The misguided attraction of energy conservation

At the end of March, the CEO of the Ontario Power Authority (OPA) issued a directive regarding the implementation of Ontario's "Long term energy plan," which spells out  what the provincial energy regulator plans to do to spur energy conservation. The Ontario Clean Air Alliance summarized it by saying: "According to the OPA, the directive actually requires that utility driven conservation programs will ensure that electricity consumption is 5% or 7 billion kilowatt-hours less than it is now by 2020, which is a tremendous step forward."

While we're grateful to the Clean Air Alliance for clarifying the OPA's goal, we respectfully disagree that it is any kind of step forward. We are baffled why a group concerned with clean air views forcing down energy consumption as an end in itself. There is overwhelming evidence that as energy consumption and economic activity have grown over the past few decades, Ontario air quality has improved dramatically. If you don't believe it, check for yourself - detailed charts are online at yourenvironment.ca, a website created specifically to disseminate federal and provincial pollution records in an easy-to-use graphical format.

So if cutting energy consumption is not necessary for improving air quality, is it at least good for the economy? The most recent evidence strongly suggests that it is not: putting constraints on energy availability today means economic losses tomorrow.

The Fraser Institute recently published a study examining the relationship over time between energy consumption and economic growth. Many previous studies have explored this relationship but were inconclusive about causality: it was well known (and easily demonstrated) that energy consumption and economic growth were fellow-travelers, rising and falling, more or less in tandem over time. A few studies that tried to tease out causality found indications that energy consumption leads economic growth while others were inconclusive. Until recently, the relationship was murky. But it is becoming more clear.

In our study, Ross McKitrick, economics professor at the University of Guelph and Fraser Institute senior fellow, and graduate student Elmira Aliakbari applied time series econometric techniques to Canadian provincial data (1995-2010) to see if the direction of influence could be inferred out of the correlation between energy consumption and economic growth. In a nutshell, the answer was "Yes." That is, the study found that energy consumption (which can also be defined as energy abundance or energy affordability) is a limiting factor in economic growth. This discredits the notion that energy consumption and economic growth are merely random fellow-travelers or that energy consumption only grows as a sort of "luxury good" following periods of rising incomes.

The study concludes: These considerations are important to keep in mind as policymakers consider initiatives (especially related to renewable energy mandates, biofuels requirements, and so forth) which explicitly limit energy availability. Jurisdictions such as Ontario have argued that such policies are consistent with their overall strategy to promote economic growth. In other words, they assert that forcing investment in wind and solar generation systems "while making electricity more expensive overall" will contribute to macroeconomic growth. The evidence points in the opposite direction. Policies that engineer increased energy scarcity are likely to lead to negative effects on future GDP growth.

If the government of Ontario, or other governments across Canada want to foster economic growth, the current thinking that "less energy is a primary goal' should give way to an understanding that energy consumption is the means to economic prosperity. Cutting energy use should not be seen as an end in itself or as a proxy for environmental improvement, or as an instrument for promoting economic growth.

Energy abundance is a fundamental input to a growing economy and is necessary if Canadians want to enjoy the economic prosperity and robust social services that are funded by a strong economy. Fostering energy abundance, not trying to ration, reduce, or overprice energy, should be the guiding principle of energy policy whether at the local level, the provincial level, or the federal level.