By Nick Martin
Published in the Hill Times

December 20, 2017

Say you need a new car, so you head to the closest dealership. The salesperson shows you a car with a price that makes your jaw drop—$350,000. Sensing your apprehension, the salesperson shows you the dealership’s cheapest model at only $200,000.

You’re not a multi-millionaire, but you live far from your work, with no alternative transit options, and must have a car to get there. So what do you do? Take out a second mortgage, cash out your retirement savings, and buy the $200,000 car?

Of course not. You leave the Ferrari dealership and head to a reputable and affordable lot down the road.

Climate policy is a lot like buying a car.

We must act to mitigate the harmful damages of climate change, just like you must buy a new car to get to work. But we also don’t want to overspend in our efforts to achieve these goals. Nor should we buy a car just because it’s the cheapest one on the lot. We should look at all our options to get what we need most cost-effectively—whether it’s getting to work on time everyday or avoiding catastrophic climate change.

Achieving our climate goals at the lowest possible cost is not a new idea, but we’re still trying to get it right. Every economist will tell you an explicit price on carbon is the best way to achieve emission reductions at the lowest cost. And they are right—except when they’re not. Sometimes carbon prices do not work because some emissions are difficult to quantify and therefore price. Sometimes they don’t work because of other market failures such as monopoly power or incomplete information.

Canada is shopping at the right car lot. Most Canadians already live in a province with an explicit carbon price, and the federal carbon price floor begins next year.

We need to reduce tailpipe emissions from our cars and trucks—but should the government mandate everyone buy an electric vehicle? We need to reduce smokestack emissions from our electric grid—but should the government mandate 100 per cent solar and wind power? Of course not. By pricing carbon in the transportation and electric sectors, Canada is letting the market decide the best way to reduce emissions—instead of picking the winner from the start.

But now it’s time to make sure our other climate policies align with and complement the benefits of a carbon price, because it can be very expensive when we don’t.

As an example, the Ecofiscal Commission estimates that Quebec’s Drive Electric program, which provides rebates up to $8,000 for electric and hybrid vehicles, reduces carbon emissions at a cost of $395 per tonne—nearly eight times more expensive than the 2022 federal carbon tax floor. In this case, Quebec forgot to leave the Ferrari dealership. Electric vehicles will certainly be part of the overall climate solution, but there are better ways to reduce emissions with tax payer money.

Yet there are areas where a carbon price might not suffice.

A good place to start would be in Alberta and Saskatchewan, which both rely heavily on fossil fuels for electricity. To drive emission reductions in this sector, both provinces have almost exclusively focused the development of in-province low-emitting resources. Yet to the east and west of these provinces are neighbours with plentiful carbon-free electricity. Maybe going it alone is the most cost-effective solution, or maybe Alberta and Saskatchewan would be better served with carbon-free hydro power from British Columbia and Manitoba to reduce reliance on fossil fuels and help integrate more intermittent renewable resources.

Policy should be flexible enough to consider these and any other options for decarbonizing the grid. Since electric grids do not lend themselves to free markets easily, the Western provinces would be smart to look at the mutual benefits of a more integrated electricity grid and make policy that encourages more interprovincial electricity trade. The federal government can play a role in helping fund beneficial infrastructure that enables this trade.

We need to be sure we are looking not just at cars we cannot afford, but at all options to get what we need as cost-effectively as possible.

Nick Martin is a policy analyst at the Canada West Foundation