INTRODUCTION

Regulations and policies for energy have material consequences for the Canadian economy. Increasingly, energy policy decisions have been predicated on cost benefit analyses that are wholly deficient. This has resulted in material consequences for consumers and the economy. Good energy policies should be based upon sound analyses. Instead, many, not just Canadian, energy policies are being justified without proper assessment of the true costs and benefits with significant economic and social consequences.

In March 2022, the Government of Canada issued its 2030 Emissions Reduction Plan (ERP)^[1] in accordance with international climate commitments agreed under the Paris Agreement. The objective is to reduce national GHG emissions by 40 to 45 per cent below 2005 levels by 2030 and to reach net-zero emissions by 2050. The ERP includes a plan to introduce a regulated zero-emission vehicles (ZEV) sales target that will require 100 per cent of passenger car and light truck sales to be ZEVs by 2035, with interim targets of at least 20 per cent by 2026 and at least 60 per cent by 2030. The proposed new “Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations”^[2] was, with remarkable temerity for such a consequential policy, announced with little fanfare by a Parliamentary Secretary immediately prior to Christmas in 2022.

Under the authority of the Canadian Environmental Protection Act (1999), the Federal Departments of Environment and Climate Change and Health have completed a Regulatory Impact Analysis Statement (RIAS or Statement) based upon an earlier Cost-Benefit Statement (CBS). A consultation period, which lapsed on March 16, 2023, was established by government to receive comments to the proposed Regulation.

ENERGY POLICIES AND COST-BENEFIT ANALYSES

Here it is argued that the conclusions reached to justify implementation of the proposed ZEV regulations are substantially flawed because they ignore material, associated costs that impact the Canadian economy. In addition to concerns about rising demands on our electrical generation and transmission systems, the proposed EV regulation constitutes a significant diminishment of consumer choice and will be accompanied by higher taxes, reduced government revenues, traffic-related disruptions and escalating insurance coverage for motorists.

The resultant limitations for consumer choice alone will have material economic consequences for Canadians. Meanwhile, the projected “benefits” will be largely limited to urban areas close to hydroelectric, nuclear or electrical transmission sites, while the costs and inconveniences that will befall many rural, northern and Indigenous communities are downplayed, or ignored. Hence, the proposed regulation falls far short of a proper public interest determination for the national interest.

The CBS incorporates several flawed assumptions. For instance, the cost-benefit analysis claims a net benefit of $28.6 billion, of which $19.2 billion is attributed to “avoided global damages.”^[3] In effect, this assumes an infinite pool of climate change-related damages against which any assumed “benefits” may be assessed. However, the RIAS presents no analysis of the $19.2 billion of claimed benefits while nonetheless claiming that the figure might be “conservative”. Unreferenced “academic literature” is used to assess the social cost of carbon which subsequently attributes benefits of $9.4 billion to result from energy savings from the use of ZEVs. In effect, the “avoided global damages” used in the Statement assumes a bottomless pit of economic costs against which any proposed policy could be justified. The RIAS also estimates that (2026 to 2050) of the proposed amendments will have projected incremental costs for ZEV vehicles and home chargers of $24.5 billion resulting in savings in net energy costs approaching $33.9 billion and with cumulative reductions in GHG emissions of 430 megatons (Mt). The conclusion is that this would result in net benefits of $28.6 billion, while “working to assist Canada in reaching its GHG emissions reduction targets of 40 per cent below 2005 levels by 2030 and net-zero emissions by 2050.”^[4]

Experts, such as Dr. McKitrick, who have assessed other policies such as the Low Carbon Fuel Standard and the biofuels mandates, conclude that such comparisons typically used to justify climate change policies are irrelevant.^[5] His testimony to the Natural Resources Committee^[6] studying the biofuels mandate indicated that proper comparisons must consider (on one hand) the costs of climate change over the forecast horizon without the policy, versus (on the other hand) the costs of climate change over the forecast horizon with the policy, plus the cost of the policy. For the proposed regulations (even if such an analysis could be done) it is likely that the difference in the costs of climate change between the “do nothing” case and the “do something” case (with or without implementation of significantly more rigorous emissions reductions by mandating ZEV’s) faces the inevitable, and significant, problem of carbon leakage across international borders. This alone would invalidate any further conclusions because the alleged $19.2 billion in “avoided global damages” cannot be accorded any statistical significance. The inescapable conclusion is that global increases in emissions from international sources will more than offset any Canadian reductions, including all those from the transportation sector.

