Fraser Institute
Canada can solve its productivity ‘emergency’—we just need politicians on board
From the Fraser Institute
By Jake Fuss
Policymakers are slowly acknowledging the problem, but their proposed solutions are troubling.
According to Carolyn Rogers, senior deputy governor of the Bank of Canada, it’s time to “break the glass” and respond to Canada’s productivity “emergency.” Unfortunately, the country is unlikely to solve this issue any time soon as politicians are doubling down on the policy status quo rather than making sorely needed reforms.
Worker productivity—the level of output in the economy per hour worked—is a crucial indicator of a country’s underlying economic performance. When productivity increases, we not only increase our output and efficiency, but worker wages typically rise as well.
According to Statistics Canada, the country’s productivity dropped for six consecutive quarters before eking out a small gain in the final quarter of 2023. Rogers is right, this is an emergency, and it’s unsurprising that living standards for Canadians are falling alongside our productivity. Since the second quarter of 2022 (when it peaked post-COVID), inflation-adjusted per-person GDP (a common indicator of living standards) declined from $60,178 to $58,111 by the end of 2023—and declined during five of those six quarters, now sitting below where it was at the end of 2014.
Policymakers are slowly acknowledging the problem, but their proposed solutions are troubling. Federal Finance Minister Chrystia Freeland, for instance, recently emphasized the importance of making “investments in productivity and growth.” Yet, the federal government increased taxes on capital gains in its recent budget, which will disincentivize investment in Canada. Usually, when a politician says the word “investment” this is a fancy way of saying we need more government spending.
And in fact, more government spending appears to be the popular solution to every problem for most governments in Canada these days. Canadian premiers and the prime minister already support this approach in health care even though it’s been tried for decades. The result? In 2023, the longest wait times for health care on record despite having the most expensive system (as a share of GDP) among high-income universal health-care countries.
And now, these same policymakers are advocating for the same approach to boost productivity—that is, throw taxpayer money at the problem and hope it will somehow go away.
But there’s hope—governments have other options. For starters, governments from coast to coast could eliminate interprovincial trade barriers, which limit productivity improvements by (among other things) shielding inefficient local businesses from competition from businesses in other provinces. Governments also effectively prohibit the entry of foreign-owned competitors in crucial industries such as telecommunications and air travel. There’s less incentive for Canadian firms to innovate or improve when there’s no threat to shake things up.
Moreover, if governments reduced regulatory red tape and subsequent compliance costs, firms could allocate more resources towards training their workers, investing in equipment, and producing new and better products. And if governments reduced tax rates on families and businesses, they could make Canada more attractive to productive businesses, high-skilled workers and investors. Our current relatively high tax rates on capital gains, personal income and businesses income discourage capital investment and scare away the best and brightest scientists, engineers, doctors and entrepreneurs.
The Trudeau government, and other governments in Canada, seemingly want to spend their way out of our productivity emergency. While some level of government spending can help improve productivity, continued spending increases reallocate resources from the private sector to the government sector, which is by nature less productive. Governments should impose credible restraints (i.e. fiscal rules) on the growth of government spending to prevent this crowding out of private-sector investment.
There are plenty of ways Canada can boost productivity. We just need policymakers to be on board.
Author:
From the Fraser Institute
After accounting for backup, energy storage and associated indirect costs—estimated solar power costs skyrocket from US$36 per megawatt hour (MWh) to as high as US$1,548, and wind generation costs increase from US$40 to up to US$504 per MWh.
At a recent energy conference in Houston, U.S. Energy Secretary Chris Wright said the Trump administration will end the Biden administration’s “irrational, quasi-religious policies on climate change that imposed endless sacrifices on our citizens.” He added that “Natural gas is responsible for 43 per cent of U.S. electricity production,” and beyond the obvious scale and cost problems, there’s “simply no physical way that wind, solar and batteries could replace the myriad uses of natural gas.”
In other words, as a federal election looms, once again the United States is diverging from Canada when it comes to energy policy.
Indeed, wind power is particularly unattractive to Wright because of its “incredibly high prices,” “incredibly huge investment” and “large footprint on the local communities,” which make it unattractive to people living nearby. Globally, Wright observes, “Natural gas currently supplies 25 per cent of raw energy globally, before it is converted into electricity or some other use. Wind and solar only supply about 3 per cent.”
And he’s right. Renewables are likely unable, physically or economically, to replace natural gas power production to meet current or future needs for affordable, abundant and reliable energy.
In a recent study published by the Fraser Institute, for example, we observed that meeting Canada’s predicted electricity demand through 2050 using only wind power (with natural gas discouraged under current Canadian climate policies) would require the construction of approximately 575 wind-power installations, each the size of Quebec’s Seigneurie de Beaupré wind farm, over 25 years. However, with a construction timeline of two years per project, this would equate to 1,150 construction years. This would also require more than one million hectares of land—an area nearly 14.5 times the size of Calgary.
