A new course for Ontario

The Institute for Competitiveness and Prosperity (ICP) has just released a report on Ontario’s economic future, and it delivers a pretty simple and clear message: Ontario needs a kick in the pants.

Looking back at how the province has evolved economically since 2001, the ICP concludes that the province has failed to close what it refers to as its “prosperity gap” (measured as the difference in GDP per capita between the North American peer median and Ontario.) In its introduction, the report provides a pretty devastating assessment of the prosperity gap that continues to bedevil Ontario:

Ontario has not yet achieved what is needed to drive competition and business growth. As a result,the province continues to lag most of its North American peers in terms of economic output. Productivity growth, especially in manufacturing, pales in comparison with that of the United States. Lower levels of investment persist in productivity-enhancing tools, such as machinery and equipment (M&E) and information and communications technology (ICT). Innovation, as reflected by spending in R&D and patent output, is low.

From there, the report provides a roadmap to where Ontario should go. Of particular interest to us at SP (turns out that we share more than just a focus on prosperity with ICP) is the recommendation that Ontario bring in a carbon tax shift. The tax shift would mirror British Columbia’s, with carbon tax revenues being used to offset reductions in personal and corporate income taxes.

Now, we understand the environmental rationale for the tax lower carbon emissions. And we know that, if properly designed by recycling the revenues to tax cuts, a carbon tax will have a neutral economic impact. Those two policy drivers have been validated in Sustainable Prosperity’s own 5 year review of the BC carbon tax model.

Going beyond that, however, the ICP report makes an affirmative economic case for the carbon tax, built on its proven ability to foster and promote innovation. As the report says…”a carbon tax provides clear incentives for developing new clean technologies, as consumers will increasingly demand low-carbon alternatives in response to a tax introduction. An innovative clean technology sector is one of the few sustainable sources of long-term competiveness.”

The report does point out that there are legitimate concerns over how a carbon tax could impact Ontario’s competitiveness. But another Sustainable Prosperity policy brief found that “carbon competitiveness” is largely a function of how energy intensive and trade exposed (EITE) a sector is, and EITE sectors form a small part of Ontario’s economy. Taking the economy overall, we would take the position that a carbon efficient economy -made so by a carbon tax- could in fact be a long-term competitive advantage.

Since the financial crisis of 2007-08, policy makers have struggled to find new sources of growth in their economies, especially growth that reflects their particular comparative advantages. Ontario’s comparative advantage is in a strong technology R&D sector and a well-diversified manufacturing base. The province even has an emerging clean energy technology sector. These advantages line up well with what would be required to exploit emerging markets for clean energy.

What is missing is a policy signal that makes transparent to investors and consumers the fact that low carbon goods and services are the future. A carbon tax could be that signal, setting off a virtuous cycle of investment, innovation, and scale that would match up well with what we know will be strong anticipated future demand, both domestically and in export markets.

Ontario does need a kick in the pants. Innovation in policy can lead to innovation in the technology that will help Ontario find new sources of growth. If that is what the province needs, then there are worse ways to go about getting it than with a carbon tax.