Significantly for the EV assessment, while government contends that its analysis may actually underestimate the damages from climate change, it admits that: “The Department is in the process of updating its SCC estimates” with “results (that) are not yet available.”^[7] This is a material omission because this unavailable data, even if shown to be reasonable and correct, is fundamental to the determination of the findings and conclusions in the Statement. In effect, the assessment is based on debatable “estimates” that are unconfirmed.

Environment and Climate Change Canada’s updated use^[8] of the “social cost of carbon” has since been criticized^[9] by Canadian economist Ross McKitrick as “a brand new model that no one has ever seen before, and it’s spit out this completely different social cost of carbon estimate that flies in the face of all the research that’s been done up to this moment.”

Then there is the issue of required electrical output. The Statement argues that a small increase of Canadian electrical output, ranging from 2.6 to 4.8 per cent would be required to achieve a 100 per cent national conversion to electric vehicle fleets by 2035 and that the rise in electrical pricing would not be “significant”. While this may be the case, by choosing to focus solely on the requirements needed to support a national electrified vehicle fleet, the RIAS ignores other material factors involved in the proposed transition to net zero and apparently omits considerations of issues associated with an expanded electrical generation and transmission system that would be required to achieve the “transition.”

Relying on multiple studies, the Canadian Climate Institute recently noted that the Canadian electricity system will need to double, or triple, its generating capacity by 2050:

“Specifically, studies show that electricity demand will be 1.6 to 2.1 times larger in 2050 compared to today, on a path to net zero. Meanwhile, the capacity of Canadian electricity systems — the maximum amount of electricity that a system can technically produce — needs to grow even more, at least doubling, if not more than tripling, over the same time frame. Aggressive improvements in energy efficiency are needed so Canada’s electricity systems meet electricity demand that is “right sized.” Yet even with significant efficiency improvements, electricity systems must grow substantially for a net zero world. In fact, Canada must, on average, grow system capacity at a rate 3 to 6 times faster to 2050 compared to the previous decade, in order to support rising electricity demand associated with net zero.”^[10]

Having effectively discounted the sweeping changes that will befall the Canadian electrical generation and transmission systems in a transition to net zero, the proposed regulation attempts to implement a “one-size fits all” solution to reduce emissions generated throughout the entire Canadian transportation fleet. Furthermore, the Statement admits that in rural, or remote, locations the adoption of EV’s may face significant resistance because such communities: “may have lower access to public charging infrastructure” and because “prolonged periods of cold temperatures…may affect the range of battery-powered EVs.” Not only are rural communities to be affected but so will low-income households as there are: “rental units which may not be suitable for at-home-charging equipment” and that such “low-income households would likely be disproportionately and negatively affected.”^[11] [Emphasis added].

Hence, not only will consumers, especially lower-income families, be faced with “disproportionate” negative economic effects but opportunities to offset these economic impacts will almost certainly be circumscribed by diminished consumer choice in the marketplace. The regulation also presumes that future EVs will have an added price differential of $3,300 over current internal combustion vehicles based upon assumptions that economies of scale and technological and manufacturing innovations will produce cost-effective solutions to restrain pricing. While this may be correct, it does not consider other factors that could disrupt such assumptions, like increased demand for rare earth minerals for EV batteries resulting in escalating prices. Moreover, the Statement further admits that:

“Manufacturing costs for ZEVs tend to be higher than those for non-ZEVs and are expected to be passed directly to consumers who switch to ZEV purchases in the regulatory scenario, although price differences are expected to decrease over time. [Emphasis added].^[12]

