On policy durability

Doug Ford has been premier of Ontario for roughly a month, and already his legislative changes are creating a policy U-turn on many fronts. Cap and trade: cancelled. Green spending programs: gone. Some 758 renewable energy contracts: poof. What’s noteworthy in these changes is not that they’ve happened—Ford did campaign on doing as such—but in how the power of the Crown is being invoked to limit the rights of business to seek compensation. Ontario’s Bill 2 and 4 go above and beyond the standard ebb and flow of government transitions. They include legislation that retroactively revokes the rights of firms to seek compensation from government action. It is not only unjust, it introduces a costly uncertainty for future investment. Why does this matter? The obvious reason is the chill such strong-arm tactics impose on future investment. Any firm considering an investment or commitment with the Ontario government now has to question whether their contract will be torn up when the next election comes around. Investors often have notoriously short horizons, but four years is a difficult hurdle to achieve. The result: more costs to Ontarians in the long run. Moreover, policy incentives will be ineffective if firms and individuals do not believe in their durability. Why would an oil sands facility make large capital investments to improve its emission intensity and thus pay less under the revamped carbon competitiveness regulation, only to see a new government revert to the largely ineffective and inferior specified gas emitters regulation, where dirtier facilities receive more allowances? Returns predicated on the former will be uneconomic under the latter. Policy uncertainty, or more specifically, policy U-turns, have both economic and environmental costs. How to make policy durable? In short, building constituencies. Look, no one likes taxes. The scorched earth campaigns against carbon taxes are a great example of that. But if we are serious about taking climate action, then leaving decisions to millions of individuals and firms to make choices that are best suited for them, taking into account their cost of emitting, is the most cost-effective way to do so. But it’s a tax. And its visibility is both its feature and its bug. But rather than opting to “scrap the tax” and necessarily make climate action more costly, building constituencies speaks to focussing on how the revenue from such a tax is used in a way that considers efficiency and equity, but also policy durability. Efficiency arguments favour using the revenue to reduce income taxes. Tax more of the “bad”, less of the “good”. Equity favours targeted lump-sum transfers to lower income or those more heavily burdened by the imposition of carbon taxes as a share of their income, such as rural families. Durability, however, recognizes that sacrifices to efficiency and equity ideals are often necessary to build policy that lasts. Rather than targeted transfers, universal lump-sum transfers, such as those espoused by a fee-and-dividend model, provide money back to all households, blunting arguments that carbon taxes are simply stealth redistribution. If different levels of redistribution or social transfers are desired, they can always be dealt with outside carbon policy. And to the extent carbon taxes increase distortions from income taxes, there is nothing stopping an efficient tax shift from income to sales outside carbon policy. In terms of renewables, downloading accountability and ownership to community levels ensures the benefits, and the removal of them, are felt by constituents that retain an interest in policy durability. For policy to be effective, it needs to withstand the whims of election cycles. No doubt there will be changes in direction—that is, after all, what voters are asking for when electing a new government. But legislating away rights of firms has serious consequences to investment and economic activity and long term environmental harm. In an increasingly polarized world, policymakers need to pay special attention to durability, in addition to their efficiency and equity criteria, to design policy that stands the test of time. Blake Shaffer is an energy policy fellow at the C.D. Howe Institute and Fulbright Scholar at Stanford University where his research focuses on strategic climate policy. He holds a PhD in economics from the University of Calgary. Disclosure: Dr. Shaffer provided paid and unpaid advice to the Alberta government on output-based allocations and other aspects of climate and energy policy from 2015 to 2018. The Hill Times