A new study of 1,500 climate policies in 41 countries says subsidies don’t work, pricing emissions does. So why are we awash in subsidies?
JACK MINTZ
FINANCIAL POST
Tariffs are becoming a part of high-cost protectionist industrial policies purportedly aimed at curbing greenhouse gas emissions. Mimicking the U.S., Canada is imposing a 100-per cent tariff on imported Chinese electric vehicles and a 25-per cent tariff on Chinese aluminum and steel. Trade-busting tariffs are not the real problem, however. The real problem is the growing debacle in climate-focused industrial subsidies.
The Chinese are criticized for subsidizing EVs to grab global market share. China officially denies this in its response to the World Trade Organization’s regular review of its trade policy and the WTO has been unable to confirm or deny China’s position because financial information related to equity investments in its state-owned manufacturers is opaque. In the meantime, the U.S. and Canada, far from innocent in terms of subsidizing their own EV production, have retaliated with tariffs that will likely invite further Chinese retaliation. Tit for tat is just starting.
If Canadian and U.S. politicians really believed climate change is the “existential” threat they repeatedly say it is, they would welcome low-cost Chinese imports to encourage increasingly reluctant North American consumers to adopt EVs. Even better, Chinese subsidies for such cars would be a big saving for Canadian and American taxpayers. But it turns out climate policies are less existential — for politicians’ jobs, at least — than national security and employment protection.
Putting aside trade issues, a deeper question needs to be asked: Why have subsidies become so prevalent in supporting the energy transition? Aren’t other policies more effective, including carbon pricing, whether through emission trading systems or carbon taxes?
A new multi-authored study published last week in Science confirms that subsidies have been used far more frequently than carbon pricing but are far less effective in achieving GHG emission reductions. In a review of 1500 policies in 41 countries over the past quarter century, and after controlling for temperature changes, population, GDP and country factors, the authors found that only 63 interventions — just 4.2 per cent — had been successful. The study is unique and likely path-breaking for using machine learning to determine the effects of policies in combination rather than just one at a time.
In general, the authors find that a mix of policies is most successful in reducing GHG emissions. As they put it, “Some of the most widely used regulatory instruments and subsidy schemes may require complementary instruments to enable substantial emission reductions.” They argue, however, that in developed countries subsidies have not accounted for any of the 21 successful interventions. Combined with pricing, however, they have been effective in a third of the successes. On the other hand, pricing applied all on its own accounted for another 20 per cent of the 21 successful cases.
In developing economies, regulations were effective in a third of 42 successful cases. Combined with subsidies, pricing or information, regulation has been critical in two-thirds of these successful cases in these poorer countries.
While this is a pathbreaking study, it leaves two issues open. First, the analysis only focuses on emission reduction, not affordability or economic cost. A mix of policies might well be more effective in reducing emissions; on the other hand, economic, administrative and compliance costs may be higher when policies overlap. Further, the study evaluates effectiveness only in a two-year time span around a break in emissions. A policy’s impact could be greater over a longer interval. In a recent German paper, gradual increases in carbon prices result in a reduction in emissions of 19 to 23 per cent after 10 years.
So, if carbon emission trading systems and taxes work better than subsides, why don’t we see more of them compared to the ineffective trade-distorting subsidies so popular with our governments? Politics, obviously. Companies support climate change so long as a deep subsidy pool is available to make their investments profitable. A carbon tax reduces the cash flow available for investment, it doesn’t increase it. And if subsidies are deficit-financed, myopic voters may not care so long as they’re not on the hook to cover the costs. In the U.S., taxes are especially unpopular. And Congress hasn’t looked at a national emission trading system since one went down in flames back in 2010, in Barack Obama’s first term. Instead, the trillion-dollar taxpayer-funded subsidy scheme known as the “Inflation Reduction Act” has garnered the most political support.
In Canada, federal and provincial governments have used a mix of carbon pricing, regulations and subsidies. But uncontrolled spending on climate subsidies in one federal budget after another has strained public budgets. And the government that introduced the carbon tax seems not to really believe in it: what else explains the dozens of other climate policies it has brought in? Not surprisingly, many Canadians now see carbon taxation as just another contributor to inflation.
The same thing is happening elsewhere as governments pour out subsidies to support the energy transition. But these subsidies have unintended consequences. They create trade wars. They increase inequality by lining the pockets of stakeholders in subsidized businesses. And they lead to more investment in renewable and other projects that can in turn sell carbon credits to polluters. With a greater supply of such credits available, their price falls, which means large emitters can purchase credits at a lower cost, enabling them to emit more.
Voters should be concerned. Having busted government budgets, excessive climate subsidies are now starting a wasteful subsidy war. If the Science study is right, why are we all jumping off this subsidy cliff?