Solar power did not fare much better. According to the study, to meet Canada’s predicted electricity demand through 2050 with solar-power generation would require the construction of 840 solar-power generation stations the size of Alberta’s Travers Solar Project. At a two-year construction time per facility, this adds up to 1,680 construction years to accomplish.
And at what cost? While proponents often claim that wind and solar sources are cheaper than fossil fuels, they ignore the costs of maintaining backup power to counter the unreliability of wind and solar power generation. A recent study published in Energy, a peer-reviewed energy and engineering journal, found that—after accounting for backup, energy storage and associated indirect costs—estimated solar power costs skyrocket from US$36 per megawatt hour (MWh) to as high as US$1,548, and wind generation costs increase from US$40 to up to US$504 per MWh.
The outlook for Canada’s switch to renewables is also dire. TD Bank estimated that replacing existing gas generators with renewables (such as solar and wind) in Ontario could increase average electricity costs by 20 per cent by 2035 (compared to 2021 costs). In Alberta, electricity prices would increase by up to 66 per cent by 2035 compared to a scenario without changes.
Under Canada’s current greenhouse gas (GHG) regulatory regime, natural gas is heavily disfavoured as a potential fuel for electricity production. The Trudeau government’s Clean Electricity Regulations (CER) would begin curtailing the use of natural gas beginning in 2035, leading largely to a cessation of natural gas power generation by 2050. Under CER and Ottawa’s “net-zero 2050” GHG emission framework, Canada will be wedded to a quixotic mission to displace affordable reliable natural gas power-generation with expensive unreliable renewables that are likely unable to meet expected future electricity demand.
With a federal election looming, Canada’s policymakers should pay attention to new U.S. energy policy on natural gas, and pull back from our headlong rush into renewable power. To avoid calamity, the next federal government should scrap the Trudeau-era CER and reconsider the entire “net-zero 2050” agenda.
Kenneth P. Green
Senior Fellow, Fraser Institute
From the Fraser Institute
Mark Carney, our next prime minister, has floated a climate policy plan that he says will be better for Canadians than the “divisive [read: widely hated] consumer carbon tax.”
But in reality, Carney’s plan is an exercise in misdirection. Under his plan, instead of paying the “consumer carbon tax” directly and receiving carbon rebates, Canadians will pay more via higher prices for products that flow from Canada’s “large industrial emitters” who Carney plans to saddle with higher carbon taxes, indirectly imposing the consumer carbon tax by passing those costs onto Canadians.
Carney also wants to shift government subsidies to consumer products of so-called “clean technologies.” As Carney told the National Observer, “We’re introducing changes so that if you decide to insulate your home, install a heat pump, or switch to a fuel-efficient car, those companies will pay you—not the taxpayer, not the government, but those companies.” What Carney does not mention is that much of the costs imposed on “those companies” will also be folded into the costs of the products consumers buy, but the cause of rising prices will be less distinguishable and attributable to government action.
Moreover, Carney says he wants to make Canada a “clean energy superpower” and “expand and modernize our energy infrastructure so that we are less dependent on foreign suppliers, and the United States as a customer.” But this too is absurd. Far from being in any way poised to become a “clean energy superpower,” Canada likely won’t meet its own projected electricity demand by 2050 under existing environmental regulations.
For example, to generate the electricity needed through 2050 solely with solar power, Canada would need to build 840 solar-power generation stations the size of Alberta’s Travers Solar Project, which would take about 1,700 construction-years to accomplish. If we went with wind power to meet future demand, Canada would need to build 574 wind-power installations the size of Quebec’s Seigneurie de Beaupre wind-power station, which would take about 1,150 construction years to accomplish. And if we relied solely on hydropower, we’d need to build 134 hydro-power facilities the size of the Site C power station in British Columbia, which would take 938 construction years to accomplish. Finally, if we relied solely on nuclear power, we’d need to construct 16 new nuclear plants the size of Ontario’s Bruce Nuclear Generating Station, taking “only” 112 construction years to accomplish.
Again, Mark Carney’s climate plan is an exercise in misdirection—a rhetorical sleight of hand to convince Canadians that he’ll lighten the burden on taxpayers and shift away from the Trudeau government’s overzealous climate policies of the past decade. But scratch the surface of the Carney plan and you’ll see climate policies that will hit Canadian consumers harder, with likely higher prices for goods and services. As a federal election looms, Canadians should demand from all candidates—no matter their political stripe—a detailed plan to rekindle Canada’s energy sector and truly lighten the load for Canadians and their families.
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