Carbon Price Won’t Suffice to Drive Green Transition, Smart Prosperity Argues

A research associate with Ottawa’s Smart Prosperity Institute is taking aim at the curious notion that a carbon price will be enough to push Canada’s economy onto a low-carbon path, without a boost from green stimulus spending.

“That argument is wrong,” McNally states, in a June 2 post on the Smart Prosperity website. “It misunderstands the current crisis and ignores the realities on the ground. We are not fighting climate change in normal times, we are trying to advance a net-zero transition during an economic meltdown.”

The backdrop to the discussion is an economy that “has ground to a virtual halt” in the pandemic, McNally writes, with more than three million jobs lost in April and May. That harsh reality means that “Canada will need stimulus spending, and it should drive investment and jobs in green opportunities. Policy-makers should also recognize that carbon taxes are no replacement for green stimulus when it comes to supporting a net-zero transition in exceptionally unpredictable times.”

Even if Canada had a clear path to that recovery, the realities of open borders, international supply chains, and social distancing make an economic recovery complicated, he explains. “Viral outbreaks elsewhere, and reduced spending on services like tourism and entertainment, make any immediate rebound profoundly unlikely. The more likely outcome is a gradual decay of balance sheets and waves of private defaults. Without intervention, this could descend into a depression.”

Which points back to the “explicit aim of stimulus: to drive investment and create jobs. If that stimulus is green, then the whole point of green stimulus is to create jobs and drive market investment into low-carbon or environmentally-friendly solutions.  It may have a secondary benefit of reducing emissions, but that is not its primary aim.”

In contrast to a carbon price, whose purpose is “to support market investment in a low-carbon direction over the long run,” McNally adds, “stimulus is all about short-term public sector spending to drive growth. We can, and should, have both. But they each occupy a different space in a policy-maker’s toolkit, and support distinct objectives.”

That’s why “it is incorrect to say that carbon prices alone are enough to reduce emissions,” he concludes. “This is especially true in a crisis, partially due to the rebound effect that accompanies an economic recovery.” Recalling that global greenhouse gas emissions grew 6.1% in 2010, the year after the last global economic crash, he says the picture would have been very different if more than a small percentage of stimulus investments had been green.

But a decade later, things are rather more urgent. “We are getting ever closer to 2050, when the government has set a target for net-zero carbon emissions, and now face a reality where the infrastructure we build today has to be compatible with that world. If Canada fails to make the investments necessary to enable decarbonization to the pace and scale needed to meet targets today, it will likely have lost its last chance to do so.”

Get the full details of McNally’s argument here.