all about the main themes, policy recommendations, and overview issues in the report (click here to view) but, just for fun, here is a visual overview of the roundtables:

These word clouds were created from my notes, which were typed up during each of the sessions. Words that appeared more often in the conversation appear larger in the clouds and words that were less common are smaller. In a sense, these clouds give a visual overview of what ideas were most prevalent during the roundtables and which topic generated the most interest.

What is really fun is to see how the conversations—which were all structured around the same questions—varied from province to province.

For example, in Saskatoon, one of the main themes was on how to deal with carbon constraints in an environment of economic growth.

Those in Vancouver were most concerned about how carbon should be constrained, should it be a tax or cap and trade?

Calgary roundtable participants were pretty set on the need for a national framework around energy and emissions.

While in Winnipeg the discussion centered on how challenging it can be to put in place carbon policies when power is so cheap and emissions rates are so low in the province.

Of course these word clouds do not tell the whole story, but they do provide an interesting visual overview of what issues were important to roundtable participants and how the conversation varied across the region.

Click here to download a copy of Cautious Optimism: Western Perspectives on a Low-Carbon Economy.

By: Shawna Stirrett

Just prior to Environment Minister Peter Kent’s announcement in December 2011 that Canada had decided to withdraw from the Kyoto Protocol, the Canada West Foundation and the National Round Table on the Environment and the Economy (NRT) wrapped up a series of meetings in western Canada on developing a low-carbon growth strategy for the country. One of the key themes that emerged from these meetings was the role of national and international emission reduction targets such as those in the Kyoto Protocol.

Interestingly, there was consensus among the participants that Canada should not be overly focused on emission reduction targets. Participants argued that reduction targets have a tendency to send the wrong signals to producers and consumers. A focus on targets that are not accompanied by a clear strategy for meeting them can have a paralyzing effect rooted in uncertainty and fear.

For example, did every province under Kyoto need to reduce emissions by 17% by 2020, or was the target meant to be a national average? If it was a national average, did that mean that if some provinces did not meet the target, other provinces would have to make up the difference?

Another reason participants took issue with an emphasis on targets was that they can have the unintended consequence of promoting competition rather than cooperation. Targets can create the perception of a zero-sum game in which, as long as a province or country is doing better than another, it wins.

A final reason participants argued that there should be less emphasis on emission reduction targets is that they often overshadow other environmental considerations such as land management, water quality, protection of biodiversity and so on.

Instead of relying exclusively on emission reduction targets, participants argued that Canada should be setting environmentally quantifiable goals that are holistic in nature. These goals would ideally foster interprovincial cooperation, account for all aspects of environmental protection, encourage energy efficiency and facilitate the creation of a nationally coordinated plan for dealing with energy and environmental issues.

While the consensus of participants was that emission reduction targets should not be the main focus of environmental management in Canada and it’s path to a low-carbon future, this does not mean that they were in favour of pulling out of Kyoto. Nonetheless, there was a clear sense of the limitations of Kyoto-like targets for achieving our environmental goals.

For the full summary report of the western Canadian roundtables on a low-carbon growth strategy for the country, see the Canada West Foundation report entitled: “Cautious Optimism: Western Perspectives on a Low-Carbon Economy.”

By: Robbie Rolfe

I sometimes find myself getting weary of ideologues on environmental issues. One argument I find particularly tiresome is the insistence that there are significant tradeoffs when it comes to the economy and the environment. The conclusion of these extreme viewpoints is that we can be prosperous polluters or penniless hippies. Apparently, there is no middle ground.

These zero-sum views neglect market-based instruments (MBIs for short) that can make us both prosperous and green. The careful deployment of MBIs can address a major difficulty facing governments trying to encourage good environmental practices: people and businesses will not provide enough ecological goods and services because the costs of providing them accrue to individual persons or businesses while the benefits are enjoyed by the wider community. An MBI is a mechanism that shares the costs of environmental protection among its many beneficiaries.

Take a farmer who is nearing retirement and needs cash. If he sells his farm to a developer, he gets the money he needs. If he holds onto the land to ensure that it continues to provide a nearby city’s water system with valuable natural filtration, he takes a direct financial hit. There are significant tradeoffs in that situation: the farmer gives up some of his livelihood to maintain ecological benefits or gives up ecological benefits to enhance his livelihood. An MBI could pay the farmer for the ecological goods and services his land provides. To ensure a fair price, the amount the farmer gets could be set by a market, or at least market-like mechanisms. Taxpayers living in the city who benefit from the natural filtration on the farmer’s land could fund the MBI through their taxes, thereby sharing in the costs associated with the benefits they receive.

The good news is that these kinds of policies are increasingly under consideration in western Canada. The Alberta Land Stewardship Act, for example, urges the use of market-based instruments on a regional or local level to better provide ecological goods and services, particularly when it comes to land use and land management.