Hence, the assumed incremental cost of $15.3 billion to achieve 100 per cent turnover to electric vehicles is most probably highly conservative. While price reductions among some EVs are presently occurring, they tend to be made for higher-end, expensive models. Another factor is that it generally costs more to insure EVs than traditional vehicles (some data indicate rates as much as 27 per cent higher). Even more concerning is the cost for vehicle repair. Because EV’s currently represent but a small fraction of vehicles on the road, insurance industry-wide data are far from definitive. However, trends are emerging that show low-emission automobiles are increasingly being written off after incurring minor damage. Battery packs can cost tens of thousands of dollars and represent up to 50 per cent of an EV’s price tag, often making replacement uneconomic. Because battery packs have been incorporated as “structural” components of these vehicles, insurers appear to be facing few options to assess, repair or certify battery packs damaged after even minor accidents. Not only does this undercut imputed economic gains from EVs, there is the emerging spectre of significant environmental costs as damaged battery packs are sent to scrapyards. This constitutes an expensive gap in the presumed “circular economy.” Worse, EV battery recycling facilities, where damaged or discarded battery packs can be stored in specialised containers, are either non-existent, or in their infancy.

AN EXAMINATION OF ALLEGED COST BENEFITS FROM NET ZERO POLICIES

The passage of the US Inflation Reduction Act (IRA) with its material decarbonization economic initiatives has caused a global reaction among trade partners, including Canada.^[13] In a parallel development the Trudeau government announced C$80 billion in tax credits for clean technology over the next decade, including C$25 billion for investments in clean electricity. Notwithstanding that the US is off-target to reach the goal of a 50 per cent reduction in greenhouse gas emissions by 2030 (based on 2005 levels), western governments continue to accelerate policies aimed at achieving the transition to a net zero economy.

Nevertheless, western governments including Canada and the EU have embraced the concepts of “build back better” associated with a “green economic recovery,” largely based on attempts to reduce GHG emissions from all sources. For instance, in addition to pending and existing regulatory proposals, the 2023 Canadian budget^[14] expanded measures first announced in the 2022 Fall Economic Statement to include new incentives:

These policies, which some believe embrace questionable concepts of central planning, have recently been brought into question by the National Bureau of Economic Research (NBER)^[15] with a study that concludes that, for the US at least, these policies may impose significant costs on their economy. Given the acceleration of GHG-reduction legislations in Canada, measures that include not just a carbon tax but numerous other GHG-reduction initiatives such as regulatory standards for clean fuel, electrical generation and the proposed EV Regulations, this study may also have material implications for Canada. It concludes that for the US the annual recurring costs of green policies could reach USD $483 billion per year with forecast real GDP and consumption “2–3 per cent less in the long run if policies are implemented as stated, underscoring the opportunity costs of achieving green objectives when resources might be more efficiently deployed”.^[16] The authors also warn of the perils associated with implementation of policies that embrace high ideals without the benefit of well-considered, realistic analyses:

“Political platforms are not detailed policy proposals, but directional documents intended to provide a vision of political leadership. Many details are filled in later, if voters invest their votes in the vision articulated in the platform. The analysis presented here highlights the importance of that policy design and implementation step. If implemented literally without adjustment or nuance, the bold transformation of the energy system articulated in the Biden plan, or variants more closely adhering to the Green New Deal, promise substantial economic opportunity costs.”^[17]

There are growing signs that the economic analyses employed to justify the material capital expenditures behind these policy goals may be misleading, if not misplaced. For instance, in face of continued assertions of a net benefit derived from the Canadian federal fuel charge,^[18] Canada’s Parliamentary Budget Officer recently reported that:

“When the economic impact is combined with the fiscal impact the net cost increases for all households, reflecting the overall negative economic impact of the federal fuel charge. Taking into consideration both fiscal and economic impacts, we estimate that most households will see a net loss, paying more in the federal fuel charge and GST, as well as receiving lower incomes, compared to the Climate Action Incentive payments they receive and lower personal income taxes they pay (due to lower incomes).

