EnviroEconomics.ca

NRTEE released yesterday a good read on climate change and northern impacts (here).

TRUE NORTH: Adapting Infrastructure to Climate Change in Northern Canada
…First, make existing institutions work better now by mainstreaming adaptation into government policies, processes, and mechanisms and ensuring northern views are “at the table”, and second, build northern climate change adaptation capacity in science and at the community level, so the region is more resilient, self reliant, and less vulnerable in meeting the challenges of climate change adaptation in the years ahead.

Repositioning the climate debate to be less about globe and mail economics (mitigation is too costly) and more about avoiding on-going damages can only help.

Jack Layton has a priceless quote here from question period today

“We are glad that the Prime Minister is finally taking this issue seriously and has taken his head out of the tar sands,” Mr. Layton said. “The question is: Is he going with any plan? So far, we have seen no plan even though it was promised by the Minister of the Environment.”

Of course referring to this,

Harper heads for Copenhagen after all

Fun times, eh.

While looking at some wonky modeling results, I received an email from the author of said results simply entitled

Whacky Shit

Which of course immediately got me thinking of Monty Python, and I stumbled on these,

The Climate Policy Argument

and this

The Ministry of Climate Policy and CCS Subsidization

To be fair to the ENGO community, I should post a link to “every ‘tonne’ is sacred”, but I think I will pass.

Never a dull moment in Canadian climate policy, eh.

I had the pleasure of listening to Alberta’s Minister of Finance recently. She gave a good, but apologetic speech about how Alberta had to dip into the rainy day heritage (oil) fund to balance the books in the face of the global slowdown. While she is one of the luckiest finance ministers in the world, to not have to take her jurisdiction further into debt (ala Ontario), she is also one of the unluckiest. Why?

Economic obesity

At the end of the speech, she recognized an important oil type in the audience, and asked him a very good social planning question — what would you do to improve the welfare of Albertans? Well, this rather large balloon of a man slowly rose his hulk out of the chair and rumbled simply, “fix the oil royalty regime”.

And so it is no surprise to see today that the oil industry has launched a full scale marketing blitz looking for more oil subsides.

Big Oil makes case for carbon-capture subsidies

Based on calculations contained in the report, the ask is at least $3 billion in 2020, assuming a CCS cost of $150 tonne. With no national carbon price, the highest emitting sector in the country is asking for a subsidy of $85/ tonne.

While there is economic rationale due to market failures to support CCS innovation and learning by doing, the sheer size of this ask is ridiculous. Especially when so many Canadian emissions remain unpriced.

On the twelfth day of Carbon Pricing my government gave to me,

Twelve MTs regulatory reductions,
Eleven information programs,
Ten provincial policies misaligning,
Nine-ty MT o’trucks a-spewing,
Eight new ways of regulating,
Seven ways to avoid investing,
Six-ty MT of upgraders e-mitting,
Five gold subsidies,
Four–ty baseline megatonnes missing,
Three offset mechanisms,
Two tech fund exemptions,
And an emission accounting scheme from Enron.

Merry Christmas

If one looks back over the carbon policy discussions in Canada credit for early action figures prominently. Simply, under cap and trade, some argue that they should receive credit for action initiated in the lead-up to implementation. The core argument is that in expectation of a future carbon constraint, early action was undertaken to align with normal capital decisions. Thus, the argument goes, the early action should be recognized in setting the new carbon constraint to be less stringent. Now if you can follow all that, or it you know intuitively what I m talking about, you know why credit for early action is a mess – it is hard to sort out what is real or not. And so with a mechanism to enable credit for early action the regulator has to disentangle investment decisions and motives going back some years and then see how this influences the new allocation. Additionally and administrative burden both likely suffer with credit for early action.

Under the current Canadian plan, there is 5 MT allocated for early action. Not a lot, which is good, but still enough to trigger all kinds of positioning, and to require a few folks at Environment Canada to sort this all out.

And why am I ranting about this? Well there is a neat article here on how one BC municipality will see a carbon bill increase of $300,000 in 2012 under the BC carbon tax. And the link to credit for early action? The carbon tax will implicitly account for all early action undertaken through the lower emission intensity whereas trading may not.

