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Stephen Gordon: Yes, minister, emission regulations have costs

Why consumers will pay for regulation.

This is from last Thursday’s Hansard:

Mr. Dean Del Mastro (Parliamentary Secretary to the Prime Minister and to the Minister of Intergovernmental Affairs, CPC): Mr. Speaker, picking up a bit on where the Hon. Minister of Canadian Heritage left off, it is not just that the Canadian public rejected Liberal proposals over the last three campaigns, of course mindful of the Liberals’ woeful record with respect to climate change, but it is something to hear the Liberals continue to retread through ideas that have been rejected and present them once again as though they are new and should be taken up even though Canadians have said something quite different.

Does the member understand that there is a world price for oil, there is a world price for gasoline and that oil companies like the idea of a carbon tax principally because they will get the world price for oil or gasoline regardless, but the carbon tax will then be paid by Canadian consumers and it will completely exempt them? However, if they are actually regulated, they will have to absorb these costs and only receive the world price for oil and gasoline. Oil companies are not charitable organizations. They are an important industry for Canada, but they are not charitable.

It’s very true that oil companies are not charitable organizations–which is why it’s not a good idea to make policy based on the assumption that they will passively absorb the costs of new regulations. It’s not at all obvious why firms would pass along the costs of a carbon price but not the (larger) costs of regulation.

Firms’ responses to new regulations depend very much on what form those regulations take, so unless and until the Conservatives outline what regulations they have in mind, we won’t know the exact mechanism by which the costs will be passed on. But if, say, the regulation imposes the use of a new technology that reduces profitability, we’ll see a reduction in investment and output by Canadian oil companies and consumers will simply avail themselves of more imported oil as domestic production contracts. This shift to imported, unregulated oil will attenuate whatever effect the regulations would have had. And although consumer prices won’t be affected–imports are set by world prices–the cost of these regulations will manifest itself in the form of reduced incomes.

This whack-a-mole game will play out regardless of the form the regulation takes. Regulation is costly, and those costs will, one way or another, be passed on to consumers, workers and savers.

Stephen Gordon is a professor of economics at Laval University

This article originally appeared in Maclean’s.