Given the structure of the federal fuel charge, the overall budgetary impact will effectively be limited to the economic impact of lower income tax revenues. We estimate that the federal fuel charge will reduce the budgetary balance (that is, increase the budgetary deficit) by $1.8 billion in 2023–24 and ultimately by $7.1 billion in 2030–31.”^[19]

Given the magnitude of deficit spending on these “transition” programs, all of which directly impact the energy sector, the Parliamentary Budget Office report should raise concerns, not just about the validity of the presumed cost benefits of these regulatory initiatives, but the value of accelerating, much less continuing with, these expenditures:

“Canada has followed through on its Paris commitments over the past seven years by taking action, investing over $120 billion to reduce emissions, protect the environment, spur clean technologies and innovation, and help Canadians and communities adapt to the impacts of climate change.”^[20]

In this regard the Fraser Institute cautioned:

“According to the government’s 271-page emissions-reduction plan: “Putting a price on pollution is widely recognized as the most efficient means to reduce greenhouse gas emissions.” The obvious corollary — other policies, such as $120 billion in spending, are widely recognized as relatively inefficient and therefore unnecessarily expensive means to reducing greenhouse gas (GHG) emissions.”^[21]

The Canadian government’s intent to attain net zero GHG emissions by 2050 through the use of multiple policy options, including clean-fuel standards and bans on single-use plastics has been shown not just to be costly but perhaps unattainable. Others^[22] have cautioned that, even if its Canadian “net-zero” policies were effective, the economic pain would be offset by accelerating emissions from China and India. China alone has approved plans to add a total 8.63 gigawatts (GW) of new coal power plants in the first quarter of 2022, with emissions that are projected to swamp all of Canada’s efforts to achieve “net-zero.”

Meanwhile, the Canadian government, echoing most economists who maintain that pricing mechanisms like a carbon tax are most efficient way to reduce GHG emissions, are nonetheless pursuing additional policies. A recent (April 1, 2023) example are new guidelines requiring concrete of more than $10 million used in federal projects to be “10 per cent less GHG-intensive” than a regional average.^[23] Once again, the government has supplied no cost-benefit analysis to justify these measures.

Even when economic analyses for alternative energy projects are provided, there are indications that the modeling used in the projections may be questionable. Recent studies^[24] in the UK that compared governmental price modelling against actual results from wind producers have found “surprising irregularities.” Although the UK’s Department of Energy predicted that capital expenditure per MW of offshore wind would fall by more than 50 per cent between 2018 and 2025 and that operation and maintenance costs would fall by a factor of four (with average output at 51 per cent installed capacity over the course of a turbine’s lifetime), it has been shown that the cost of installing and operating windfarms actually increased throughout the 2010’s. In fact, the operation costs per MW for new offshore turbines quadrupled between 2008 and 2018 while capital expenditures doubled.

More broadly, the Manhattan Institute has challenged even the most basic assumptions that underlie claims that wind, solar, and EVs have attained cost parity with traditional energy sources, or other transportation modes:

“Even before the latest period of rising energy prices, Germany and Britain, both further down the grid transition path than the U.S., have seen average electricity rates rise 60%–110% over the past two decades. The same pattern is visible in Australia and Canada. It’s also apparent in U.S. states and regions where mandates have resulted in grids with a higher share of wind/solar energy. In general, overall U.S. residential electricity costs rose over the past 20 years. But those rates should have declined because of the collapse in the cost of natural gas and coal — the two energy sources that, together, supplied nearly 70% of electricity in that period. Instead, rates have been pushed higher thanks to elevated spending on the otherwise unneeded infrastructure required to transmit wind/solar-generated electricity, as well as the increased costs to keep lights on during “droughts” of wind and sun that come from also keeping conventional power plants available (like having an extra, fully fueled car parked and ready to go) in effect by spending on two grids. None of the above accounts for the costs hidden as taxpayer-funded subsidies that were intended to make alternative energy cheaper. Added up over the past two decades, the cumulative subsidies across the world for biofuels, wind, and solar approach about $5 trillion, all of that to supply roughly 5% of global energy.”^[25]

At least in Canada, there appears to be an unmistakable trend among some agencies not to actively examine, or explain, the emerging differences between projected and real-world experience with energy production. Is it possible that this is a consequence of their failing to meet imposed statutory requirements for net zero? Meanwhile, consumers are bearing the costs of mounting electrical and heating bills. In the EU, energy prices reached record levels in 2022 as producer and consumer prices more than doubled.^[26] This has forced governments throughout the EU to implement price caps, interventions that are projected to cost more than USD $500 billion.^[27] The Bruegel think-tank noted that the European Union and United Kingdom have committed €280 billion ($280 billion) to offset energy price increases to consumers, while the German government announced a €65 billion ($65 billion) aid package for energy costs. In sum, recent energy subsidies in the EU and the UK have reached more than €500 billion.

