TD Bank Financial Group economists are calling on policymakers to employ market-based solutions into environmental action plans in a new report.

TD’s report suggests that market mechanisms, including taxes, subsidies and tradable permits, can help mitigate the loss of jobs, income and competitive standing for Canadian business in the global marketplace.

“These tools are an effective way to change the cost structure of pollution to reflect its social detriments,” the report says. “By doing so, polluters bear a higher cost for their actions, and conversely, those making an effort to pollute less incur a lower cost or greater benefit.”

“Canadians are concerned about the environment and want the most pressing challenges addressed,” says Don Drummond, senior vice president and chief economist at TD Bank. “But many believe there’s a fixed economic cost to any environment action. To be sure costs exist but they can be reduced with an appropriate blend of market-based instruments.”

TD indicates that the intent of this report is to expand the focus of environmental action plans beyond traditional tools of regulation and voluntary agreements. “These tools have a role to play, but for the most part they should complement market-based policies,” it argues. “It is important to recognize that not all environmental approaches have the same economic costs. This is an especially pressing point to make for regulation because it remains a central focus of policymakers.”

“Regulations distort the cost-price structure in the market, which causes companies and individuals to behave in a way that is inconsistent with their perceived best interests. A blanket emissions policy can impose exorbitant compliance costs on firms and individuals, to the point where the cost may end
up higher than the value society places on reducing the environmental damage in the first place,” it suggests, adding that regulations also provide little incentive for firms and households to innovate or invest in new technology that would help them exceed the minimum threshold for compliance.

An underlying challenge for policymakers is that existing prices for pollution are too low, and as such, do not reflect the true cost it has on society, TD says. And, there is no incentive to alter behaviour for the greater good, it notes. “This ‘market failure’ means people and companies do not take into
account the consequences of their actions, resulting in overuse,” TD Economics says, suggesting that this challenge can be addressed through a blend of regulation and market-based options.