November 4, 2014

By James Munson

Canadian governments should marry their fiscal systems with environmental protection in a historic shift that would be on par with public health care and free trade in its ramifications, said a new commission launched today in Toronto.

A team of top economists and political heavy-hitters plan to spend the next five years studying how different levels of government can adopt ‘ecofiscal’ principles, a new buzzword to describe a growth-focused fiscal framework that also benefits the environment, said McGill professor Christopher Ragan, chair of Canada’s Ecofiscal Commission.
“Our fiscal systems are encouraging pollution and environmental waste because they allow the environment to be treated like a free disposal garburator,” said Ragan, who has served stints in Ottawa among the federal government’s top brass in banking and finance.
“No one built them this way intentionally, but they’ve evolved to the point where they are quite backwards,” he said.
The commission’s members include some of the biggest names among policy-oriented economists and academics, including economist Don Drummond, former privy council clerk Mel Cappe and business prof and former senior federal bureaucrat Paul Boothe. The supporting advisory board includes former prime minister Paul Martin, former Quebec premier Jean Charest, former B.C. premier Michael Harcourt, former federal Liberal leader Bob Rae, Inuit activist Sheila Watt-Cloutier and McKinsey & Company’s Dominic Barton.
“We have unsurpassed economic firepower in this commission,” said Ragan.
Ecofiscal policy, a term Ragan hopes will garner attention, relates to any pricing or fees set by government over a pollutant or a polluting activity. More specifically, an ecofiscal policy would encourage the reduction of environmental effects and, in some respect, take into account the economic benefit that comes from the environment, like clean air.
For instance, the Canadian Medical Association estimates that over the next 20 years, the health cost of air pollutants will be above $200 billion, said Ragan.
An ecofiscal policy would use that as a premise to price air pollution based on the longer-term economic hit.
But the idea of pricing a environmentally costly activity is not new and governments across the world have rolled out lots of new programs that might have carried the ecofiscal handle.
In Singapore, the government was able to achieve a nine-per-cent reduction in water consumption by making its pricing system more responsive to its environmental costs and usage.
In London, a price on driving in the city’s most congested areas has reduced traffic by 36 per cent in the first 10 years since it was introduced in 2003.
What the commission wants to do that hasn’t been done in the past is a concerted study of these examples — which includes policy already in place in Canada such as carbon pricing — and examine which ones would best suit Canada more broadly, said Ragan.
The commission will do this by releasing three reports per year over the next five to six years, he said.
Infrastructure user fees, subsidy reform, air pollution pricing, water pollution pricing, water use pricing and catastrophic risk pricing are some of the other policy realms the commission plans to tackle.
To determine which policies might best suit Canada, the commission will have to break things down to the regional or municipal level.
Water is a prime example.
Singapore’s drive to curb water waste is motivated by the island city-state’s scarcity, and since most of Canada is water abundant, recommendations on ecofiscal water policy will be focused on specific places, said Ragan.
“Water scarcity is a much bigger problem in southern Alberta, for example, than it is in northern Ontario,” he said.
Whereas this geographic heterogeneity makes a national conversation on the environment difficult, the commission hopes to be effective by trying to influence municipal and provincial governments.
“We like to say we are national in scope but regional in detail,” said Ragan.
The commission’s inaugural report provides an overview of where the economists plan to focus, but isn’t making any recommendations yet.
When the time does come, they’ll be looking for situations in which an environmental pollutant has multiple, different sources because using a fiscal tool to reduce pollution in this scenario is more efficient than a blanket limit on the pollutant, said Ragan.
In other situations, a ‘prescriptive, quantitative’ policy model — like current rules around the amount of heavy metals a mine can leak into nearby waterways — may be best, he said.
The commission’s hunt for reform opportunities won’t be restricted to places where the environment can be best protected, but where the government is losing money for little or no environmental gain, as with certain subsidies.
“As a general rule, we think that pricing pollution is a more efficient way to go than subsidies,” said Ragan, adding that there will be exceptions.
Compared to other OECD countries, Canadian governments gain little ecofiscal revenue, says the commission’s report.
Currently, total Canadian government revenues represent more than one-third of GDP, yet revenues through ecofiscal policies are only one per cent of GDP, it says.
In speaking of Canada’s reluctance to impose carbon emission rules on the oil and gas sector, Prime Minister Stephen Harper has often argued that no country would knowingly shrink its economy without other countries doing the same.
Ragan foresees opposition to the commission’s work from exactly this kind of thinking.
“(People) have got themselves to the point mentally where they think we’re incapable of having a clean environment without given up something on the economic side,” he said. “We think that is wrong and we think there is tremendous evidence to show that it is wrong.”
Given that thinking similar to ecofiscal policy has been around for years, Ragan describes the commission’s work less as radical change and more as an an attempt to more consciously embark on a shift that has been happening incrementally.
But over many years, the move toward ecofiscal policy could be as historic a policy shift as public health care, the Canadian Pension Plan, inflation targeting and free trade in its impacts on Canadian life, said Ragan.
“Ecofiscal is the next great policy opportunity of our generation,” he said.
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