Canada’s biofuels program is too costly to keep

Low-cost carbon pricing gets more bang for the buck, say Mel Cappe, Glen Hodgson and Christopher Ragan.

As members of Canada’s Ecofiscal Commission, we are pleased to see the growing national momentum for carbon pricing. Governments across this country are increasingly willing to implement policies that realistically promise a significant decline in greenhouse gas emissions.

Some people may be surprised to learn that we also favour the elimination of some “green” policies because some, while modestly successful in improving the environment, achieve their outcomes at too high a cost.

We can only improve the environment and the economy together if policies are smart. With sluggish economic growth, we can’t afford to be cavalier about the sources of Canadians’ economic prosperity. We need to encourage governments to design policies that offer environmental gains at the lowest possible economic cost.

A new report from the Ecofiscal Commission argues that current federal and provincial biofuel policies fail this crucial test. These policies have led to small reductions in emissions at an unnecessarily high economic cost.

What are biofuels and what are the current policies doing?

Biofuels are made from renewable biomass, and they are blended with gasoline and diesel to reduce the overall carbon content of transportation fuels. For the past decade or so, governments across Canada have been encouraging the production and use of biofuels. On the supply side, governments provide direct cash subsidies to producers, financed by taxpayers. On the demand side, governments mandate fuel distributors to blend their gasoline and diesel with ethanol and biodiesel, respectively; since biofuels are more costly than fossil fuels, these mandates have increased consumer prices.

These biofuel policies have reduced greenhouse gas emissions by an estimated three megatonnes per year. The reason is straightforward: for every litre of low-carbon biofuels used, a similar amount of high-carbon fuel is displaced. Canada currently produces about 730 megatonnes of emissions, so this reduction is not huge. While every bit counts, the important thing is to determine the cost of these reductions.

The Ecofiscal report estimates the cost to taxpayers of the production subsidies and the cost of being required to use more expensive fuel blends. Over the 2012 to 2015 period, the average fiscal-plus-consumer cost in Canada was $640 million per year.

The best way to think about this number is in terms of the dollars spent per tonne of greenhouse gases reduced. For the production and use of ethanol, the emissions reductions come at an average cost of roughly $180 per tonne; for biodiesel, the average cost is about $145 per tonne.

The next question is whether these costs are a lot or a little to pay for reducing a tonne of emissions. The only way to really answer this question is by comparing these costs to those incurred by alternative policies. But which alternatives should be considered?

The obvious choice is the emerging countrywide carbon price, which after the federal government’s recent announcement, is coming sooner than once thought. Current estimates show that British Columbia’s carbon tax, currently at $30 per tonne, can reduce emissions at an average per-tonne cost of just over $28. The estimates from Ontario and Quebec, which will soon have economywide carbon prices of about $17 per tonne, would likely be commensurately lower.

Emissions reductions from carbon pricing therefore cost only a small fraction of the highcost reductions that come from our existing biofuel policies. With low-cost carbon pricing soon to be available in all parts of the country, why would we continue using higher-cost policies?

Reducing greenhouse gas emissions is obviously a good idea, but the requirement that our policies have low economic costs is too important to be ignored. Rather than using high-cost policies to promote the production and use of biofuels, governments can rely on a rising carbon price for a more effective and low-cost approach. Mel Cappe is a professor in the School of Public Policy and Governance at the University of Toronto. Glen Hodgson is a Senior Fellow at the Conference Board of Canada. Christopher Ragan is an associate professor of economics at McGill University.