Governments Urged to End Expensive Emissions-Reduction Policies

Toronto, October 4, 2016 — Canada’s biofuel policies have helped to reduced GHG emissions, but according to a new report from Canada’s Ecofiscal Commission, these reductions have come at a significant cost.

The report, Course Correction: It’s Time to Rethink Canadian Biofuel Policies, examines the extent to which biofuel policies have achieved their stated objectives, and whether these policies have been cost-effective for Canadians.

Federal and provincial governments currently use two different types of policies to encourage the production and use of biofuels. Production subsidies provide cash payments directly to biofuel producers, financed by taxpayers. Fuel mandates require gasoline and diesel to be blended with more expensive ethanol and biodiesel, thereby raising driving costs for consumers.

Course Correction finds that these biofuel policies have reduced GHG emissions by an average of 3 Mt per year from 2010 to 2015, an amount less than one-half of one percent of Canada’s total GHG emissions. These small reductions have been very expensive, however.

According to the Commission’s report the total consumer and taxpayer cost has been approximately $640 million per year. On a per-tonne basis, the estimated average cost of the emissions reductions have ranged from $128 to $185, far greater than the cost achievable with a carbon price, such as the ones already available and coming by 2018 to all Canadian provinces as per yesterday’s Federal announcement.

An analysis of the policies’ other objectives appears unlikely to justify these high costs. When it comes to support for rural communities, the federal government’s own cost–benefit analysis for its renewable fuel mandate found that economic costs far exceeded benefits.

Further, the Ecofiscal report finds that impacts on air pollution and on the development of next-generation biofuels have been negligible.

As a result, the Ecofiscal Commission recommends that all production subsidies be terminated as initially planned, and that renewable fuel mandates be gradually phased out. In their place, the Commission recommends that governments across the country continue to develop a rising pan-Canadian carbon price.

The report also notes that as part of the policy transition, governments should consider complementing carbon pricing with flexible performance standards and broad funding for research and development to spur the shift to low-carbon transportation.

“Carbon pricing should be the backbone of any climate policy, as it is the most cost-effective way to reduce greenhouse gas emissions,” said Commission Chair Chris Ragan, an associate professor of economics at McGill University and member of the federal government’s Advisory Council on Economic Growth.

“In the policy context now emerging in Canada, with over 80% of Canadians living in provinces with a carbon pricing system in place or soon to be, and the federal government stepping in to fill the gaps, it is prudent to re-examine older policies to see if they still make sense. Our research finds that biofuel policies don’t pass this test, and that it’s time for governments to correct course and shift to the more cost-effective policies now available: carbon pricing and flexible performance standards.”

“Furthermore, as Canadians across the country continue to embrace carbon pricing, it will be helpful to have a coordinated pan-Canadian system which will make the various provincial policies even more cost-effective,” Ragan continued.

“This report shows that some sector-specific policies, though well-intentioned, may not be as sensible as many people think. A broadly applied carbon price, if well-designed, can ensure that we reduce GHG emissions while maintaining the strongest economy possible.”

Report Abstract

Biofuel policies have been a contentious topic internationally, with the debate centred on the climate impacts of biofuels, and also their impact on food prices, air quality, and economic development. Course Correction assesses the economic and environmental case for biofuel policies in Canada and examines the extent to which biofuel policies have achieved their stated objectives. In particular, the report finds that biofuels policies have reduced GHG emissions by 3 Mt per year over the 2010-2015 period, however they have done so at a very high cost. Finally, this report concludes that low-carbon transportation policies are still likely needed to complement the emerging carbon pricing policies in Canadian provinces. See Infographic  here

Four Recommendations

The report puts forward four recommendations for policy action:

#1: Provincial and federal production subsidies should be terminated, as initially planned.

Canadian biofuel policies were integral to building domestic capacity to meet federal and provincial fuel mandates, but they were an expensive way to achieve emissions reductions. When compared with other policies, especially carbon pricing, biofuels are clearly not the most cost-effective approach to reducing GHG emissions. The majority of recipients through the federal production subsidy program stopped receiving payments in 2015, so the transition from production subsidies is already well underway.

#2: Provincial and federal governments should phase out renewable fuel mandates.

Renewable fuel mandates have benefited the biofuels sector, but have been costly for consumers and inhibited the development of emerging low-carbon technologies. Decarbonizing the transportation sector will involve many different and competing technologies; the technologies that prove the most effective and economically viable should win the day. Only through this competition of ideas—via policies that provide equal incentives—will the most cost-effective technologies emerge.

#3: Provincial and federal governments should continue to work toward an increasing pan-Canadian carbon price.

The development of carbon pricing in Canada is changing the landscape for climate policy. Federal and provincial governments continue to work toward achieving a pan-Canadian carbon price, which is the most effective and cost-effective way to achieve Canada’s climate targets. Achieving a broad-based carbon price in Canada will shift the incentives for developing and deploying low-carbon technologies.

In particular, it will increase the value of low-carbon technologies—including some biofuels—that can deliver more GHG emissions reductions at a lower cost. The Ecofiscal Commission therefore continues to support Canadian governments in their pursuit of establishing carbon pricing as the best overall policy tool to achieve Canada’s climate targets.

#4: As part of the policy transition, governments should complement carbon pricing with flexible performance standards and broad funding for research and development.

By itself, a pan-Canadian price on carbon may not be enough to meet Canada’s emissions-reduction targets. Market failures can inhibit the development of low-carbon technologies. To make the shift to low-carbon transportation, complementary policies may be required in the short term, such as low-carbon fuel standards or zero-emission vehicle standards. In addition, governments should continue to fund research and development of low-carbon transportation technologies.

Industry Reaction

Reaction from the biofuels industry was swift and highly critical. “The report’s conclusions that biofuels have had no meaningful emissions impact is misleading,” said Advanced Biofuels Canada (ABFC) President Ian Thomson in a statement released also on October 4th.

“It is obvious that nominal use of biofuels (5% or 2%) will produce modest results. But, advanced biofuels used in Canada today reduce emissions by 60% to 115% below fossil gasoline and diesel. In 2014, biofuels delivered 4.4 million tonnes of GHG reductions in Canada, the equivalent of taking 1 million cars off the road while reducing carcinogenic fossil fuel tailpipe emissions.” said the statement.

“Rarely have we seen a report that falls so short on accuracy, balance, scientific rigour, and knowledge of the subject it addresses,” said Thompson, adding that “the report relies too much on an economist’s perfect world, where free markets with an effective price on carbon will seek out the cheapest ways to reduce emissions, rendering regulations unnecessary.”

The full EcoFiscal report Course Correction: It’s Time to Rethink Canadian Biofuel Policies  is available here.