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No. 8: Economics and the Environment: The Recent Canadian Experience and Prospects for the Future

by Brian R. Copeland, University of California, under contract with Industry Canada, 1998


Summary

Canada faces two major environmental challenges in the immediate future. The first is to translate the rather vague concept of sustainable development into a consistent set of policies that can address the need to move the economy in a direction consistent with ecological constraints. The second and perhaps more serious challenge is that there is a looming global environmental crisis that Canada, on its own, can do little about.

Canadian Problems

Canadian environmental and conservation policy has had significant successes during the past 25 years. Emissions of toxic substances such as lead and mercury have been dramatically reduced. Air and water quality have improved in some areas, despite growth in income and population. And large tracts of wilderness have been set aside for preservation. But there have also been notable failures. Fish populations off the east coast have collapsed. Air quality is still poor in some of our larger cities. And in spite of reductions in emissions of sulfur dioxide, Canada remains one of the highest emitters of sulfur dioxide per capita in the world. Because of its sheer volume of production and consumption, Canada remains a big polluter.

In the past, environmental and conservation policy in Canada has suffered from two problems. First, policy has essentially been remedial — a piecemeal response to various problems of over-exploitation of natural systems. This has led to inconsistencies in government policy — one arm of government may provide subsidies to the fishing industry while another arm of government tries to reduce fishing effort to preserve the stock. The concept of sustainable development may potentially emerge as a unifying framework that forces a more integrated approach to policy, one that takes into account ecological constraints. However, we are still a long way from that point.

The second problem affecting policy has been a lack of commitment. One of the key problems in environmental policy is that short term re-election horizons combined with uneven distributional effects of environmental policies can expose governments to considerable political pressure to deal with short term income and employment concerns at the expense of long run sustainability issues. This means that it is important to develop an institutional framework in which it is difficult to back away from attaining policy objectives — that is, increased attention should be given to the role of commitment devices in environmental policy.

Such a perspective has a number of implications for future policy. Among these are: (1) clear environmental quality targets should be set, and a review process should be put in place to ensure that they are met; (2) good information about environmental quality should be provided by the government to the public so that failure to meet targets cannot be hidden; (3) voluntary or negotiated agreements to attain environmental standards must be backed up by strong enforcement; (4) national standards for ambient environmental quality can act as commitment devices for provinces; (5) international agreements may be useful to help commit to environmental goals, particularly if there is a linkage to trade access or aid, and (6) economic instruments that increase the degree of commitment to an environmental goal should be considered — a pollution tax applied as a matter of course may be more effective than a standard backed up by the threat of a fine that is rarely carried out.

Although command and control methods have dominated environmental policy in most western economies, the time may be ripe for a gradual introduction of more incentive-based policies for the following reasons:

  • Revenue — There is considerable pressure not to raise general tax rates, and so environmentally friendly taxes and user fees may be, politically, a more palatable way of raising revenue to finance investments in the infrastructure needed to maintain or improve environmental quality.
  • Increasing abatement costs — Pollution control costs will likely rise in the future because (1) growth will put more pressure on the environment; and (2) the easier environmental problems were solved first in part because the other problems were more costly to deal with. This will increase the need for cost-effective policies. New taxes on business will not, however, be popular in a context of rising costs. Rather, policies which are revenue-neutral from an industry perspective (such as allowing limited transferability of pollution permits) are likely to be more feasible.
  • Increasing relative importance of non-point sources of pollution — The use of economic instruments may be useful to deal with complex problems involving large numbers of polluters who are difficult to monitor. For example, taxes can target inputs highly correlated with pollution (such as fuel and pesticides).
  • Tax reform and the double dividend — Canada's tax system contains many undesirable disincentive effects. Revenue raised from environmental taxes may be used to finance reductions in distortionary taxes, such as payroll taxes.

One problem with policies that attempt to recover the full costs of environmental services from users is that they may be regressive — there is some evidence that the cost of environmental policies as a fraction of income has been greater for lower income groups than for higher income groups. An expansion of the use of environmental taxes and user fees could be regressive. But the regressiveness of any individual instruments does not mean that the underlying policy is undesirable. Rather it means that environmental policy must be integrated and coordinated with other activities of government. Some European countries have introduced environmental taxes as part of a major tax reform.

Although individual tax changes may be regressive, the overall package of reforms need not be.

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Global Problems

At the global level, two crises are looming in the near future. The first is that some very poor countries may be unable to sustain their current consumption of their own environmental services and may not be able to generate enough income from other activities (such as manufacturing) to import environmental services (especially food) from other countries. Canada will be confronted with a serious ethical dilemma about how to reconcile its wealth with significant human suffering in other parts of the world.

The second crisis looming arises from countries with relatively large populations that are also currently undergoing rapid rates of economic growth. This will affect Canada directly. The net international demand for Canada's environmental services will likely increase as the need for food, minerals, and forest products rises with income and population, and with the depletion of the resource base in some countries. However, this trend will yield benefits only if resource stocks and environmental services are properly managed. Many environmental services are based on common property resources (such as air and water). Canada has only partially succeeded in controlling access to these resources. Growing international trade can be harmful for an economy that exports the services of open access resources. Therefore, Canada's trade policy must be coordinated with its conservation policy. More liberalized trade requires increased conservation efforts in order to ensure sustainability. If Canada is unable to ensure that proper conservation measures are put in place, it should not commit to open foreign access to its resources.

As consumption levels increase, particularly in the rapidly growing economies of Asia, severe pressure will be placed on the global environment. Even if one accepts the optimistic scenario that higher income eventually leads to improved environmental quality, projections suggest that global environmental quality will get much worse before it gets better. Carbon emissions will increase, biodiversity will be threatened, the health of the oceans will be placed in jeopardy, and there will be further pressure on the ozone layer. Although Canada's consumption of environmental services may well be sustainable if the consumption of the rest of the world stays low, it is extremely unlikely that the world could sustain the spread of North American levels of consumption to a significant fraction of the earth's population. Therein lies the dilemma. Global sustainability will require some coordination among countries to reduce the emissions of key pollutants.

The distribution of the right to pollute among countries will be one of the key international policy issues in the next few years. An equitable approach to this problem would involve equal access to environmental resources per capita across the globe. But such a principle would involve significant reductions in the consumption of environmental services by richer countries. A more likely scenario is that power and wealth will continue to determine access to environmental services. This in itself can exacerbate global problems, because the incentive for countries to increase their wealth and power to stake a claim on global environmental services will add to the strains exerted on the earth's life-supporting resources. Even in a power-driven scenario, however, it will be in the interest of richer countries to help poorer countries reduce and control environmental damage.

Canada should continue to play an active role towards the development of a multilateral approach to dealing with global pollution problems. At the same time, it should also ensure that defensive measures are taken at home. It should resort to commitment devices to ensure that long run environmental goals are achieved. It should set clear goals for ambient environmental quality and move to put in place a review process to ensure that these targets are met. And it should diversify its environmental risks. In a world increasingly committed to free trade, Canada should adopt a conservative and cautious approach to allowing access to common property resources.

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