There is little doubt that rising prices are of serious concern to many working Canadian families, especially those in insecure and low-paid jobs. Inflation was running at 5.1% year over year in February, double the increase in average weekly wages over the same period.
War in Ukraine is now adding fuel to the fire of rising energy and food prices, which risks sparking a popular revolt.
The right-wing response
Populist right-wingers like Conservative leadership hopeful Pierre Poilievre and Alberta Premier Jason Kenney are seeking to turn the issue of rising prices to their political advantage. They are supporting an expansion of oil and gas production and new pipelines to counter rapidly rising prices and calling for the suspension of pending increases in the federal carbon tax, a clean fuel standard, and other clean energy regulations.
The right-wing are claiming that environmental measures to deal with the climate crisis are a major cause of inflation. But we do not face an unpalatable choice between saving the planet and lower living standards. Progressives must come up with a serious alternative.
Policy to reconcile our economic and environmental goals must work to rapidly reduce demand for fossil fuels rather than increase supply through new energy mega-projects which will only accelerate planetary collapse, as highlighted by the most recent IPCC report.
Moreover, it would take years for new fossil fuel projects and infrastructure to have an impact upon global supply and to lower prices.
Shifting our reliance
The war in Ukraine has further highlighted the vulnerability to peace and human security posed by over-dependence on fossil fuels controlled by non-democratic states like Russia and Saudi Arabia.
An alternative response must be to dramatically reduce our national and global economy’s reliance on carbon-emitting fuels through massive investments in energy conservation and renewables.
From this perspective, rising fossil fuel prices are actually a good thing, at least to a degree. They function like an increase in carbon taxes to reduce demand and increase investment in energy efficiency and alternatives. This transition can create many new jobs.
Further, high oil and gas prices are massively boosting the profits of the oil and gas industry. These can be drawn upon to fund non-polluting technologies and to meet mandated reductions in emissions which companies have hitherto claimed are not affordable without subsidies.
Soaring corporate profits can also be taxed to fund public investments in the energy transition and to cushion the impacts of higher prices on lower-income working families through tax credits like the GST credit, the Canada child credit and the Canada workers benefit. These benefits should be increased and made available to more families. Just as the proceeds of carbon taxes are recycled to households in most provinces, so should excessive corporate profits.
Paying for the transition
Many right-wingers, notably Pierre Poilievre, claim that we cannot afford major new public investments or larger tax credits since interest rates have to rise to combat inflation. This will increase the cost of government deficits and public debt. The Liberals, too, are saying the cupboard is bare.
But the Bank of Canada recognizes that rising prices are not so much the product of excess demand in the economy as of specific sectoral impacts of the pandemic which will fade over time. They are unlikely to increase interest rates too far, too fast.
Further, the federal government should and can ensure that financing costs for the needed energy transition as well as affordable housing are cushioned from higher interest rates. We should expand public investment banks like the Export Development Corporation to extend low-cost credit and/or equity to desired investments. These banks could be financed in part by the Bank of Canada subject to agreements between the Bank and the federal government.
Effectively there would be two interest rates – a general one, and a preferred one. Only the former would be manipulated to maintain a reasonably low inflation rate, while essential investments would be protected. Alternatively, commercial and private and investment bank lending could be more closely regulated, for example, by limiting mortgage credit for market housing or by setting different reserve requirements for different kinds of financial assets.
Inflation and rising energy prices are clearly a problem, but they should not be allowed to derail the needed transition away from fossil fuels.
Andrew Jackson is senior policy adviser at the Broadbent Institute.