In the case of Burnaby, a range of investments have lowered energy use, emissions intensity, and ultimately the carbon tax burden,

But the best example is Burnaby’s recent earth-friendly upgrades to 49 city-owned buildings. Completed by Honeywell Ltd., the $6-million project includes new light fixtures, water-saving measures and digital controls to keep heating, ventilation and air-conditioning costs down. “That cut down our energy consumption in total by 20 per cent for all of municipal operations”.

No need to sort out motives – the emission intensity does that. This is why a tax can be fairer than trading when one looks at early action. And certainly it is administratively simpler.

And what do rate payers in the municipality get? They get the great cost pass though,

Burnaby residents will be stuck with the bill. “We don’t have any other (funding) source but the property tax,”

But then again, the $300,000 cost in 2010 is less than 1% of Burnaby’s projected $333 million expenditures in 2010. Which makes me wonder why a 1% increase in operating costs four years from now is news.

Carolyn Fischer sent me a news story that went on something like this,

“Cap and trade is a charade to continue business as usual,” said Angela Johnson Meszaros, director of the California Environmental Rights Alliance.

Environmental justice groups instead favor carbon fees on polluting industries, a strategy endorsed by many economists as simpler and more transparent, although politically tough to enact.

Her hilarious response was this,

Buying your way out of pollution reductions with permits = bad.
Buying your way out with taxes = good.
Logic = priceless.

Once I stopped laughing I started crying, cause this, unfortunately sums up the federal government’s position, although their logic is reversed and slightly more distorted,

Taxes = bad
Permits = good
Regulations > good
Logic = priceless

BC has demonstrated that a carbon tax shift is politically feasible. The reactions in the press are not bad, and are actually downright supportive (when the only complaint is that ferry tickets will go up, BC has hit a home run). Why? I suspect the carbon tax shift. In Canada the reason is simply, I think, that folks despise income taxes more than carbon taxes. So, if you throw a few dollars my way though a tax credit, and then reduce my income tax, well, that sounds rather nice. And people start to think, “hey, this BC carbon tax thingy is not a money grab after all”. Kewl stuff.

And it makes economic sense. Nic Rivers and I have just finished a revenue recycling assessment of a national carbon tax and found that GDP impacts could be considerably reduced with smart tax shifting. This is the main thrust of a David Suzuki Foundation paper to be released this Monday (keep an eye out, and check back, I will post it here).

So, carbon tax with recycling is economically efficient, results in real reductions and can be politically acceptable. So, why are the provinces going it alone (see article here). Well cause the federal logic is priceless. But don’t let me sway you, let’s let minister Baird speak,

“We have a different focus, our approach is on industrial regulation”

You can’t script this stuff. We have a left leaning province implementing a carbon tax shift, a perceived left leaning organization, the David Suzuki Foundation, supporting a national carbon tax shift and a conservative government preferring regulations. Only in Canada, Eh. Priceless.

Ok, so in taking a look at the CBO document a couple of points are worth mentioning.

First the report’s main conclusion that a carbon tax is five times more efficient than cap and trade is based on a policy comparison that is unreal. Essentially the inflexible option compared is unlike any cap and trade system that would be seriously contemplated. The poorly performing “inflexible” cap and trade policy has no design features for price certainty, like a safety valve, banking or borrowing. Most designs allow for intertemporal shifting of abatement effort to allow for efficiency in time. When these are added, the efficiency approaches that of a tax in the CBO document (see Figure 1-2). This assumed policy inflexibility seems excessive and is not therefore a real option. Yet the report makes the inefficiency argument strongly based on this comparison. This is not quit right.

Next, the report does make some good points on why a cap and trade program is less desirable. The case about administrative complexity is a good one, where cap and trade requires a number of design features that need to be tweaked in time to enable price certainty. This seems like a heavy administrative burden and thus the tax seems to be more desirable.

I think the authors of the report could have done us all a better service if they had highlighted one single point – design matters. In designing these programs effort is required to get things right – balancing price certainty through containing costs is important, but so is getting emission reductions. The report argues that reductions later are ok, and thus price certainty is more important (based on Weitzman’s argument that marginal costs are rising but damages are flat and somewhat uncertain and thus price certainty is preferred). But this does not mean that a tax is preferred, but rather that price certainty is important and can be achieved in cap and trade and a carbon tax.

