Action on climate change is very popular with the Canadian public, but that many don’t understand the possible implications for the economy, says research firm Global Insight.

“The issue of climate change has moved up on the Canadian public’s priority list, and is set to dominate the upcoming federal election,” it says in a research note. “In Global Insight’s view, the issue also looms large in the long-term outlook for the economy. Unfortunately, many Canadians are not fully aware of the difficulties and economic risks associated with capping greenhouse gas emissions, notwithstanding the potential for improvements in air quality.”

Global Insight says that as it ponders economic developments in Canada over the next 20–30 years, issues related to the population slowdown and climate change loom large on the horizon. “While the demographic change is to a large extent determined in the past and thus relatively straightforward to extrapolate into the future, the assessment of the implications on the economy of climate change is surrounded by a much wider band of possible outcomes. The risk of those outcomes to GDP as currently measured appears tilted to the downside.”

The firm reports that the available data for 2004 show that emissions have risen 27% since 1990. “If Canada were on the path to meet Kyoto targets, emissions should have been 4% below the 1990 level in 2004. A simple regression analysis suggests that unless something drastic happens to the structure of the economy, Canada’s greenhouse gas emissions will grow at six-tenths the pace of economic growth, reaching 40% above the 1990 level by 2012 and 90% above by 2035,” it says.

“A cold-turkey imposition of lower emission targets on all economic agents could wreak havoc in the economy, causing double-digit unemployment and most likely a return to fiscal deficits. The pain would be sharpened by the fact that some of our key trade partners and competitors — especially the United States, China, and India — are outside the Kyoto protocol,” it warns.

“Over the long term, the availability and application of clean-air technologies may cause emissions to stabilize or perhaps even decline without affecting measured GDP growth,” the firm allows. “Even in this benign scenario, however, there will be wide-ranging implications for all players in the economy. Businesses in industries that account for most of the emissions will either invest more in clean technologies or move to countries with less stringent environmental standards. Those businesses that have to stay in order to exploit Canada’s natural resources, most notably oil sands, may have to pay the price in the form of lower profitability in order to remain viable.”

“Consumers will have their choices restricted to more expensive, but more environmentally friendly, technologies, such as hybrid vehicles, and cleaner sources of energy. Meanwhile, the task of keeping track of who is emitting what, and how much, will keep governments busy at the cost of taxpayers’ money,” it says.

“The winners, naturally, will be businesses analyzing, designing, and selling clean-air technologies. As much as it is held in suspicion by the public due to a few isolated accidents in the past, this means a boost for nuclear energy, as well as for hydro. Solar and wind power, and other alternative energy sources, will also be exploited more intensively,” it adds.

In Global Insight’s opinion, the risks to economic growth stemming from actions on the environment are tilted to the downside. “It cannot be overemphasized that here we mean the risks to GDP growth as currently measured. Cleaner air would, of course, lead to a healthier population and a more pleasant environment. Any time there is a structural adjustment in the economy, the process of moving resources from old to new activities invariably involves learning new things,” it says. “This in turn implies that a lot of capital and labor that was previously employed in highly productive endeavors will have to adjust to become productive somewhere else, with a temporary negative hit to productivity growth.”

“In addition to the adjustments in the private sector, there will be also a process of learning on the job by governments and regulators. Some mishaps will be inevitable. Unless the cost of such inevitable mistakes is counterbalanced by lucky technological breakthroughs, measured economic growth would be weaker than projected in the baseline,” it concludes.