June 29, 2010

A policy brief released today links carbon pricing to possible gains in productivity through increases in innovation. The review profiles a growing body of academic research and good evidence (from the EU in particular) to show that careful carbon pricing policy may be a tool to help Canada, in particular, prosper in the long term.

The research review, and related analysis of implications for policy makers, was commissioned by Sustainable Prosperity, a national policy and research network based at the University of Ottawa. It was written by Roger Martin, Dean of the Rotman School of Management at the University of Toronto and Director of the Michael Lee-Chin Family Institute for Corporate Citizenship.

Traditional wisdom is that higher energy prices will bring painful outcomes. But what is becoming clearer is that the relationship between carbon pricing, energy prices, and the economy is not necessarily a negative or even neutral one. In fact, a growing body of evidence is showing that pricing carbon can be good for the economy.

The logic underlying such a claim is as follows. Carbon pricing can help drive innovation in technologies and business models that promote resource efficiency, particularly in relation to energy. For a country like Canada, which annually ranks among the most energy inefficient economies in the world, this presents a huge opportunity. That is because there is an increasingly strong case for how improving resource efficiency translates into improvements in productivity, which is really the Holy Grail of competitiveness for economies like Canada’s.

The research also shows that design matters. A key criticism of the experience with carbon pricing is the volatility of the price of carbon and the unpredictability that brings to investment decisions. Such experiences are informing the development of new carbon pricing policies. The various proposals around comprehensive climate/energy legislation being discussed in the U.S. Senate, for example, all feature some version of “price collar” for the carbon allowances to be created, with a price floor and ceiling. Alternately, if a pricing policy is built around a carbon tax, that kind of volatility is removed altogether.

Carbon pricing is not a silver bullet. It will clearly not solve by itself the sizable productivity challenge. But it can help. The research brief suggests that all possible policy tools can, and should be, considered. And one such tool that has not been considered up to now is carbon pricing.

Sustainable Prosperity is a national research and policy network, based at the University of Ottawa. SP focuses on market-based approaches to build a stronger, greener economy. It brings together business, policy and academic leaders to help innovative ideas inform policy development.

The Michael Lee-Chin Family Institute for Corporate Citizenship at the Rotman School of Management helps current and future business leaders integrate corporate citizenship into business strategy and practices.

The complete study is available at http://www.sustainableprosperity.ca and http://www.rotman.utoronto.ca/lee-chininstitute

For the latest thinking on business, management and economics from the Rotman School of Management, visit http://www.rotman.utoronto.ca/NewThinking

The Rotman School of Management at the University of Toronto is redesigning business education for the 21st century with a curriculum based on Integrative Thinking. Located in the world’s most diverse city, the Rotman School fosters a new way to think that enables the design of creative business solutions. The School is currently raising $200 million to ensure Canada has the world-class business school it deserves. For more information, visit http://www.rotman.utoronto.ca.

Ken McGuffin
Manager, Media Relations
Rotman School of Management

Alexander Wood
Senior Director, Policy and Markets
Sustainable Prosperity