The inescapable conclusion is that current global increases in emissions from international sources will be more than offset even with the most stringent Canadian reductions in emissions from the transportation sector. Indeed, Canada’s global contribution to GHG’s is relatively miniscule (less than 2 per cent). Hence, the imputed value of $19.2 billion used for “avoided global damages” in the Statement will be entirely overtaken by rising international emissions, not the least of which will emanate from China and India. In effect, any Canadian aspirations for “climate leadership” by curbing domestic emissions will be trumped by the certain growth in international emissions while material economic and social costs will cascade onto Canadians — with no reductions in global GHG’s.

CONCLUSION

Policies for Canadian energy production and transmission, with a sole focus on emissions, are being enacted with scant attention paid to the direct and unpredictable effects on the economy. The proposed EV regulations inadequately consider many factors, not the least of which is the assumption of widespread public acceptance of a significantly altered transportation fleet. Many would consider the regulatory assessment as a veiled attempt to justify policies that are beset with unattainable goals and unpredictable consequences. In short, is this an energy and transportation policy designed to reduce Canadian emissions or to selectively eliminate an entire class of transportation technologies?

Canadian energy policies are being designed and introduced in the absence of valid assessments of their costs and benefits as Federal expenditures and deficits are ballooning. This has left the Parliamentary Budget Office with the unenviable task of producing independent, retroactive assessments of enacted legislation. Even dispassionate observers would probably conclude that Canadian consumers and taxpayers are becoming worse off as a result of these, largely unconsidered, policies. McKitrick provided a clear, but stark, assessment of the consequences of ill-considered energy policies:

“In Ontario we are living with the consequences of a series of bad policy decisions made between 2004 and 2014 concerning the electricity sector. Enthusiasm for phasing out coal power and adding large amounts of wind and solar capacity, combined with uncritical acceptance of claims that doing so would create jobs without raising costs, put us on a path of rapidly rising electricity commodity prices relative to competing jurisdictions. The Province of Ontario began subsidizing electricity to stem an exodus of manufacturing and relieve hardships on households. A new report from the CD Howe Institute estimates that these measures now cost the province $6.5 billion annually. This is $700 million more than Ontario spends annually on Long Term Care facilities.”^[28]

Canadians, not just the Parliamentary Budget Officer, should be paying attention to energy policy.

* Dr. Wallace retired as a Permanent Member of the National Energy Board in 2016. He is a board member of the Canada West Foundation and a Fellow of the Canadian Global Affairs Institute.

The author acknowledges the enlightened advice and counsel received in the preparation of this submission from several individuals: Mr. Steve Kelly, P. Eng., Dr. Murray Lytle, Dr. Jack Mintz, Dr. Colleen Collins, Mr. Neil McCrank, P. Eng., and Mr. G. Dale Friesen, P. Eng.  Any errors or omissions are the sole responsibility of the author.