Though market-based instruments show great potential, we are only beginning to explore their varied applications. If we can tap that potential, then one day we may be able to have our cake and eat it too.

MBIs are explored in detail in a new Canada West Foundation report entitled The Invisible Hand’s Green Thumb: Market-based Instruments for Environmental Protection in Alberta. To download the report, click here. 

By: Dr. Roslyn Kunin

For many Canadians, there never seems to be enough time in the day. Taking the long view, time stretches to infinity, but, within the scope of our lives, it is much more limited. It has no substitutes and it cannot be re-used or recycled.

Lack of time is the excuse we give for not doing all the things we would like to do or that we have to do. We each have only 24 hours in a day and, like land, they aren’t making any more of it. Unlike land, unfortunately, you can’t buy it.

We can, however, make much more effective use of the time that we do have, both in our personal and our working lives.  There are lots of suggestions for making better use of time at the individual level, but it is in our collective working lives that the inefficient use of time is doing us the most harm. Not a lot is being said about this and less is being done, it seems.

Productivity is the measure that is used to determine how effective we are in our working lives. There are many yardsticks of productivity, but the most basic one is output per hour worked.

By this measure, Canadian productivity has been lower than that of the United
States, our biggest trading partner, for at least the last three decades. What’s more, the gap is widening. Although productivity has been rising in Canada, it has been creeping up at a rate of about 1% per year for the last decade. Meanwhile, in the United States, productivity has been charging ahead around double the Canadian rate.

Why is it so important for Canadians to be churning out the greatest amount of goods and services each hour that we work? Because the wages we earn and our standard of living depend upon it. No one can afford to pay anyone more than the value of what it is they produce. If our output is just creeping upward, our incomes and our standard of living can do no better.

And how do we improve our productivity to make better use of the working hours that we put in? We make use of a resource that is widely available and often underused—our brainpower. We have the smarts to develop, adapt and implement the technology and systems that will allow us to become more productive and prosperous.

Now all we need to do is to find the time.

By: Michael Holden

Just in time for Christmas, the federal government has announced a new funding plan for health care. The present funding agreement, in which federal cash transfers to the provinces and territories grow by 6% per year, is set to expire in 2013-2014. The new ten-year plan will see that 6% annual escalator maintained through to 2016-2017. Thereafter, federal cash transfers for health care will be tied to annual growth in nominal (i.e., not adjusted for inflation) economic output, with a floor provision that guarantees a minimum increase of 3% per year, regardless of how well the economy actually does.

This unilateral announcement caught many people off guard. Federal-provincial transfers have always been a sensitive and nuanced subject and new funding agreements typically come only after extensive, public, and often bitter negotiations between Ottawa and the provinces. Many people were just beginning to get geared up for the next round of talks, which now appear to have been cut off at the pass.

Reaction across the provinces to the new arrangement has been mixed. Alberta is strongly supportive, for reasons that I will discuss below, while BC and Saskatchewan are also largely in favour. In the rest of Canada, however, the backlash has been harsh. It being the Christmas season, “lump of coal” metaphors abound.

This backlash is rooted in the interpretation of a Conservative Party campaign promise during the last election; several provinces had expected the 6% escalator to be maintained over the entirety of the new funding arrangement. Tying federal transfers to economic output will almost certainly result in slower growth in health transfers beginning in 2017-2018.

How much slower is anyone’s guess at this point. However, historical data suggest that nominal economic growth in Canada has actually been quite consistent over the long term, averaging 4.2% over the past 10 years, 4.7% over the past 15 years and 4.5% over the past 20 years. Assuming growth at the low end of that range (4.2%) over the duration of the new plan, total federal health transfers to the provinces can be expected to increase from about $30 billion in 2013-2014 to about $47.7 billion in 2023-2024. Had the 6% escalator remained in place, transfers would have reached $53.7 billion.

As I hinted at above, Alberta is the clear winner under this new funding arrangement. One of the less-publicized changes it will bring is that cash transfers for health care will be distributed across the provinces on an equal-per-capita basis. At present, this is not the case. The history and complexities of federal transfers are too complicated to get into here, but the end result is that wealthy provinces (with strong tax bases) currently receive less cash per person from the federal government for health care than poorer provinces. Since Alberta is by far the wealthiest, it receives far less on a per-capita basis than the other provinces.

When the new funding arrangement comes into effect, there will be a large increase in per-capita cash transfers to Alberta in order for it to reach the same level as the other provinces. This change is bound to be controversial. Alberta is already the richest province in Canada. For it to receive a perceived “windfall” of cash may not sit well with some provinces, especially since the increase in payments to Alberta will, by definition, come at the expense of increases to other provinces (because all funds come out of a fixed pool).

