Mintz and Williams: Continuing Canada’s Tradition of Smart Fiscal Policy
As the world becomes increasingly open to policies addressing economic growth, innovation and environmental quality, increased attention has been paid to what might be called “ecofiscal” policies: levies used to reduce environmental degradation. Canada has good reason to be open to these policy reforms given its record in strong fiscal policy in the past two decades with lower debt and more efficient spending and tax policies.
Taxes directed to reduce harmful environmental practices result in better use of air, water and our natural resources. With revenues from new environmental levies, other taxes most harmful to growth and innovation can be further reduced.
Considering the right fiscal options
One attractive option is for governments to recycle new revenues by reducing the taxes most detrimental to jobs, innovation and growth: corporate and personal income taxes. Other options are also worth considering. How we choose to recycle the revenue from eco-fiscal policies requires careful analysis and debate.
Internationally, market-based policies are being used effectively to deal with water-quality concerns, air pollution, landfill waste, and traffic congestion, to name just a few. All these policies are directed at making better use of the resources by pricing their consumption. Otherwise, consumers will not take into account the impact of their decisions on the environment without better pricing. Ultimately, a strong economic case can be made for putting ecofiscal policies on the table including road pricing and water charges.
Many countries that have actively instituted ecofiscal policies are outpacing Canada in environmental performance as well as innovation and productivity, two central determinants of the competitiveness of our firms and our living standards. It should not be surprising that ecofiscal policies can be strong drivers of innovation: when a price is placed on environmental damage, new solutions to those problems become economically valuable, both for firms and households.
A few decades ago, the use of ecofiscal policies to address sulfur dioxide emissions in the United States coincided with increased technological innovations and dramatic reductions in acid rain. Today, significant global attention is paid to carbon pricing. Carbon can be “priced” by imposing a tax on emissions or alternatively by auctioning allowances to firms who trade credits in markets (the so-called cap and trade system). In both cases, new revenues generated from carbon pricing can be used to reduce taxes elsewhere.
Carbon tax or cap-and-trade
Whether carbon tax or cap-and-trade system is preferable requires careful analysis. Carbon taxes provided businesses price certainty, allowing them to adjust overtime with new costly technologies. Cap-and-trade system with government auctioned allowances achieves environmental reduction with certainty but the carbon prices will fluctuate depending on economic conditions.
No matter the reform, it is clearly important to Canada as a major resource producer. In September, Alberta, Quebec and British Columbia joined many other jurisdictions in advocating for a global carbon price, agreeing that it is the best way to reduce overall greenhouse-gas emissions while letting markets drive the most innovative and efficient economic outcomes.
Fiscal efforts in Canada
While Canada’s innovation lag is a well-documented concern, it is often blamed on our reliance on the development of natural resources. But the example of Norway suggests otherwise. Also resource-intensive, Norway scores 29% higher than Canada on the Global Competitiveness Innovation Index.
Arguably, it is because Canada’s economy is underpinned by our natural wealth that we should seriously consider ecofiscal policy reform. Policies that reduce taxes on investment and innovation while discouraging harmful environmental practices can contribute to stronger economic performance.
Ultimately, the biggest question at stake is: what kind of fiscal system do we need to position Canada, and our industries, to thrive in a rapidly changing global economy? Answering that question requires delving deep into issues of competiveness, of national and subnational approaches, of impacts on working families, and the distinct contexts of Canada’s diverse industries and regions. This is work worth doing. In fact, facing these issues head on is necessary if we are to grasp the opportunities of a global economic shift toward sustainability.
This week we helped launch a new commission—Canada’s Ecofiscal Commission—to undertake the critical analysis of ecofiscal reform for Canada. We believe that our nation’s current fiscal systems can, and should, be improved. As the international momentum for ecofiscal reform continues to mount, now is the opportune moment for Canada to consider all of its options.
About the Authors
Jack Mintz is the Palmer Chair and Director, School of Public Policy, University of Calgary and Steve Williams is the Chief Executive Officer of Suncor. Both are members of the Advisory Board of Canada’s Ecofiscal Commission.