By Philip Cross, Dec. 20, 2016
We heard it repeated ad nauseum in the ongoing debates over Canada’s climate-change policy, this hackneyed catchphrase that our society does not have to choose between clean energy and economic growth. This makes it sound as if there are no economic risks in our choice of energy sources. Nothing could be farther from the truth.
The exploitation of energy is fundamental to economic growth. Ruth Sandwell, in her recent book Powering Up Canada, divides human economic development into two eras according to their principal sources of energy. The first was based on inefficient organic sources of energy, mostly plants and animals as well as wood, that produced a low standard of living for most of human history.
Then the Industrial Revolution harnessed mineral sources of energy, mostly fossil fuels such as coal, oil and gas. Fossil fuels have the advantage of allowing us to tap massive stocks of energy immediately, which justified large investments in its infrastructure, including transporting it in bulk to the growing concentration of users in urban areas. As the cost of energy fell dramatically, our standard of living soared. The benefit to everyday life from more access to cheap energy is enormous; the average American household today commands 186,000 calories of energy per day, the equivalent of having 93 human beings at your service for work, transportation, household chores and recreation.
The mounting cost of policies to fight global warming has helped keep the western world mired in slow income growth for eight years after the Great Financial Crisis.
The price of fossil fuels is falling, notably for oil and gas, thanks to the fracking revolution. This should be propelling economic growth higher. Instead, many jurisdictions in Canada are raising electricity prices (Ontario, most notably) because of the higher cost of switching to renewable energy sources. Soon everyone will see prices rise as a carbon tax is imposed. While this may be defensible as environmental policy, it clearly subtracts from economic growth.
And forget about green energy creating many jobs; renewables are no different than fossil fuels in that they are more capital intensive than labour intensive. More importantly, the primary economic boost from energy is not the jobs supported by its infrastructure, but the proliferation of new goods and services and the saving to users from lower prices for everything from transportation to operating machinery and equipment. Higher energy prices have the opposite effect.
It is naïve or wilfully misleading to pretend there is an overall economic benefit from higher energy costs. There is no possible way of putting a positive economic spin on the doubling of electricity prices in Ontario since 2002. It is a drain on household budgets and a burden to the competitiveness of businesses.
Not surprisingly, Ontario’s economy has struggled, despite what should have been the benefit of lower prices for oil and gas (by comparison, Alberta’s electricity prices have risen only five per cent since 2002 as it passed on lower energy prices, although the Notley government’s policies will soon put an end to that).
Transitioning away from fossil fuels will be easier for some uses than others. Daniel Yergin, the world’s leading energy economist, notes that “history demonstrates that energy transition takes a long time. It took almost a century before oil overtook coal as the number one energy source.” Green energy has not even begun to crack the nut of transportation fuel, where the enormous efficiency of gasoline in powering engines for vehicles and planes shows no signs of loosening its dominance as the fuel of choice. Stephen Chu, Obama’s energy czar, conceded in 2010 that oil would remain the world’s dominant fuel “because oil is an ideal transportation fuel.” Oil is also extremely versatile in manufacturing; there is more oil embedded in the materials in your car (such as paint, plastic, seats and tires) than in your gas tank. Renewable energy sources cannot replace these creative uses of oil.
Sandwell concludes that it is unlikely Canada will ever transition to a post-carbon economy. Our geography dictates that we will always need to continue consuming large amounts of energy, which are also one of our leading exports. We’re good at energy production because we have to be, living in a dark, cold and vast land.
Bjorn Lomborg, the self-styled skeptical environmentalist, made the case that while climate change is happening, its costs pale by comparison with the enormous burden of stopping it, which he estimates at US$1 trillion a year for the global economy. A better strategy would be to invest in measures that mitigate its effects — it has, after all, always been mankind’s mission to make inherently dangerous climates safer for habitation — and diverting more resources to invest in policies that better our health and environment at a much lower cost than the ruinously expensive effort to halt the rise in global temperatures.
The mounting cost of policies to fight global warming has helped keep the western world mired in slow income growth for eight years after the Great Financial Crisis. The longer the average person sees no prospect of income growth and jobs for himself and his children, the more likely he will be tempted to vote for populist leaders such as Donald Trump, who promise much different choices in the trade-off between restoring income growth and battling climate change than our liberal elites have been making. At least the average person and populist leaders know there is a trade-off between the economy and the cost of energy. Proponents who pretend that more expensive energy policies don’t harm incomes simply demonstrate that they fail to understand the basics of economic growth.