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Kyoto or Not?
by Jim Stanford
THE ECONOMICS OF HOT AIR
Pop quiz: What group of Canadians, opposed to an international treaty that they say will erode Canadian sovereignty and destroy our economy, now predicts dire consequences - including millions of job losses and falling living standards - if the agreement is ratified? Sounds like doomsday predictions from anti-globalization protestors, campaigning against the latest free trade agreement, right? Wrong.
Answer: This time it is Canada's business leaders who are overflowing with angst and predicting the imminent end of our country as we know it. This time it is business leaders railing against a global agreement. But this time, the globalization in question is not a free trade deal: it's an international treaty to protect the environment.
The role-reversal of old free-trade combatants is just one of many ironies raised in the kerfuffle over Canada's ratification of the Kyoto accord. Stolid old free-traders like Perrin Beatty, now head of the Canadian Manufacturers and Exporters, rail on about the power of global bureaucrats and threats to Canadian jobs. Soon we'll see him throwing stink bombs over the security fence at the next meeting of global environmental ministers.
Meanwhile, the environmental community tries to adopt the calm, sane air of assured and capable technocrats. Kyoto is a modest, logical, careful first step, they keep repeating. Indeed, they should take a page from the free-traders' own handbook of propaganda techniques. Let's get David Suzuki in front of the cameras to symbolically rip a copy of the Kyoto treaty in half: "See, it's just a simple commercial agreement, and we can cancel it any time."
As with free trade, much of the debate over Kyoto revolves around competing forecasts of the accord's economic impacts. Opponents rage that ratification would deliver a huge body blow to our economy. Kyoto supporters say the economic consequences would be minimal, and could even be positive.
The government estimates that the economic costs of Kyoto will be minimal - a hit of between 0 and 2 percent of GDP by 2012. Business lobbyists claim the cost will be much higher, destroying millions of jobs. We can expect more dire projections from business-funded researchers in coming months about the costs of Kyoto. But their calculus goes wrong on several counts. Here's some economic antacid to help digest the scare-mongering of a panicked business community; chew on these the next time someone tells you that Kyoto puts your job at risk.
Most economic models consider none of the costs of continued climate change - and hence assume there are no economic benefits to slowing or (god bless us) even one day stopping that trend. In reality, the costs of global warming are already huge: droughts, severe weather damage, greater energy consumption for air conditioning and related uses, and complex and expensive health costs. It's hard, but not impossible, to put numbers on these effects. Any model which ignores the costs of climate change forgets why we are trying to control it in the first place.
Most models incorporate no demand-side economic benefits from the new investment and other measures required to reduce emissions. If Kyoto commitments lead Canadian companies, consumers, and governments to spend billions on cleaner technologies, public transit systems, methane collectors at landfill sites, and more efficient vehicles, this will create swads of new jobs. Indeed, there's no reason why big-ticket investments in environmental infrastructure and technology couldn't power a lasting economic expansion - just like waves of investment in railways (1850s), automotive infrastructure (1950s), and computers (1990s) did in earlier times.
The models ignore the offsetting actions of policy-makers in the face of changes, either positive or negative, in the economy. Suppose that the business lobbyists are right, and Kyoto does in fact produce a measurable economic decline in Canada. What will then happen? The Bank of Canada will respond just as they do to every other run-of-the-mill economic decline: they'll cut interest rates to stimulate spending by consumers and investors. This will push the economy back toward what the Bank believes to be its maximum possible output and employment levels. Likewise, government will step in with tax cuts or (preferably) new spending to counter economic weakness.
Even in the pessimistic scenarios, the economic costs of Kyoto are blatantly insignificant in a longer-term view. Suppose the actual economic cost of Kyoto is twice as bad as the federal government's worst-case scenario, and reduces our GDP in 2012 by all of four percent (or about $50 billion). Compare this to what happened in the 1990s when the federal government, led by Paul Martin, was slashing and burning its way to a balanced budget. Even Martin's supporters acknowledge that his cuts cumulatively reduced our GDP by at least four percent between 1995 and 1997. Yet Martin is still lionized today for his hell-or-high-water commitment to fiscal prudence.
Kyoto could even turn out to be good for our economy. It is an enduring irony of capitalism that bad things can be good for the economy. Our free-market system is limited not by the capacities of human beings to produce, but by their capacity to spend. Anything that leads people, companies, and their governments to spend a lot of money, creates jobs and prosperity in its wake. Wars are well-known money-makers in this regard, as are natural disasters - like the 1998 Quebec ice storm, which sparked a mini-boom in that province as it rebuilt billions of dollars worth of ice-damaged infrastructure.
If it makes us spend, then responding to the unwelcome effects of climate change will be clearly beneficial for the economy - despite the plaintive wails of those (like business) who are required to do the spending. In this sense, the chances of ratifying Kyoto (as just a first step toward a greener economy) will be better if we can describe it as requiring more work to be done in our economy, not less, and hence beneficial for both economic security and environmental sustainability.
Jim Stanford is an economist and senior researcher with the Canadian Centre for Policy Alternatives and an economic advisor to the Canadian Autoworkers Union.
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