One thing is for certain; after a few quiet years, fiscal federalism and issues about federal-provincial transfers suddenly are back in the public policy spotlight. We will be writing more on these subjects in the months ahead.

By: Dr. Roger Gibbins

Throughout 2011, Canadians took comfort in the fact that as the world around them seemed to go to hell in a hand basket, life was pretty good here at home. Although the Canadian economy sagged a bit, it held up well by comparison with our major trading partners. Stock markets rebounded, employment did not plummet, and across western Canada there was real economic growth and widespread prosperity.

Unlike the political deadlock and acrimony that has become increasingly characteristic of political life south of the border, Canadian governments enjoyed reasonably strong electoral support and, for better or for worse, we have been freed from the paralysis of minority governments in Ottawa. All in all, 2011 goes down as a pretty good year for Canada admidst a general international environment of uncertainty and unease.

Nonetheless, it is difficult to look forward to 2012 with anything close to unbridled optimism. Economic and political conditions in the United States, still our major market for virtually anything we produce, are unlikely to improve as Americans lurch toward the November elections. Economic conditions in Europe remain grave. Closer to home, western Canadians face huge challenges in moving resource assets to new international markets while at the same time, American markets are soft and/or overflowing with conventional Canadian products such as natural gas.

So often western Canadians believe that we have the resources the world needs, and assume the world will beat a path to our doors. Quite understandably, resource wealth breeds complacency. Increasingly, however, we realize that we will have to do much of the beating, that our competitors are many and often better positioned geographically, and that the barriers to international market access are challenging in the extreme. Being resource rich in the absence of markets is not a recipe for sustainable prosperity.

In 2012, Canadians from across the country will also have to come to grips with growing regional imbalances within the national economy, and how these play out through the frameworks of fiscal federalism and in a period of growing financial constraints for all governments—federal, provincial and municipal. On balance, western Canadians are doing very well, but how do we reconcile regional prosperity here with more disadvantaged regions of the country? How do we ensure that regional economic strength is encouraged as a national asset, and not seen as a target?

None of this means that Canadians should be fearful when looking ahead to 2012. At the same time, we will face some truly intimidating policy and political challenges as we try to re-jig the Canadian federal system and national economy to meet unstable and rapidly changing global conditions. The upcoming year will not be a time for the faint of heart, or a time for complacency. But then, to quote the last words of Australian bushwhacker Ned Kelly as he stood on the scaffold, such is life. Or, in the more current vernacular, bring it on!

On behalf of the Foundation, I would like to wish you all the best for the holidays. Thank you for your engagement over the past year. As 2012 approaches, we look forward to continuing our work as the only think tank dedicated to being the objective, nonpartisan voice for issues of vital concern to western Canadians.

By: Roslyn Kunin

Any reporter knows that if you can get the answers to six questions, you have a story. The questions are Who? What? Where? When? Why? And How?

The biggest economic story that is likely to affect all parts of Canada as we move out of 2011 and into 2012 is not within Canada. Nor is it in Asia, the source of much of global economic growth. It is not in Africa which we should be starting to watch as that continent begins to exhibit growth patterns similar to those in China and India of a few decades ago.

The story concerns the very precarious financial situation in Europe and the on-going, increasingly desperate attempts to ameliorate things or at least generate enough stability to avoid conditions becoming any worse.

So far, we have answered the “what” and the “where” questions. The “when” is now. The “why” is generating growing concern among both political and business leaders and informed citizens. Failure to put Europe back on a secure financial footing could spell the end of the euro as a widespread and growing common currency. It could threaten the European common market and the resulting free trade and mobility. The simple uncertainty of the situation could generate economic retraction in Europe, which could then spread to the rest of the world.

This has led the political leaders in Europe to earnestly seek out “how” to avoid these dire consequences. Greece and Italy have positioned unelected technocrats as heads of their governments, hoping they will be able to find and implement the tough answers needed.

An almost continuous series of summit meetings has been held, featuring Nicolas Sarkozy of France and Angela Merkel of Germany, each meeting seeming to lead only to the next summit meeting. The latest meeting did result in some more specific proposals, including a tax on financial transactions.

Already Britain and others in Europe are stepping back from this potential solution. Nevertheless, the situation is serious enough that this proposal just might work. Merkel has already stated progress could be made even if not all countries choose to participate.

However, there is still one very important unanswered question. The current proposal, and indeed any solution, will involve imposing fiscal and monetary requirements on individual countries. Rules will be set and penalties specified for breaking those rules. The big remaining question is “who” will apply and enforce these rules and penalties?

Europe and the euro zone have always had rules. They were often broken. If previously established deficit limits had been adhered to, Europe would not be in its current mess. So putting in place more rules that will intrude even more deeply into national sovereignty and expecting them to work requires a leap of faith. Unless, and until, there is an agreed upon body with both power and widespread consensual support, an effective solution to the European problem will remain elusive.