While this report is worth the read, a critical eye seems warranted.

The CBO report (see my last post) has a number of folks talking. But I like this reaction, (here)

Good Climate Policy, Bad Politics.

A new report from the Congressional Budget Office confirms one of the most depressing facts about climate change: The best policy is the one that’s going nowhere in Washington.

The CBO report concludes that a tax on carbon emissions “would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement. If it was coordinated among major emitting countries, it would help minimize the cost of achieving a global target for emissions by providing consistent incentives for reducing emissions around the world.” But the major presidential candidates aren’t supporting such a tax, and the few proposals on Capitol Hill to impose a tax are not expected to go anywhere anytime soon.

I still plan to take a closer look at the report, and don’t totally support the whole sale adoption of the report’s conclusion without a closer read. But still, even if cap and trade is as efficient given similar design, the post’s inference holds…carbon tax is a four letter word in politics.

There are two articles in the Globe today that perpetuate bad thoughts on carbon policy and carbon costs. The first article (see here) pegs costs way too high by assuming that every single molecule of carbon results in a uniform costs at the highest carbon price, say $50,

At $15 a tonne, if Keephills were to fail to cut 12 per cent of its emissions, or 360,000 tonnes, the price tag on the facility’s emissions would be a mere $5-million…But at $50 a tonne, the price for Keephills would rise to $18-million. For all of TransAlta’s Canadian operations, the total penalty at $50 a tonne would rise to about $170-million.

But, there will be lower cost opportunities at the facility. So they will take abatement action and make carbon reducing investments up to the point where they can either get cheaper reductions elsewhere through trading or pay some sort of fee like that enabled under the Technology Fund or a carbon tax. And if there is recycling even this cost would be reduced on remaining emissions.

As a very general rule of thumb, since the marginal cost curve is rising (that is more reductions are more expensive), the total cost of reductions is total emissions times the carbon price divided by 2 or

Total costs = ~(Qemissions * Pcarbon)/2

This is essentially the area under the marginal abatement cost curve fixed by the price (tax) or quantity (cap/allocation) constraint. So, in the example cited, the costs are more like $8 million for the facility and $85 million for all TransAlta’s operations. And most likely there is a facility target and therefore no cost for remaining emissions of if the target emissions are achieved the fee on remaining emissions is returned (as in the case of Sweden). Suppose there is a 25% reduction required from 360,000 tonnes. This then lowers actual costs of about $2.25 million. Not trivial but not nearly as high as reported.

And where to start on the second article (see here). Here are a few samples from the article,

A much better, more effective route is a cap-and-trade system with auctioned allowances, under which government sets the future target for emissions – the cap – and turns to free market mechanisms to achieve those targets… government then has to make a guess as to where to allocate all of the carbon-tax revenues, hopefully avoiding the appearance of pork barrel politics and special interests.

With auctioning of permits, the firm must buy their allocations, which transfers cash to the regulator, and thus the cap and trade behaves a lot like a taxes. Government still has to deal with the revenue.

And then this,

A tax is simply not the best way to create effective incentives to cut emissions, and it’s not the right mechanism for promoting innovation that will abate human-caused climate change.

This argues that taxes will not result in continuous improvement, that is an ongoing incentive to reduce emissions. Not likely, since the firm will continue to see the tax and thus seek ways to avoid paying it though making investments that lower emission while minimizing the tax burden.

And perhaps most challenging,

…That’s because a carbon tax puts the government into a nearly impossible Goldilocks scenario: It must set the price of carbon just right. Not too high, meaning everyone overpays and the economy is damaged. And not too low, in which case emissions reductions are not maximized. Additionally, as we move forward, we cannot afford a system where carbon prices remained static in such a dynamic environment.

But if we set a cap too high and there is no cost constraint (i.e. price cap), costs emerge that are unanticipated. Government then has to release more permits to reduce compliance costs, which dilutes the cap (more emissions) and reduces the real value of permits (like printing money and causing inflation). In practice, the regulator will have to adjust either the cap or the tax rate as new information on climate science, cost and abatement responses emerge.

Both cap and trade and a carbon tax have challenges that need to be sorted out. But we need better reporting on this stuff. Otherwise we will continue to muddled and mired in debate…but then again that suits some folks just fine.