Want fewer emissions? Subsidize industry less

The Energy Sector Management group at HEC Montreal recently came out with a report showing that industrial greenhouse gas emissions (GHGs) due to energy consumption in Quebec had fallen only three per cent between 1990 and 2020. Seeing this as a disappointing performance, pundits and politicians have called for more government interventions on top of those that already exist.

But the report offers a clue that this disappointing performance may itself be due to too much government meddling in the economy, not a lack of it.

There's an obvious builtin incentive to cut GHG emissions tied to energy consumption: finding more energy-efficient production methods means lower costs for firms and thus more profits. Which is why emissions are actually falling in most sectors. For example, they're down 52 per cent in pulp and paper and 33 per cent in manufacturing, while in construction they're stable. In chemical products, it's true, they're up — but from a very low starting point.

There are two notable exceptions, however: in agriculture, emissions are up 12 per cent and in steel, 13 per cent, with both seeing large increases in GHG emissions related to energy consumption. Both these industries are heavily subsidized and protected from competition by the provincial and federal governments. And when you subsidize something, you get more of it. You also numb the incentives to cut costs and improve efficiency, as managers devote more of their time and effort to convincing politicians to dole out special privileges.

Since the 1960s, Quebec's steel industry has been the recipient of important provincial government largesse. In fact, in 1968, the government created a Crown corporation for steelmaking (Sidbec), which it privatized in 1994 because of the high cost of subsidizing production. Even after privatization, however, the government continued to offer tax credits and direct subsidies.

The agricultural sector is and always has been heavily subsidized. Special provincial tax credits, direct subsidies, tariffs and price supports abound. This is on top of federal support. As a result, many more farms remain in existence, even though consolidation and opening up to foreign trade would reduce food prices for Canadian consumers. If these governmental aids to agriculture were removed, many less efficient farms would close or perhaps be absorbed in larger, more efficient farms. Millions of acres could return to forest. As forests expanded GHGs would be sequestered, thereby reducing Canada's net emissions — a result consistent with the literature showing that agricultural liberalization (notably the elimination of subsidies) has a strong potential to reduce GHG emissions (conditional on how liberalization is enacted).

These examples speak to how governments are better at creating environmental problems than solving them. The two above-mentioned sectors have been heavily subsidized for decades. How much lower would GHG emissions be today if they had never been subsidized?

When people express concern about environmental issues, they speak to the idea that there's a cost to economic activity that's imposed on citizens. Polluters, on the other hand, do not pay that cost so they do more of the activity that has a cost for everyone else but them. Proposed remedies such as carbon taxes are meant to reduce that cost.

The flawed assumption is that government intervention can only reduce this cost. Wrong. If the government subsidizes GHG emissions, they will increase. Before imposing taxes on carbon, governments might adopt a “first, do no harm” strategy and stop providing subsidies and other aids to industry.

Pundits who claim that more government action is needed to deal with GHG emissions are wrong. Curtailing the state's involvement in the economy might be a better option. After all, why should we trust the pyromaniac to stop a fire?

FINDING MORE ENERGY-EFFICIENT PRODUCTION METHODS MEANS LOWER COSTS FOR FIRMS.