Smart, Practical, Possible: Canadian options for greater economic and environmental prosperity

Canada's Ecofiscal Commission will examine practical fiscal solutions for Canada that spark the innovation required for increased economic and environmental prosperity.We believe that aligning Canada's economic and environmental aspirations is both critical and possible for our country's continuing prosperity. SMART ENVIRONMENTAL POLICY IS SMART ECONOMIC POLICY.Canada's current and future economic prosperity depend on protecting our clean air, water, and land, and also reducing our greenhouse gas emissions.They depend on ramping up Canadian innovation to respond not only to today's demands, but also to the emerging environmental realities that will shape the markets of tomorrow.We can no longer afford to silo our economic and environmental agendas.The sustained well-being of Canadians requires new policies that align our aspirations for a thriving economy and a clean environment.Current evidence suggests that we can achieve this by using ecofiscal policies.Ecofiscal policies correct market price signals to encourage the economic activities we want (job creation, investment, and innovation) while discouraging those we don't (greenhouse gas emissions and pollution of our land, air, and water).The revenue generated from pollution fees can create further benefits; for example, by reducing taxes on families and businesses or investing in new technologies or critical public infrastructure. ECOFISCAL REFORM IS A CRITICAL OPPORTUNITY FOR THE COUNTRY. V Executive Summary continuedCanada uses extensively, reduce incentives for investment and job creation and tend to reduce economic growth.In contrast, taxes on pollution, which we use sparingly, create incentives for activities that improve the health of our environment.Ecofiscal policies use market forces to rebalance this equation.They align economic and environmental priorities, creating incentives for conservation, but allowing flexibility in how firms and individuals reduce their pollution.They enable reductions in other taxes, such as corporate and personal income taxes.For example, ecofiscal reforms in Denmark that target air, carbon, and water pollution were used to lower personal income tax rates and reduce employer contributions to social security and pensions while supporting investment in energy efficiency. Ecofiscal policies can be designed to ensure fairness in multiple ways.Fairness is intrinsic to the use of ecofiscal policies, since they require polluters to pay for the environmental damage they cause.Fairness also means ensuring that our grandchildren inherit Canada's natural wealth, not its ecological debt.Failure to invest in clean energy now will cost Canadians many times over down the line.According to estimates by the OECD, for example, every dollar invested now in a low-carbon electricity sector results in more than four dollars saved by future generations (who would otherwise be required to reduce emissions at much higher costs).Acting fairly also means making decisions that respect and accommodate the diversity of Canada's regions, sectors, and families.Well-designed ecofiscal policies can recognize the differences between regions and need not involve wealth transfers between them.They can also ensure that additional burdens are not placed on the most vulnerable.For example, research suggests that only 10% of the revenue generated by a Canadian carbon tax would be required to offset the impact of the tax for low-income Canadians.Similarly, several policy options exist to address the potential impact of ecofiscal policies on firms' competitiveness. Improving innovation is critical for Canada's future.Ecofiscal policies drive innovation by creating incentives for the development of new technologies that reduce pollution and environmental damage.In Sweden, for example, a price on emissions of nitrogen oxides coincided with a seven-fold increase in patents on pollutionreducing technology from 1988 to 1993.Over the longer term, this innovation will put Canada in a more secure and advantageous position, particularly as our trading partners implement more of their own ecofiscal policies. Canadians can seize an opportunity for long-term, clean prosperity.Right now, however, we are behind the curve.We lag behind most OECD countries in innovation and productivity growth; we also lag behind them in environmental performance.Perhaps not surprisingly, we are close to the bottom of the list in the use of ecofiscal policies.However, important progress-particularly at the provincial level-shows that these policies can and do work in Canada.This report is the starting point for Canada's Ecofiscal Commission.Future research by the Commission will focus on practical policy solutions that can drive the innovative economy we need to succeed in the 21st century.The Commission's future reports will explore these opportunities for pragmatic Canadian policy.Policy issues will likely include:• Road congestion pricing.Road access is free yet it leads to congestion, air pollution, greenhouse gas emissions, and lost productivity through wasted time.Congestion is becoming a significant issue in Canada's major cities.Congestion pricing could be a promising policy solution to promote efficient transportation systems.• Municipal user fees.Cities have limited revenue tools; they tend to rely on property taxes to fund municipal infrastructure.At the same time, users of infrastructure often have no incentive to limit their usage.User fees can create incentives for conservation while also ensuring that cities do not have to overbuild infrastructure.• Carbon pricing.Global climate change will have major economic costs for Canada.Pricing carbon emissions can help achieve reductions at the lowest cost, can contribute to global emissions reductions, and can help position Canadian firms to compete in a cleaner global economy.• Subsidy reform.Many existing Canadian subsidies are environmentally harmful, fiscally wasteful, or both.Biofuel subsidies for ethanol, for example, may actually increase greenhouse gas emissions while also representing large public expenditures.Phasing out such subsidies can therefore generate both economic and environmental benefits.

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