How Government Can Often Make The Environment Worse

Canadian firms spend billions of dollars each year to minimize the environmental and social effects of the manufacture and transport of their products. These investments include money spent on research and development, on building infrastructure and maintaining it, on making sure day-to-day processes are working well, and on complying with regulations.

Firms face clear incentives to abide by the rules, to listen to people potentially affected by their activities, and to make sure scientific information circulates widely. It is in their own interest to ensure that everything runs smoothly and that the best technologies are used to minimize environmental problems. They have every reason to avoid environmental degradation, for which they would ultimately be held responsible, whether by governments, by the courts, or by public opinion.

Research and development, in environmental matters as in any other, are costly and risky. They involve risk because the firms that engage in them are never sure in advance of the results. Any factor that makes an activity costlier or riskier will discourage this activity. Therefore, reducing needless risks surrounding innovation in environmental matters should lead to more innovation.

Factors complicating the adoption of new technologies

Some degree of risk is inherent to R&D, innovation, and investment. But certain types of risk could be minimized by enlightened public policy. Among the problems that can be addressed by government, three are worthy of special mention: the growing complications surrounding official environmental assessments, the rise of the concept of social licence, and the effects of changing fiscal and regulatory environments.

First, environmental assessment processes have become unduly long, complicated, costly, and uncertain. This increases the risks involved in investing in better ways of doing things, and could lead to many abandoned projects, even if they are worthy of consideration. The recent Expert Panel mandated by the Minister of Environment and Climate Change is a case in point.

Trying to replace or improve infrastructure has become a nightmare, but it can be expected to get worse if Minister McKenna goes forward with its recommendations. This Panel's suggestions would make assessments more political and lengthier, which can only increase risk from the viewpoint of developers. This would be an investment killer. The hot off the press Expert Panel on the modernization of the National Energy Board recommends sweeping changes to the approval process, including having the Cabinet decide if the projects are "in the national interest". Again, more politics and more uncertainty.

Second, the rise of the concept of social licence has increased the risks involved in many innovations and investments that could lead to better environmental outcomes. Social licence is a concept that is ill-defined, and Canada's laws and regulations make no reference to it. Taking into account such a fuzzy concept when deciding which projects will be allowed by regulatory institutions opens the door to arbitrary decisions and threatens the rule of law.

Again, this is clearly another investment killer, and the government needs to step in and defend the universality and predictability of the rule of law. Unsurprisingly, the aforementioned Panels instead recommend increasing the importance of social licence.

Finally, a firm that commits to a major investment, be it in infrastructure or innovation, expects a return on its investment. The calculated return is always hypothetical, as the future is unknown, but one of the determinants of return is the cost of regulation and taxation. A volatile regulatory and tax environment discourages investment, as it creates extra uncertainty.

If the government is to help make the adoption of cleaner technologies less risky, it needs to do its job, which is to set clear, predictable, stable ground rules — and then get out of the way. If it follows the Panels' recommendations, however, it will be doing the opposite and seriously undermining the Canadian resource sector.

Jasmin Guénette is Vice President of the Montreal Economic Institute. The views reflected in this op-ed are his own.

____________________
Read more articles on the themes of "Environment" and "Regulations."