Riding the subsidy wave...

In an earlier post, Tim mentioned the Federal government's Energuide for Houses Program, which has since been scrapped in favour of the nearly identical, but differently named EcoEnergy Program implemented by Stephen Harper's Conservative government.

Both of these programs are examples of subsidization programs; a particular type of economic tool used by governments to change people's behaviour. The Canadian federal government (both Conservative and Liberal) has traditionally taken a liking to the subsidization strategy as a means of dealing with environmental issues.

Along with the EcoEnergy and Energuide for Houses Program, the federal government has launched several programs offering subsidies to the general public, including the infamous EcoAuto program whereby car-buyers were offered rebates for purchasing vehicles with better fuel economies.

Apart from being expensive and often very difficult to revoke, some subsidies, such as the 'Eco' programs, aren't always as effective as they could be. Much of this is attributeable to the 'free rider' problem.

Say you're a homeowner with an oil furnace. You're starting to feel guilty about burning oil and its contributions to global warming, while the price of oil in the summer skyrocketed and even though it's gone down since, it'll probably go back up. It's time for a change. So you elect to replace your dirty old oil furnace with a high efficient natural gas furnace. It's cleaner and will save you a bundle in the long run. Oh, and look at that, the federal and provincial governments, along with the gas company are offering subsidies to cover almost half the cost of the furnace. Bonus.

Let's look at this situation. I coordinated a program under the EcoEnergy program this past summer, and such a scenario was incredibly common. It wasn't the subsidy that convinced these people to change their behaviour, but other factors. The subsidy was just an added bonus. The people are free riders'; people who are getting money at the expense of taxpayers to do something they would have done anyway.

The same story exists with the EcoAuto program. Was it the subsidy that was making people buy the fuel-efficient cars, or is it concerns over climate change and high gas prices?

Several subsidy programs can be effective and curb people's behaviour, while also spurring innovation in certain industries, such as solar and wind subsidies in Germany. But numerous subsidy programs suffer greatly from the 'free rider' problem and are ineffective in seriously changing people's behaviour. They are also costly and take the place of other funding programs or strategies to deal with environmental issues.

I would also argue that subsidy programs are a key political ploy. So next time a subsidy program is announced, take a second look and see how effective it might actually be and the context it's being offered in.