On carbon pricing, Trudeau risks repeating Obama’s mistakes

In politics, compromise and cool-headedness are usually virtues, especially when facing a bitterly divided electorate. Occasionally though, a time or challenge calls for bold action that ruffles a few feathers in the short term, but pays big dividends in the long term and resounds in history. Examples of such bold action from the past century include universal healthcare and the Charter of Rights and Freedoms in Canada; the New Deal and the Civil Rights Act in the U.S.

Climate change is one of these grand challenges demanding bold action, but Justin Trudeau’s government so far seems to be taking a cautious approach—by first adopting the Harper government’s unambitious emissions targets and then setting a carbon price too low even to meet them. The bet Trudeau is making with this moderate strategy is that he can bring the sides of Canada’s bitter climate and energy debates together, in a way that increases national unity and promotes future progress. Looking back at Obama’s presidency, I think Trudeau might lose this bet.

In the wake of the 2008 financial crisis, U.S. economists and politicos were bitterly divided over whether there should be a stimulus. Those in favor argued for a massive stimulus to offset weak and downwardly spiraling aggregate demand—rapid growth and modest inflation would reduce the public debt burden even as the nominal debt increased. Those opposed cautioned against crowding out private investment and exploding the national debt.

President Obama took a middle ground—a stimulus, but a modest one compared to what the ‘pro’ side was calling for. Neither side’s prescription was put to a clear test, and so both sides were able to spin the predictably middling results as evidence of their position. The economy did improve, but did so at a relatively sluggish pace. Was the recovery sluggish because the stimulus wasn’t big enough, or because it crowded out private investment and lowered market confidence by increasing the deficit? The ideological battle—and resulting political paralysis—rages on, to the detriment of the recovery and national unity.

Arguably, Obama made a similar mistake on healthcare. Before he took office, the U.S. healthcare system’s high costs and high numbers of uninsured clearly suggested a problem. Some called for a transition to public healthcare, or at least a public option (which was originally part of Obamacare, but was removed before it passed as a political compromise). Others called for combinations of regulatory measures to increase competition and a government-subsidized voucher system. The final version of Obamacare did significantly increase the numbers insured, but also imposed significant costs on small businesses—a public option might have fared better. Again, ideological divisions have only deepened.

Trudeau risks making this type of mistake by setting a carbon price and emissions-reduction targets that experts widely agree are too low. A likely outcome of his plan is that: some emissions reductions will take place, but not nearly enough; some pain will be felt in the energy sector, but not enough to increase the nationwide panic level; and some growth in the renewable sector (from the carbon-price incentive and recycled revenues) will take place, but again not nearly enough to either offset short-term energy (and housing) losses or put Canada out in front in the clean energy economy. In other words, Canada’s future will look a lot like the status quo to unsatisfied stakeholders on all sides of the current debate, and divisions will deepen.

Instead, Trudeau’s government should put in place the price floor experts agree is needed (at least 30$/toneventually rising to over $100/ton), and it should ensure that the revenues are reinserted into productive areas of the economy—infrastructure, education (including retraining), and renewables. Would this be a cash grab? Not if it’s revenue neutral. Would it be a big government-driven redistribution of investment incentives across sectors? Yes it would, but with a quarter of Canada’s GDP currently tied up in either oil and gas or dangerously overheated housing markets, maybe a big redistribution of investment incentives is exactly what Canada’s economy—and its environment—needs.

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