Governments’ recent enthusiasm for green industry subsidies is due, among other things, to the fact that they are less of a political sell than carbon pricing. But it cannot be the only way to slow global warming, or even the main one, because we do not have the means.
The United States alone is promising almost US$400 billion over 10 years in public aid for clean energy and electric vehicles as part of its Inflation Reduction Act (IRA). Not wanting to be left out, the European Union, China and even Canada are also promising billions to companies to accelerate the reduction of greenhouse gas (GHG) emissions and to prevent them from packing up. and head towards countries where subsidies would be juicier.
In the sole case of the future battery factory of the Swedish Northvolt, in Montérégie, announced last week, we are talking about more than CA$7 billion in public funds, at the rate of almost 3 billion from Quebec and 4.4 billion from Ottawa.
All this public money is intended to be a way of encouraging the private sector to also put their hands in their pockets. It will be necessary to be very convincing because we are counting on it to assume 80 to 90% of the effort aimed at increasing from 400 billion currently to between 2000 and 2500 billion US$ the new investments which will be necessary annually for horizon of 2030 to achieve carbon neutrality by 2050, according to the International Energy Agency.
But even counting on their leverage effect, green transition policies – which would be based mainly on subsidies and public investments – would quickly prove not only insufficient, but also “untenable” financially for public authorities, noted in an analysis the International Monetary Fund (IMF) at the start of the week. Already, we must expect — with their high debt, the rise in interest rates and the deterioration of growth prospects — that the debt of governments will increase on average by 1% per year in proportion to the size of their economy.
Choosing to drag our feet would not be better, warned the IMF. “Insufficient climate action would leave the planet defenseless against the harmful consequences of global warming, while macroeconomic risks would increase in parallel. »
In Canada alone, the damage that climate change already inflicts in terms of destruction of property, accelerated depreciation of infrastructure or even preventable diseases and loss of life is expected to amount to $25 billion in Canada in 2025, estimated last year, the Climate Institute of Canada, equivalent to half of that year’s increase in gross domestic product (GDP). And if nothing were to change, the bill would only increase thereafter, reaching between 78 and 101 billion CA$ in 2050, then between 391 and 865 billion at the end of the century.
However, the measures already put in place, or announced so far, by the G20 countries will only make it possible to reduce their GHG emissions by 13% on average, according to the IMF, whereas this proportion should have been doubled and even having increased it to 50% by 2030 so that they have a chance of respecting their commitment made during the Paris Agreement.
Effective, but unpopular
However, there are other ways than government subsidies to combat global warming and encourage the private sector to push in the right direction. If you ask the experts, they will tell you every time that one of the best ways to encourage consumers, businesses and nations to reduce their GHG emissions is to attach a price which will then weigh on each of them. their decisions, encouraging energy conservation and the search for greener alternatives. The best thing about this idea is that, in the case of a carbon tax, we can subsequently use our revenues as we want, including to finance the green shift, like in Quebec, or return them to our pockets. households, as in Ottawa.
But for the moment, only a quarter of GHG emissions are subject to some form of carbon pricing in the world, and this, at an average price of only US$20 per tonne, deplores the IMF . Canada does better than most others with a price equivalent to US$45.25 per tonne, a price which applies to more than 70% of emissions.
All this is still far from the target of $130 per tonne recommended for 2030 and even further from the $280 per tonne which would be necessary in 2050 if we had to rely solely on carbon pricing to achieve carbon neutrality. And let it be said, deferring carbon pricing can prove costly, warns the IMF, with each year lost with a price that is too low aggravating the climate crisis and its costs in such a way that it could increase public debt by the equivalent of 0.8 to 2 percentage points of GDP.
A “trilemma”
As effective as carbon pricing is in reducing GHGs, our experts admit that it cannot, on its own, solve all the problems or correct all the market failures. Moreover, we are forced to admit that it proves “difficult to sell politically in more than one country”.
Governments thus find themselves confronted not with a dilemma, but with a “trilemma”, says the IMF. That is to say, finding a way to combine an effective fight against the existential climate crisis, with effective measures, but also politically feasible, while ensuring the viability of public finances.
This last factor turns out to be just as important as the other two, underline the institution’s experts. Because otherwise, it would mean passing on the cost of the crisis and the necessary economic transition to future generations.
They are therefore calling for the adoption of a set of measures including carbon pricing, but also regulation and a certain amount of subsidies. The remarkable capacity for adaptation demonstrated by most companies during the energy crisis of recent months shows that governments should not worry too much about them. Their policies will, however, have to be adapted to the reality of each economy, but also coordinated with other countries in order to avoid sending contradictory signals and costly and sterile competition.