Take the high road

Last week I spoke about democracy. This blog is supposed to be about solar energy, not political science, but today I’ll take a stroll down the majority-rule road again. That’s because an issue that is critical to the future of Canada will shortly be decided by less than 14% of its people.

On May 14th of 2009, the government of Ontario passed the Green Energy Act (GEA). The first of its kind in the country, this legislation was intended to boost investment in clean, renewable energy. In just over two years, the act has given birth to an entire industry in the province, and attracted thousands of Ontarians into the business of generating and selling green electricity. Dozens of new companies are now doing manufacturing, installation, maintenance, and financing for projects that produce power from sun, wind, and biomass. Wind turbines and rooftop solar arrays are becoming an increasingly common sight in the province.

So far, the only Canadian jurisdiction that has followed the Ontario lead is Nova Scotia. Next week the province launches the “ComFIT” (Community Feed-In Tariff) program as part of its Renewable Electricity Plan. I’ll talk more about that next week.

My suspicion is that politicians in the other provinces and territories, as well as those at the federal level, are waiting to see what happens in Ontario before they commit to any big, bold initiatives. It is a rare politico that will go out on a limb with a new, unproven policy. On the campaign trail, the candidate that plans to tackle any more than three issues is the candidate that won’t get elected. Unfortunately, green energy is rarely such a front-and-centre topic that it makes the top three list.

So all eyes are on Ontario. If the GEA succeeds, chances are other jurisdictions will give serious consideration to imitating it. But if the GEA fails, it will set the renewable energy clock back a decade.

There are storm clouds on the horizon for the GEA. For one thing, some “Buy Ontario” stipulations of the GEA are under attack. Both Japan and the European Union have launched legal action at the World Trade Organization. They allege that these local procurement provisions violate WTO agreements, and constitute protectionism.

In my opinion, they’re right. In Canada, we’ve always had to contend with the occasional jingoistic American senator that wants to put an end to all this nasty importing of goods from foreign countries. 73% of our exports go to the US, so when “Buy American” fever takes hold, we’re the ones that get the shakes. So we can hardly turn around, get protectionist ourselves, and expect no repercussions.

Ontario didn’t sign the WTO agreements that form the basis of the complaints, but Canada did. That binds Ontario just as surely as if Bob Rae, the premier at the time of the WTO’s birth, had affixed his name to the document. So did Premier McGuinty’s entire policy formulation team miss the fact that his bill would inevitably bring nasty attention in the global trade deal negotiating table? It seems incredible.

Of course they knew. Just like they knew the well-established economic principle that protectionism is self-defeating in the long run – it breeds second-rate businesses that probably couldn’t survive in a truly competitive environment, and costs the consumer a bundle as a result. That’s why all the WTO signatories agreed to work together to keep trade barriers down.

But the GEA authors also knew that in the short run, protectionism can help to create something called a cluster. A cluster is a self-reinforcing network of interrelated enterprises and a rich pool of talent, all located in the same geographic area. Think of Silicon Valley. The cluster develops advanced technologies for the product itself and  for the production process. It also establishes powerful brands, and a workforce with deep skills and experience. For anyone left on the outside of the cluster, these present a formidable barrier to entering the market.

When an industry is in its infancy, and there are no clearly dominant global players, the rules of the protectionism game are different. Some countries recognize the opportunity to cultivate an industry cluster, others don’t. The ones that move first, and set up their incubator and surround it with trade barriers, can set the stage for their industry to be a global player.

It takes a while for other countries to wake up to the fact that a market has been illegally closed to their exports. It takes a while longer for bilateral negotiations to run their course, longer still for an action to be brought at the WTO, and even longer for that action to have a noticeable effect on the trade barrier. By that time, the protectionist hothouse has done its job. If there were any established global industry leaders to begin with, they now have a new competitor in their midst. The countries that failed to see the potential of the emerging industry in the first place will never be more than branch plant territory.

Of course Premier McGuinty’s team knew all this when they created the GEA. Their intent was to make Ontario a global contender in the renewable energy arena. And from what I see, the province is already well on its way, at least on the solar energy front. There are companies like ATS that provide production line machinery for solar panel manufacturers. There are manufacturers like Canadian Solar Inc., which recently (despite what you might think from its name and its $219M market capitalization) set up its very first Canadian manufacturing plant. And there is a myriad of companies installing and maintaining solar arrays.

It’s not clear if the Japanese and European actions will snuff this blossoming industry. They probably won’t. But a much greater threat is looming, and it’s not on another continent; it’s in Queen’s Park, and its name is the Progressive Conservative Party of Ontario.

The PCs have taken a hard line against the GEA. Party leader Tim Hudak has promised to scrap the most important parts of the act if he wins the provincial election next month. Given that the rest of the country is looking to Ontario to decide whether to get into the renewable energy game, and that our proportional representation system means that a party can form a majority with less than 40% of the popular vote, that means that less than 14% of Canada’s population is making a decision that will affect the future of the renewable energy industry nationwide for a decade to come.

Here’s hoping they choose well.

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