Dealing with Climate Change, the Economy and Jobs

The David Suzuki Foundation and the Pembina Institute should be thanked for their efforts to put forward an integrated economic and emissions reduction strategy for Canada. The study was done to their specifications by M.K. Jaccard and Associates.

http://www.davidsuzuki.org/latestnews/dsfnews10290901.asp

The really important bottom line of this study is that aggressive action to deal seriously with the challenge of climate change would be pretty close to a wash in economic terms. Hitting the ambitious target of reducing Canadian emissions to 25% below 1990 levels by 2020 – the science-based target supported by most people who take this critical issue seriously – would reduce 2020 GDP by a modest 3.2% compared to a business as usual scenario, and would yield a very slight increase total employment. (The study also models the less ambitious government targets which have emissions and economic impacts  somewhere between doing nothing, and doing what we should be doing.)

Media reaction to the report focused on the much bigger negative impacts on Alberta and, to a lesser extent, Saskatchewan.  To my mind, it hardly comes as news that dealing seriously with climate change will constrain the growth of the primary oil and gas sector and, by extension, those two provincial economies. Hysteria in right- wing quarters simply underlined that the real strategy is to do nothing, since the relative regional impacts of the government target are little different, albeit at a lower level.

The report should set the stage for an adult discussion on which combinations of economic and emissions reduction strategies are most effective.

I am in no position to double guess the emissions reductions which come out of Jaccard’s model, and assume them to be broadly credible. They echo scenarios which have been put out by the National Round Table on the Environemnt and Economy among others.

What drives change in this scenario is a big  hike in carbon prices (from a starting $50 per tonne in 2010 to a very high $200 per tonne in 2020) – either in the form of cap and trade with auctioning of permits, or a carbon tax.  Most of the emissions reduction come in the form of  adjustments to major relative price changes which force greater energy efficiency and a shift to renewables.  On top of that, some major regulatory changes are made (to building codes and to vehicle and appliance efficiency standards) and carbon capture and storage is imposed after a slight delay on all new tar sands operations, coal fired power etc. The large revenues from the carbon tax are recycled into some increase in government revenues to offset losses in other tax revenues; some increase in public investments; and a large cut to personal income taxes.

Progressive economists will wince at many of the terms of the neo classical economic model which kicks out the results. Lower investment in the oil and gas sector is magically assumed to be balanced off  by new investment elsewhere, since national investment always equals national savings.  The lack of a significant impact upon employment arises, not just from the fact that we are shifting from capital to more labour intensive forms of energy, but also because the labour market is assumed to clear through lower wages. (Hourly wages fall by a hefty 10% in Alberta, though by much less elsewhere.)

Digging into the details does suggest some rather large negative impacts on jobs in a few sectors, notably mining, smelting, the petroleum industry, industrial minerals and paper. Unfortuately, there are no details of where significant employment gains would take place, and no resources are provided for Just Transition measures which would aid the magic of the market in shifting workers seamlessly between jobs.

It turns out that a big chunk of the economic/jobs  offset to the hit of a big increase in carbon prices comes in the form of big cuts to personal income taxes. Of the $72 Billion in revenues from carbon taxes in 2020, $33 Billion are recycled into personal income tax cuts.  True, this is done after the public sector has been compensated for lower revenues from other sources, but progressive economists would question the model’s assumption that this is the best way to recycle revenues.

Of the $72 Billion in carbon tax revenues in 2020, $33 Billion go to personal income tax cuts (if the kind of cut is specified, I couldn’t find it); a very small $1.8 Billion goes to help industries adjust to the energy price shock; a rather large $6 Billion gores to buy international emissions reductions (since we can’t do it all at home); $7 Billion goes to cushion households against increased home heating costs; and $10.1 Billion goes to public investments to secure emissions reductions.

These public investments seem well chosen. A total of  $14 Billion over the years 2010 to 2020 goes to investments in smart electricity grids and new transmission lines, including a bigger Ontario- Quebec link. And a big $77 Billion pver 10 years goes to greatly expand public transit and inter city rail infrastructure, enough to significantly boost use of transit in particular.

It would have been really, really useful if the study had gone beyond the overall conclusion of no negative impact on jobs overall, to telling us in some detail about the positive jobs impact of these initatives. It would also have been good to know about the job impacts of the assumed, market-driven increases in construction due to residential and commercial building retrofits and construction to much higher standards, not to mention new jobs in renewable energy development.

My major quibble would be to suggest that we would have a much greater impact on jobs if we recycled the carbon tax revenues into support for public and targeted private investments in a new green economy.  I’m a bit skeptical that the market will do it all, and other economic models (eg that of Informetrica) would show higher employment and economic growth from an increase in investment as opposed to increasing consumption via personal income tax cuts.

To my mind, the shift that has to be made will require major changes in industrial, trade and labour market policies,  which are completely outside the world of the Jaccard model.

Still – thanks to the lead organizations for giving us something useful to discuss and perhaps improve upon.

4 comments

  • To be consistent I would argue that the decrease in wages is not going to increase employment to the magnitude the study argues.

  • When I read this study, I did indeed wince at the assumption that investment lost in carbon-intensive industries will automatically be offset by precisely equivalent investment gains in other industries.

    By positing a fixed amount of investment in Canada regardless of climate policy, the study ignores the threat that carbon-intensive industries will relocate to other countries that choose not to regulate emissions.

    We should be discussing policy responses to carbon leakage, rather than assuming away this problem.

  • I’ve done a few posts, like this one (http://www.progressive-economics.ca/2008/06/27/modeling-bcs-emissions-reductions/) on Jaccard’s modelling. The main problem is that his is the only game in town, I mean the country. Which is why his results for Suzuki/Pembina look a lot like the results for the NRTEE – same model.

    That said, I did have a chance to get trained on using the model this summer, though have not had a chance to do anything with it. Given the complexities involved it is quite useful, largely based on capital stock turnover at various points in time and how those decisions get shaped by a rising carbon price. It assumes the world of tomorrow looks a lot like the world today but with technologies that do not emit, or emit a whole lot less, GHGs.

    The model is constrained from the perspective of major structural changes, ie “smart growth” policies of densification around transit hubs and ensuring greater walk/bike/transit to work, public and private services and amenities. But this means that climate policies could be more aggressive that what we see in the model.

  • Marc, I forget what exactly Mark Jaccard calls his model, but is there any publicly available description of it?

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