Why a Carbon Tax Shouldn't Worry You

Environmental protection doesn't have to stand in the way of profits. The case for more regulation.

Written by James Cowan

Barack Obama declared during his State of the Union address in January that “no challenge poses a greater threat to future generations than climate change.” Easy for him to say: Halfway through his final term, the American president is free to burnish his legacy without fear of voter reprisal.

Unlike Obama, Justin Trudeau is still auditioning for a role. So it was curious when the Liberal leader echoed Obama’s remarks soon after. “Our children’s future requires us to reduce carbon emissions,” Trudeau told the Canadian Club of Calgary. “Carbon pricing is an effective way to get us there.”

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A carbon tax has previously served as a one-way ticket to the backbenches in federal politics. Former Liberal leader Stéphane Dion proved it in 2008 with his ill-fated Green Shift proposal. And Dion’s pitch came when oil sold for $130 per barrel; as Trudeau spoke, those barrels were going for around $50. Why muse about increased regulation on an already hobbled industry?

Because it will be better for business, that’s why. Prime Minister Stephen Harper’s refusal to enact emission regulations likely crippled Canada’s diplomatic push for the Keystone XL pipeline. These political consequences would be tolerable if the Conservative government’s rationale—more government regulation is bad for the Canadian economy—were an unassailable truth. But it’s not.

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As Harvard professor Michael Porter argued two decades ago, well-crafted environmental regulations spur companies to innovate, offsetting the cost of abiding by the new rules. “Regulations provide a buffer until new technologies become proven,” he wrote. They also make it difficult to gain competitive advantage by avoiding eco-friendly investments.

The Porter Hypothesis, as it’s known, still drives debate among academics. But plenty of sound evidence supports it, particularly when it comes to the energy sector. A study published last year by HEC Montréal professor Paul Lanoie found stringent regulation of power plant emissions led to “a significant and positive effect” on productivity.

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Further, a recent OECD report found countries with the strictest environmental regulations—like Denmark and the Netherlands—also had higher GDP per person. If any companies suffered due to the rules, the report found, they likely had low productivity to begin with. If regulations can kill a company, it likely wasn’t that strong to start.

That’s not to say that Trudeau’s proposal—which would allow each province to run its own carbon regime, with federal guidance—is ideal. The best regulations for driving innovation are widely applied and offer few opportunities for loopholes—the Liberal plan fulfils neither criteria. But this is a discussion that’s overdue in Canada.

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The implication that Canadian companies can’t respond to new rules insults their ingenuity. Following the deaths of more than 1,600 migratory birds on Alberta tailing ponds in 2008, the provincial government handed down fresh environmental edicts. As noted in a paper co-authored by Canadian Business contributor Andrew Leach, oil companies responded with investments in everything from centrifugal technology to carbon dioxide€“injection systems. Suncor spent a billion dollars on a system that speeds drying of the tailings. More important, it has suggested the process will reduce its costs in the long term.

Canadian companies can make money while protecting the environment. Somebody just needs to finally tell them what the rules are.

James Cowan is the editor-in-chief of Canadian BusinessThis column is from the March 2015 issue. Subscribe now!


Originally appeared on PROFITguide.com