Regulation is good for you

Somebody needs to tell Ottawa that sound environmental laws can help business get more efficient.

Federal Environment Minister John Baird, who mostly practices the dismal science of economics these days, recently argued any attempt to honour the Kyoto Protocol would torpedo the marketplace and sink 275,000 jobs. His economic modellers, he added, also predicted any meaningful reductions in nastyweather- making pollutants — such as carbon dioxide, methane and ozone — would propel Canada into recession. End of debate.

So what's the average guy, who obviously favours a robust economy, to make of such gloomy calculations? Well, impressive studies on emission-reducing regulations solidly condemn Baird's reasoning as either fear-mongering or just plain malarkey. In fact, academic, industry and government economists routinely overestimate the cost of reducing dirty air by between 30% and 100%, and for some surprising reasons. They simply forget that good regulations spur innovation, and innovation — the mother of all factors in a competitive economy — can save us money.

Examples are as plentiful as carbon dioxide emissions from the oilsands. Let's begin with oil refineries. In 1998, two economists looked at lung-saving regulations in the smoggy Los Angeles Air Basin that forced plants to upgrade at a cost of nearly $8 million a pop. Industry, of course, didn't like it. But in the end, all those pollution controls vastly improved productivity and profitability, while refineries outside the Air Basin reported decreased output — those in the regulated area increased productivity 5% faster than the national average. Not surprisingly, the economists concluded that “the cost of environmental regulation may be significantly overstated.”

Now consider sulfur dioxide, one of the prime ingredients of acid rain. Electrical utilities screamed and hollered that it would cost them nearly $5 billion a year (or $1,500 per ton) to comply with reduction targets set by the 1990 U.S. Clean Air Act. Why, the lights might even go out! But fuel switching, combined with technological innovations, actually brought costs down, to $100 per ton. The sky didn't fall, but the air did get cleaner.

In a 1997 paper, U.S. economist Hart Hodges, director of Western Washington University's Center for Economic and Business Research, found that real control costs for acid rain eventually turned out to be two to four times lower than government estimates “and four to eight times below industry estimates.”

Not convinced? Consider the 1987 international phase-out plan for chlorofluorocarbons, the chemicals that were badly depleting the ozone. After Canada signed the Montreal Protocol to clean up this mess, industry again did a frantic Chicken Little dance. In 1988, even a worried U.S. government figured it might cost $2.7 billion to reduce CFCs by just 50% over a decade. But industry found very clever ways to totally eliminate the damned ozone-killers within just eight years, at a cost of only $3.8 billion. Nortel Networks Corp. phased out CFCs in just three years and actually saved $4 million in waste disposal costs and CFC purchases. As the United Nations Environment Programme put it as early as 1991, “previous fears have largely been groundless.”

The lessons here are pretty damned obvious: the cost of complying with smart regulations is “always less than advertised.” (One U.S. study calculates that a dollar spent on pollution control reflects a real expense of just 13¢!) While industry typically underestimates the power of innovation, governments mistakenly gather most of their estimates from firms that really don't want to be regulated. History also suggests that three compliance scenarios will always inform the debate about regulations: the apocalyptic, the doable but costly, and the profitable. Having an environment minister pick and defend an apocalyptic scenario from the get-go is probably a historical first.

Yet the record clearly shows that environmental regulations generally fall somewhere between the doable and the profitable. A 2007 study for Natural Resources Canada's Office of Energy Efficiency concluded that a carbon tax of $50 per tonne would probably benefit the economy in the long term. By inflating costs and ignoring benefits, Baird has illustrated that he is both a bad environmentalist and one lousy economist.