As the world faces the dual crises of climate change and biodiversity loss, governments are looking to policy tools that align economic activities with sustainability. Carbon taxes are often seen as the most efficient economic approach to reducing environmental harm. However, in Canada, political resistance is forcing policymakers to consider alternatives.
Enter subsidies: While not as efficient, they can be a practical “second best” solution when carefully designed.
Carbon taxes work by putting a price on emissions, incentivizing businesses and consumers to reduce their carbon footprint. Despite their economic efficiency, these taxes can be politically unpopular because they impose visible costs on specific groups.
In British Columbia, for example, the provincial carbon tax, once hailed as a model of environmental policy, has encountered resistance. Concerns about affordability and competitiveness have made it increasingly difficult to push for more ambitious carbon pricing. Nationally, similar dynamics have played out, with opposition to the federal carbon-pricing system limiting its potential scope.
Given these political challenges, subsidies may be a more politically feasible alternative to incentivize the adoption of low-carbon technologies and behaviours.
In fact, this "second best" approach already exists in Canada: Federal and provincial governments offer subsidies for electric vehicle (EVs) purchases, home energy retrofits and renewable energy installations.
These subsidies are crucial in making green technologies more accessible and helping consumers and businesses transition to lower-carbon options. While not as economically efficient as carbon taxes, these subsidies can still reduce emissions by incentivizing shifts toward cleaner technologies.
However, subsidies also have limitations. They must be designed carefully to avoid unintended consequences, such as expanding markets in ways that offset the environmental benefits.
Subsidies have political advantages over taxes because they provide direct benefits to specific groups, making them easier to implement and sustain. However, these same features can create significant risks. Once established, subsidies often become difficult to remove due to vested interests that form around them. This “lock-in” effect can lead to inefficient policies that persist long after they have outlived their usefulness.
Canada has already seen the risks of lock-in with fossil fuel subsidies, which continue despite global commitments to phase them out. Although the government has made some progress in reducing these subsidies, powerful industries that benefit from them have successfully resisted full elimination.
Subsidies can also have unintended environmental impacts. For instance, while subsidizing EVs helps reduce emissions from gasoline-powered vehicles, it can increase demand for vehicles overall, leading to higher road congestion, infrastructure costs, and resource extraction for battery materials.
Additionally, the environmental benefits of EVs depend on the cleanliness of the electricity grid that powers them. In provinces such as Alberta, where much of the electricity is generated from fossil fuels, the gains from EV adoption are limited.
To maximize the benefits of subsidies, Canada must ensure they are well-targeted and designed to avoid common pitfalls. One way to achieve this is by setting time limits or sunset clauses on subsidies, allowing policymakers to periodically review their effectiveness and adjust or phase them out if necessary.
For example, Canada’s federal EV subsidy could be revisited after a decade to assess whether it is still needed or if other policies, such as improvements to public transportation, could offer a better environmental return.
Policymakers should also prioritize “additionality” when designing subsidies. This means ensuring that the subsidy is incentivizing new behavior or investments that would not have occurred without government support.
Recent studies show that a significant portion of EV subsidies in Canada went to households that would have purchased an EV regardless of the incentive, reducing the policy's overall effectiveness.
Moreover, Canadian policymakers must coordinate subsidy policies across sectors to ensure their environmental impact is maximized. For instance, subsidies for EVs should be coupled with efforts to decarbonize the electricity grid.
As political resistance to carbon taxes increases, Canada must also somehow face the urgent challenge of climate change. Subsidies deployed wisely could drive transformational change, all while side-stepping the political and economic realities of carbon pricing.
Rashid Sumaila is a University Killam Professor and Canada Research Chair (Tier 1) in Interdisciplinary Ocean and Fisheries Economics at the Institute for the Oceans and Fisheries, and the School of Public Policy and Global Affairs, University of British Columbia.
Comments
"Good" subsidies (like the carbon tax) are useless as long as we're still subsidizing the fossil fuel industries to the tune of $7 trillion per year (IMF) globally. Fossil fuel corporations have to be forced to internalize all the social (health) and environmental costs of their widespread and deadly damage and destruction. They'll then pass on those costs to the consumer, who will find fossil fuels too expensive, which will create a demand for lower cost renewables. Let's use the "invisible hand of the market" in our favour for once.
How many subsidies can the Canadian public support? There is a limit to how many times each tax dollar can be spent....once. Are we to go broke grace a round-after-round of subsidies, for which we pay twice - ie the subsidy itself, then the higher prices they can provoke? The country's leadership must grow a pair and take the action required to ensure no further degradation of our children's and grandchildren's already-compromised health and quality of life expectations. Failure to take definitive action speaks to the degree to which politicians are "owned" by "The Economy", the profit-making tool of the most wealthy.
We need a price on carbon, targeted subsidies (free e-bike for people without a car), regulations, removal of all fossil fuel subsidies, and activism including civil disobedience. It's looking very much like we'll need to do more to stop the destruction.
The idea that the carbon tax is more efficient than subsidies is one of these free-market assumptions that never seems to need to be actually evaluated. The idea goes that
--Markets are efficient, inherently more efficient than any other approach to allocation
--Therefore, any "distortion" of markets, say by a subsidy or tax, by definition reduces efficiency
--The less market-y the distortion, the more inefficient it is, so an overall tax leaving consumption decisions to consumers is less inefficient than a direct subsidy to targeted items.
There is also a sub-idea that taxing things to increase the price will lead to a seamless, efficient reordering of priorities.
But markets aren't efficient. OBVIOUSLY markets aren't efficient, they're creating global warming that will destroy the whole economy, how much more inefficient can you bloody get?
More specifically, even within conventional economic ideas there is a distinction drawn between goods characterized by elastic and inelastic demand. That seamless reordering of priorities works when demand is completely elastic. It doesn't work at all for things characterized by completely inelastic demand. Probably nothing is at 100% either way, but for instance you can expect demand for food to be pretty inelastic . . . even if prices rise, people still have to eat, and so food sellers with a de facto cartel going can jack up prices and laugh all the way to the bank. So, apparently demand for fossil fuels is fairly inelastic, an article I read cited it being around 60% inelastic. So, carbon taxes are not going to be all that efficient. One of the reasons is that substitutes have high up-front costs, which people often can't afford to pay. Since subsidies work by reducing those high up-front costs, I think it's perfectly possible for a well-designed subsidy to be more efficient than the carbon tax.
The advantage of the carbon tax is not that it's efficient, it's that it is pervasive. Subsidies target key big-ticket items which represent big obvious chunks of carbon emissions--cars, home heating and so on. But a carbon tax also hits all the individually smaller things . . . home snow blowers, lawn mowers, agricultural tractors, mining equipment, construction vehicles, blah blah blah. That said, I think there is a tendency where as the big ticket items shift electric, the rest of the economic ecosystem will tend to follow that established technology.