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Higher electricity costs disproportionally hurt southwestern Ontario

Gears grinding
Reading Time: 3 minutes

By Elmira Aliakbari
and Jason Clemens
The Fraser Institute

Ontarians understand the personal costs of increased electricity prices caused largely by the province’s Green Energy Act. But the effect on Ontario’s competitiveness, particularly in manufacturing, has been largely ignored even though the costs continue to be substantial.

The Green Energy Act mandated and subsidized renewable energy (wind, solar, etc.) in the province’s power grid. It was introduced by the former Liberal government in 2009 and repealed by the current Progressive Conservative government in 2019.

The higher electricity prices in Ontario hurt manufacturing since electricity is second-largest cost after labour. Sergio Marchionne, the late former head of Chrysler, said in 2015 that electricity costs in Ontario were making it too expensive to do business there.

Elmira
Aliakbari

Unfortunately, Ontario’s performance in the manufacturing sector bares out this warning. Between 2005 and 2016, the province experienced one of the largest declines in manufacturing compared to other Canadian and U.S. jurisdictions. Manufacturing declined (as a share of the provincial economy) by 5.1 percentage points while increasing in many of the Ontario’s competitors.

And a 2017 study found that Ontario’s higher electricity prices cost the province almost 75,000 manufacturing jobs (about two-thirds of all lost manufacturing jobs in Ontario).

These costs aren’t evenly distributed across the province since manufacturing is concentrated in the southwestern region. The sector’s decline can be seen in the incomes of Ontarians in this part of the province.

For example, of the 36 metropolitan cities covered by Statistics Canada, Windsor, long one of Ontario’s manufacturing hubs, experienced the largest drop in median household income (in 2015 inflation-adjusted dollars) in Canada, from 10th highest in 2005 to 25th in 2015.

Jason
Clemens

Windsor was the only city tracked by StatsCan to experience a decline in median household income (-3.1 per cent) during this period – the national average was a 13.0 per cent increase. In 2005, Windsor’s median household income was 12.1 per cent higher than the national average but by 2015 it had fallen to 4.0 per cent below the national average.

London, the other southwestern Ontario city removed from the Greater Toronto-Hamilton area, experienced the second largest decline, falling from 15th to 27th. Median household income in London only grew by 2.0 per cent between 2005 and 2015.

Making any jurisdiction less competitive – whether through higher taxes, more burdensome regulations or higher electricity prices – will inevitably affect investment, entrepreneurship and general economic prosperity. Research consistently shows a strong relationship between access to (and use of) affordable energy and economic growth.

When governments make energy costs higher, they indirectly reduce rates of economic growth and prosperity more generally.

When we look at the province as a whole, the prosperity of the Greater Toronto-Hamilton area and the Ottawa region largely masks the hardship across southwestern Ontario.

But policy-makers everywhere, including in the federal government, should recognize the plight of Ontarians in the southwest. They should also realize their comparative decline is the result of many of poor Ontario government policies, and that they are now being replicated by the federal government for the entire country.

The suffering of those in southwestern Ontario should be a cautionary tale, lest Canada suffer a similar fate of higher energy prices, lower competitiveness and less economic prosperity.

Elmira Aliakbari and Jason Clemens are economists at the Fraser Institute.

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Elmira Aliakbari

Elmira Aliakbari is Associate Director of the Centre for Natural Resource Studies at the Fraser Institute. She received a Ph.D. in Economics from the University of Guelph, and M.A. and B.S. degrees in Economics, both from the University of Tehran in Iran. She has studied public policy involving energy and the environment for nearly eight years. Prior to joining the Fraser Institute, Ms. Aliakbari was Director of Research, Energy, Ecology and Prosperity with the Frontier Center for Public Policy. She has presented her work at many academic conferences and has been published in the prestigious academic journal Energy Economics.

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