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Reflections on Environmental Policy in Canada 3 Reflections on Environmental Policy in Canada Wiktor Adamowicz Presidential Address to the Canadian Agricultural Economics Society, Professor and Canada Research Chair, Department of Rural Economy, University of Alberta, Edmonton, Alberta, Canada, T6G 2H1 (phone: 780-492-4603; fax: 780-492-0268; e-mail: [email protected]). INTRODUCTION In his presidential address, Weersink (2006) identified four types of addresses: a summary of research activity, an analysis of changes in industry structure, a discussion of new social or economic issues facing the profession, or an examination of the services the professional societies like the Canadian Agricultural Economics Society (CAES) provides to the profession. This presidential address will not be any one of these, but it may touch on some aspects of at least two or three of these typical topics. The issue I examine is not directly my area of research nor is it a topic directly associated with services of the CAES. However, it is a topic that is fertile ground for research and it is something that I hope that the members of CAES consider as part of the service that our society can provide to policymakers and the public. The topic I will investigate is whether Canadian natural resource and environmental policy requires a reframing toward increased use of market-based instruments and economic methods to aid in decision making. My interest in this topic stems from several readings and occurrences. First and fore- most, a recent OECD environmental performance report for Canada strongly criticized Canadian environmental policy for not employing market-based mechanisms and for not using economic analysis in policy decision making (OECD 2004). For example, the OECD report on Canada states: While cost-benefit analysis is becoming more common in policy discussions [in Canada], it has rarely been a basis for policy decisions. Implementation of eco-efficiency is also con- strained by inappropriate market signals; to provide incentives for eco-efficient projects, instruments such as energy taxes and water charges are required (OECD 2004, p. 97). and Market based instruments are insufficiently used to foster integration of environmental concerns into sectoral policies; too much emphasis is given to soft instruments like voluntary guidelines or partnerships (OECD 2004, p. 97). The OECD report is full of examples where Canadian environmental and resource policy is lacking and where the use of economic instruments and economic analysis would benefit policy.1 The list includes air quality regulation, water quality regulation, water pricing, conservation of biodiversity, energy conservation, and carbon management. Many Canadian environmental and resource economists (including me!) have wondered about the reasons for the lack of uptake of economic instruments, water prices, benefit cost analysis, and related economic approaches to natural resource and environmental management. In this paper, I attempt to assess the following questions: Is the OECD Canadian Journal of Agricultural Economics 55 (2007) 1–13 1 2 CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS critique warranted? If the critique is warranted, why is Canada lagging in the application of economic methods to environmental policy? What can the applied economics commu- nity, notably the CAES, do to alleviate this lack of application of economic methods to environmental and resource policy? And finally, is there evidence that the tide is turning regarding the use of economics in resource and environmental policy? Is the OECD Critique Warranted? In general I believe the answer to this question is “yes.” Evidence can be captured from various sources. Beginning with water resources, the longstanding concern over the lack of water pricing or trading associated with water quantity scarcity, discussed by Adamowicz and Horbulyk (1996) and Weersink and Livernois (1996), continues today (see Horbulyk 2005; Renzetti 2005a). Water pricing and/or rights trading has seen limited use even though legal and policy frameworks to allow such mechanisms exist in several juris- dictions. Renzetti (2005b) describes the low prices that agricultural users pay for water, ranging from essentially free to small amounts per cubic meter. This lack of incentives for conservation exists even in this sector that accounts for 71% of consumptive use, for example, in Alberta, where irrigation is centered (Government of Alberta 2002). On the water quality side there is also limited use of economic instruments. While other coun- tries have implemented fees, taxes and in some cases water quality trading schemes (e.g., total maximum daily load trading scheme in the United States—http://www.epa.gov/ owow/watershed/trading/finalpolicy2003.html) Canada still largely relies on command and control, voluntary, or best management practices for water quality policy (Renzetti 2005a). In the area of air quality Canada has also lagged behind other jurisdictions in its use of market-based instruments. While there has been considerable discussion of the merits of market-based instruments for various air emissions, there has been limited experimentation with such programs. Air quality continues to be a concern, especially in areas of Eastern Canada with SOx, ground level ozone and particulates generating an increasing number of air quality warnings (OECD 2004). A recent Energy Information Administration report in the United States reported that air toxic emissions in Canada grew by 7% over the time period 1998–2000 while they decreased in the United States by 8% (http://www.eia.doe.gov/emeu/cabs/canenv.html). In the development of strategies to address climate change there was extensive discussion of market-based systems for carbon emissions management, but it is unclear whether these programs will be implemented (Tradable Permits Working Group 2000). In general Canada has relied on command and control policies while other industrialized countries, notably the United States with examples like the market for SO2 emissions, have moved toward market-based approaches. The OECD also reports that Canada collects a small amount of environmentally related taxes relative to other OECD countries (Figure 1). In land use management few economic instrument programs are in use relative to our U.S. neighbors. In the United States Transferable Development Right programs are being used to protect various public goods values including environmental values, scenery, and cultural aspects of land (American Farmland Trust 2001). In Canada few programs of this type have been implemented. There is little or no use of economic mechanisms for conservation on forest land as these lands are typically public and conservation programs are incorporated in use agreements (such as forest management agreements) in a command and control fashion. REFLECTIONS ON ENVIRONMENTAL POLICY IN CANADA 3 Figure 1. Revenues from environmentally related taxes. Source: OECD 2005, p. 287 The OECD also criticized Canada’s lack of use of benefit cost analysis and similar economic assessment tools used for the development of environmental policy. While the use of some form of benefit cost analysis is called for in federal policy documents (e.g., The Government of Canada Regulatory Policy 1999, Privy Council Office), there are relatively few recent examples of rigorous benefit cost analysis for major environmental policy issues in Canada. While there have been exceptions, including the use of benefit cost analysis in the development of particulate matter and ozone guidelines (Canada Wide Standards) there is relatively little use of such mechanisms in the environmental arena. A final area in which Canada seems lacking is the use of economic methods for the determination of compensation for environmental damages. The U.S. system for natural resource damage assessment (NRDA) that includes monetary or in-kind compensation for damages has not been implemented in Canada to any significant degree. In that system responsible parties are required to pay compensation for natural resource damages into a public fund that is then used for environmental improvement projects (see e.g., Kopp and Smith 1989). While the compensation payments form the basis for such a policy it is the deterrent value associated with the potential for compensation that is as important as the mechanism for compensation itself. Why is Canada Lagging in the Use of Economic Methods for Environmental Management? Opinions are varied about why Canada seems to be reluctant to employ economic instru- ments or embrace economic analysis methods. One view is that environmental scarcity 4 CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS is not a significant issue in Canada—we are blessed with abundant water, air, wildlife, and related resources and thus do not need to implement costly environmental poli- cies. This view is not supported by the data. Water resources are scarce in several parts of the country (Renzetti 2005a). Air quality, especially in eastern Canada, is of sig- nificant concern as particulate matter and ozone levels continue to frequently exceed acceptable levels. A Government of Ontario report on air quality states that fine partic- ulate matter guidelines were exceeded at every monitoring station in the province except Thunder Bay (http://www.ene.gov.on.ca/envision/techdocs/5383e.pdf). Thirteen cities in Ontario, including Toronto, exceeded the fine particulate guidelines for the year 2004 (http://www.ene.gov.on.ca/envision/techdocs/5383e.pdf). The number of endangered species as
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