WHAT DOES YOUR CLIMATE POLICY COST?

Last month's Swiss referendum on climate change and other environmental policies has received little attention in Canada — even though, as the BBC reported, “it was a huge shock.” The Swiss, stereotypically concerned about the beauty of their Alpine environment, rejected their government's proposals to fulfil a 2015 commitment to reduce 1990 emission levels by 50 per cent by 2030.

So far, Switzerland has reduced its GHG emissions by 15 per cent from 53.8 MT (megatonnes) in 1990 to 45.8 MT in 2020. They still have a long way to go to reach their 2030 target of 28 MT, a target now much harder to hit given the referendum's rejection of proposed climate policies.

The Swiss are devoted to direct democracy. If at least 50,000 citizens sign a petition or eight cantons request it, any federal law is subject to a national referendum. The climate referendum, based on a law passed by the Swiss Assembly that included levies on fuel and airline tickets, was rejected by 51.6 per cent of voters. Two other environmental proposals to outlaw artificial pesticides and provide subsidies to farmers using fewer chemicals were rejected by fully 61 per cent of voters. Voters didn't veto everything: referenda on COVID relief and police hiring to counter terrorism got strong support.

All parties except the People's Party backed the new climate measures so why did the Swiss reject it? As Bill Clinton would say “it's the economy, stupid.” Voters were concerned about economic recovery in a world in which Switzerland is responsible for only 0.1 per cent of greenhouse gas emissions.

The Swiss vote should be a sharp reminder to governments that climate policies that are or are believed to be costly can stoke voter anger. We saw that in Ontario in 2018 when the governing Liberals were turfed from office by concern over high utility bills. Despite implementing various cost-reduction measures the Wynne government was saddled with expensive sole-sourced contracts for wind and solar electricity awarded by the McGuinty government. Those subsidies were put on the backs of Ontario ratepayers who saw their electricity bills jump even after the sharp decline in energy prices after 2014.

Canadians generally say they support climate-change policies. Whether they support policies that could make economic recovery more difficult is not so clear. Economists have long argued that the least-cost way to reduce GHG emissions is to put a price on them, with either a carbon tax or a cap-andtrade system. In a 2008 paper, Simon Fraser's Nancy Olewiler and I proposed a broad-based carbon levy in large part to pre-empt costly command-and-control regulatory and subsidy policies.

Governments generally do not understand and certainly cannot predict the evolution of technology so should not try to pick the “winning” technologies themselves. They should instead put a price on environmental damage and let the market best figure out how to reduce it.

That is not happening today. We are getting carbon pricing — $170 per tonne by 2030, well above the US$75 floor proposed by IMF staff for 2030 carbon prices in advanced economies. But the federal government also has a full catalogue of regulations and subsidies, each with its own price tag. These include clean fuel standards, electric-vehicle subsidies, carbon capture and storage tax credits, corporate tax rate reductions for zero-emission technologies, building retrofit subsidies, and so on. Budget 2021 alone lists over 35 measures costing $8.75 billion over the next five years. That money is no longer available to fund health care or reduce taxes.

But those 35 measures are just the tip of a massive iceberg. Every provincial and municipal government has its own regulations and is adding to them almost constantly. Worldwide, the energy transition will cost trillions of dollars — perhaps as much as five per cent of global GDP, according to the International Renewable Energy Agency. Investors in new green technologies are not the only ones licking their chops. So is the financial sector, which will benefit immensely from funding new infrastructure.

Someone will have to pick up the tab for all this, either with higher prices or new taxes. Giant food companies recently committed to various environmentally friendly policies with the expectation that costs can be shifted forward to consumers through higher prices. Regulations such as the clean fuel standard will be costly to administer, resulting in higher energy costs. Electric cars damage roads so with falling fuel taxes, new revenue sources will be needed to fund highways and bridges. Highly indebted governments will eventually need to go beyond the already heavily taxed rich to reach into the pockets of the broader electorate to pay for all the commitments they have made.

One question no government seems to be asking at the moment is: “what is the most cost-efficient path to achieve a target?” If federal, provincial and municipal politicians continue to duck this question, the public may be in a rude shock as inflation and higher taxes crimp everyone's budget. Voters will wonder why they are paying for an energy transition to avoid emissions that come mainly from China and other countries whose policies do not address emissions for at least a decade. This is the sort of thing that leads to a Swiss-type democratic backlash towards carbon policies.

We might be having a federal election this fall in Canada. If so, each party leader should be asked how he or she will achieve climate change objectives at the least cost? If they don't have an answer, we should not let them run our government.

CLIMATE POLICIES THAT ARE OR ARE BELIEVED TO BE COSTLY CAN STOKE VOTER ANGER.