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Canada Needs A Bottom-Up, Market-Driven Climate Change Plan

02/10/2016 04:05 EST | Updated 02/10/2017 05:12 EST
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Cork, Ireland

Sean Speer is a senior fellow at the Macdonald-Laurier Institute and a co-author of the recent paper, From a Mandate for Change to a Plan to Govern: A Reasoned Approach to the Climate and the Economy.

The climate change file is a hot topic and not just because it's been a balmy winter. Speculation is that the prime minister will soon meet the premiers to discuss a new national climate change policy. It'll be the first opportunity for the federal government to set out its vision of a "pan-Canadian framework for combating climate change."

Climate change poses a real cost to the economy in both the short and long run.

Cue the inflated rhetoric. One newspaper has editorialized that the government must be ready and "willing to inflict some pain on Canadians" as part of an effective climate change policy. A climate change advocate has mused that the former prime minister should be jailed for his perceived indifference to the issue. And, of course, Leonardo DiCaprio has hectored us for developing our natural resources at the expense of the "future of humanity."

Pain, prisons, and the future of humanity will hopefully not be on the agenda of the first ministers meeting. The goal should be a reasoned discussion about the short- and long-term costs of climate change and the policies that can limit them.

There are no mainstream voices that contest the science of climate change or present government inaction as a credible policy response. Climate change poses a real cost to the economy in both the short and long run. The magnitude of these costs is a source of debate but the new government is right to be concerned about its risks and ready to act to mitigate them.

But the prime minister and the premiers must also recognize that policies to curb emissions also impose costs. As an IMF report has put it: "The macroeconomic consequences of policies to abate climate change can be immediate and wide-ranging, particularly when these policies are not designed carefully."

This should hardly be controversial. The intent of these policies is to influence personal and industrial decision-making with respect to carbon usage. Discouraging the use of high-carbon technologies, products, and production processes is not an inadvertent outcome of climate change abatement policies. It's the principal goal.

Herein lies the challenge: Deciding which policies are likely to limit global warming's negative effects at the lowest cost in terms of economic output.

It doesn't make for a good soundbite or a simple solution. Finding the right policy will require trial and error, and a general humbleness rather than sweeping or costly reform. Government should acknowledge the risk of man-made climate change, but it should be cautious about the prospects of top-down, command-and-control solutions.

Instead, it should focus on creating the conditions for bottom-up, market-driven technological innovation. A pro-innovation agenda with respect to climate change is composed of the same basic policies for other sectors, including competitive taxation, strong intellectual property protection and a sensible regulatory regime, investments in human capital, and high-quality infrastructure. Government has a key enabling role for the next big idea to address climate change but it will almost certainly be conceived in a university laboratory or a business facility and not a bureaucratic office.

This means being leery about state-directed investments in so-called green technologies. Government has a poor record of picking winners and losers in the marketplace. Consider the experience with federal biofuels subsidies or the Ontario government's costly Green Energy Act. It also means that any carbon pricing policy must be carefully designed so as to avoid interprovincial barriers to investment and commerce, or the imposition of stifling new taxes in the name of climate change. Sensible carbon pricing policy isn't oxymoronic but it must be revenue neutral in the form of corresponding tax cuts for individuals and businesses.

This is not to discourage the government from making climate change a top priority. But it's a reminder that the appropriate response is a level-headed solution that assesses the risks and trade-offs. If the federal government goes into its meetings with the provinces with this reality in mind, it will be that much closer to achieving a plan that sees Canada contribute to combating climate change while ensuring continued prosperity for Canadians.

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