Tuesday, August 22, 2006

Ignatieff's Environmental Policy Part I: Internalizing the Externality

In Tuesday's National Post coverage of Ignatieff's climate change plan, I found a lovely quote which, despite its inaccuracy, gives me great hope about the direction that Canadian politics will hopefully soon take. In analyzing Ignatieff's proposal, Darrell Bricker of Ipsos Reid notes that the plan may be good public policy, but political suicide.

Now, I don't think the plan is political suicide. I think Ignatieff is correct when he asserts that Canadians are increasingly environmentally conscious, as indicated both by the rapid growth of the Green Party as well as growing perceptions of the importance of environmental problems among the public as large. The success of Dion's candidacy thus far is also partially a testament to the importance of environmental issues; environmental concerns were one of Dion's three pillars, and they were probably (at least in the early part of the campaign) his strongest pillar. Thus, I don't think it's political suicide at all, and I think having a credible environmental plan is absolutely necessary.

But let's accept for a moment the idea that Bricker is correct; let's suppose that this plan is better policy than politics. In that case, kudos to Ignatieff. Society has been borrowing against itself for generations in a number of ways: environmental degradation, massive deficit spending, unsustainable development, to name a few. And while the curbing of such vices is seldom popular, it is absolutely necessary.

There will be no environmental plan which draws no criticism from a large portion of Canadians, because any plan will impose costs on Canadians in one form or another. They may restrict consumption, put higher costs on producers (either in taxes or in regulation), or tax consumers, but in one form or another, they will hurt one group of society, at least in the short term. But in the long term, strong environmental policies are absolutely necessary, and to not support policies which may sting in the short term is like taking a slow-acting suicide pill: it will kill you eventually, and by the time you want to do something about it, there's nothing you can do.

So, having made the case for why we need a strong environmental policy, what do I think about Ignatieff's plan in particular.

Quite frankly, I like it. Those who have read my blog since its beginning may have noticed the occasional tidbits of economic jargon; indeed, I like to frame things in those terms. And here's a situation where a very important economic term will pop up: externalities.

Externalities are the costs and benefits which impact third parties. Taxes need to be the mechanism used to internalize these externalities.

When I drive my gigantic SUV down the 401, I'm polluting the atmosphere. Unfortunately, while I've paid for the cost of the car and the gas, I'm not paying for the damage I'm doing to the environment. Why? There's no enforcement mechanism which can make me pay. If there's no enforcement mechanism not to pollute, then I have no reason not to, because my own contribution to global pollution is minimal. But clearly, it's in everyone's interest to counter pollution.

What environmental policy needs to do is internalize the externality: make people accountable for the pollution they produce. A significant portion of Ignatieff's proposal is to rework taxes on gasoline, such that cleaner fuels are relatively cheaper, thus creating an incentive to use them. By making people pay more for fuels that create more pollution, we cause them to take economic ownership of the pollution: we internalize the externality. This is exactly what we should be doing, as it creates incentives for consumers to consume cleaner gases, which in turn creates incentives for producers to research and create cleaner gases.

Considering the portion of Canada's greenhouse emissions which come from transportation, the development of incentive structures to cope with emissions in this field is a major development.

And something as simple as a tax on SUVs in not enough. This may discourage the usage of SUVs and internalize the costs of operating an SUV, but it provides no incentive for greater R&D into more environmental efficient fuels for all. It's a step in the right direction, but much more limited.

More on this later...


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