1. “Canada’s 2030 Emissions Reduction Plan” (12 July 2022), online: Government of Canada <www.canada.ca/en/services/environment/weather/climatechange/climate-plan/climate-plan-overview/emissions-reduction-2030/plan.html>.
2. Government of Canada, Public Works and Government services Canada. “Canada Gazette, Part I, Volume 156, Number 53: Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations”, (30 December 2022), online: Canada Gazette <gazette.gc.ca/rp-pr/p1/2022/2022-12-31/html/reg1-eng.html>.
3. Ibid.
4. Ibid.
5. Ross McKitrick, “Economic Analysis of the 2022 Federal Clean Fuels Standard” (6 September 2022), online (pdf): LFX Associates <www.lfxassociates.ca/uploads/4/8/0/8/4808045/cfs_report_2022.pdf>.
6. “Ross McKitrick, Ph.D. Professor of Economics University of Guelph…”, online (pdf): Presentation to House of Commons Standing Committee on Natural Resources <www.ourcommons.ca/Content/Committee/432/RNNR/Brief/BR11467603/br-external/McKitrickRoss-e.pdf>.
7. Supra note 2.
8. Social cost of greenhouse gas emissions, online: Government of Canada <www.canada.ca/en/environment-climate-change/services/climate-change/science-research-data/social-cost-ghg.html>.
9. ANALYSIS: Behind Guilbeault’s ‘Social Cost of Carbon’ Speech, online: The Epoch Times <www.theepochtimes.com/analysis-behind-guilbeaults-social-cost-of-carbon-speech_5216490.html>.
10. “The Big Switch: Powering Canada’s Net Zero Future” (4 May 2022), online (pdf): Canadian Climate Institute <www.climateinstitute.ca/wp-content/uploads/2022/05/The-Big-Switch-May-4-2022.pdf>.
11. Supra note 2.
12. Chris Randall, “Ford raises prices for the F-150 Lightning by up to $8,500”, (10 August 2022), online: electrive.com <www.electrive.com/2022/08/10/ford-raises-prices-for-the-f-150-lightning-by-up-to-8500/#google_vignette>.
13. Maura Forrest, “Canada’s C$80B response to U.S. clean energy push: ‘We will not be left behind’”, (29 March 2023), online: Politico <www.politico.com/news/2023/03/29/canada-u-s-clean-energy-ira-00089284>.
14. “Budget 2023 A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future” (last modified 28 March 2023), online: Government of Canada <www.budget.canada.ca/2023/home-accueil-en.html>.
15. Timothy Fitzgerald & Casey B. Mulligan, “The Economic Opportunity Cost of Green Recovery Plans” (2023) National Bureau of Economic Research Working Paper No 30956.
16. Ibid
17. Ibid.
18. Spencer Van Dyk “Guilbeault defends carbon price, says on average, households will pay more but rich will shoulder burden”, (2 April 2023), online: CTV News <www.ctvnews.ca/politics/guilbeault-defends-carbon-price-admits-average-household-will-pay-more-even-after-rebates-1.6338974>.
19. Office of the Parliamentary Budget Officer, A Distributional Analysis of the Federal Fuel Charge under the 2030 Emissions Reduction Plan, (30 March 2023), online: <www.pbo-dpb.ca/en/publications/RP-2223-028-S–distributional-analysis-federal-fuel-charge-under-2030-emissions-reduction-plan–analyse-distributive-redevance-federale-combustibles-dans-cadre-plan-reduction-emissions-2030>.
20. Environment and Climate Change Canada, Canada’s Eighth National Communication and Fifth Biennial Report on Climate Change (2 January 2023), online: <www.canada.ca/en/environment-climate-change/services/climate-change/greenhouse-gas-emissions/fifth-biennial-report-climate-change-summary.html>.
21. Matthew Lau, “Federal government’s climate spending tab excludes costs you’ll pay”, (8 February 2023), online: Fraser Institute <www.fraserinstitute.org/article/federal-governments-climate-spending-tab-excludes-costs-youll-pay>.
22. Kenneth P. Green, “Federal government continues nonsensical ‘net-zero’ policy”, (27 July 2022), online: Fraser Institute <www.fraserinstitute.org/article/federal-government-continues-nonsensical-net-zero-policy>.
23. Matthew Lau, “Ottawa’s new rules for suppliers will concretize greenflation”, (30 March 2023), online: Financial Post  <financialpost.com/opinion/ottawa-new-rules-suppliers-concretize-greenflation>.
24. Gordon Hughes, Wind Power Economics: Rhetoric & Reality, vol 1 (Salisbury, UK: Renewable Energy Foundation, 2020), online (pdf): <www.ref.org.uk/Files/performance-wind-power-uk.pdf>.
25. Mark P. Mills, “The “Energy Transition” Delusion A Reality Reset”, Manhattan Institute (30 August 2022), online: <www.manhattan.institute/article/the-energy-transition-delusion>.
26. Council of the European Union, “Infographic – Energy price rise since 2021” (last modified 28 March 2023), online: European Council <www.consilium.europa.eu/en/infographics/energy-prices-2021>.
27. Anna Cooban & Lauren Kent, “Price of war: UK and EU throw $500 billion at energy subsidies”, (8 September 2022), online: CNN Business <www.cnn.com/2022/09/08/business/liz-truss-energy-price-cap-europe/index.html>.
28. Supra note 6.