Carbon Caps and Capital – You Read It Here First

A TD-Pembina-Suzuki study released seven weeks ago projected that cutting Canada’s carbon emissions by 20% below 2006 levels, or even 25% below 1990 levels, would only modestly reduce overall Canadian GDP.

Last week, Jack Mintz critiqued this study for positing a fixed amount of capital investment in Canada. Under this highly dubious assumption, climate policy only shifts capital around between industries and provinces but cannot affect total investment.

On Monday, Stephen Gordon breathlessly reported Mintz’s finding that the TD-Pembina-Suzuki study assumed fixed capital. Yesterday, Colby Cosh at Macleans highlighted Gordon’s post as revealing this study to be a “climate-change hoax.”

But as a couple of astute commentators on the Macleans blog pointed out, Relentlessly Progressive Economics had already noted the study’s flawed assumption about capital. On November 5, a week after the study’s release and a month before Mintz’s op-ed, Andrew Jackson wrote, “Lower investment in the oil and gas sector is magically assumed to be balanced off by new investment elsewhere, since national investment always equals national savings.”

The same day, I wrote the following comment on Andrew’s post:

I did indeed wince at the assumption that investment lost in carbon-intensive industries will automatically be offset by precisely equivalent investment gains in other industries.

By positing a fixed amount of investment in Canada regardless of climate policy, the study ignores the threat that carbon-intensive industries will relocate to other countries that choose not to regulate emissions.

We should be discussing policy responses to carbon leakage, rather than assuming away this problem.