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Why Follow the Leader? CANUSA Permit Trade has a price

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Ah, it must be Spring in Copenhagen with all that talk of linking in the air. See Minister Prentice press release here for a good review of what he, or perhaps more precisely the PM is thinking.

I too have been all consumed lately with thinking on linking Canada-US permit trade. And I have come to a simple conclusion. Linked permit trade is not the answer.

Instead, we should go it alone with aligned carbon prices. Huh you say? Swimming against conventional wisdom am I? Well lets see….

My most recent modeling tumbles of the American Clean Energy Act (ACES09) and Canada’s Regulatory Framework for Industrial Emitters reveals that with linked permit trade carbon prices in 2020 will drop in Canada from $60 to $31 or so. This is basically noise for the US as our puny demand for US permits raises their permit price $1 from $30. The US carbon price under the ACES09 is so low because of all those low international offsets, which means we are also indirectly buying a whack of cheap offshore imports. Essentially, with linked permit trade Canadian oil and gas ceases to buy permits from Canadian electricity and domestic offsets and instead imports permits from US electricity. Regardless, a big $900 million sucking sound is heard south of the border as Alberta subsidizes US electricity through permit imports, which for some may be better than feeding those latte sippers in Ontario.

Now linking does reduce the GDP and sector hits, by more than half relative to a case if we do not link. When the numbers are tumbled, linking is really good as we avoid some high cost demonic I mean domestic abatement in oil and gas.
But with expectations to go deeper with climate policy, and reduce more in the long-term, the low price under linking reduces the incentive for transformative technologies such as CCS. No incentive for learning by doing, no innovation and hence no declining costs in time. And when we do want to go deeper in the future, CCS will be more expensive.
transformative technologies

So, instead of permit trade with the US, we peg a technology tech fund that floats with the US permit price. This makes us comparable on stringency, and so perhaps we avoid some of the countervailing border nastiness lurking in ACES09. But importantly it allows us to invest in CSS and other transformative technologies. Because they are important (see graph above).

The more I muck about with models, the more I am convinced oil and gas drive all things climate policy. They account for about 25% of national emissions in 2020, and have nothing but high abatement costs. They will access any safety valve we can throw at them to avoid those high costs, from offsets, to domestic permit purchases to cross border permit imports. But eventually they will have to reduce. And this means CCS.

So, bottom link, linked permit trade with the US drops the incentive to innovate and so might raise our long-term abatement costs. We can smooth relative prices to avoid high domestic abatement costs with cross-border permit trade, but pegging a technology fund to US permit prices is better.

Written by Dave Sawyer

November 16th, 2009 at 11:18 pm

Posted in emission trading

Be Patient on Climate Policy … Because we have no ambition

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A senior federal cabinet minister has added some long awaited clarity on where Canada is going with climate policy in advance of Copenhagen,

“I don’t think we’ve been ambiguous on this issue…”

(here)

Be patient cause we have no policy....

Be patient cause we have no policy....

This picture, and indeed the whole federal policy, is eerily paralleling the Bush administrations bold forays into climate policy … see post here

Our climate policy is this big...

Our climate policy is this big...

As always, while the feds fiddle, energy intensive industries are rolling out high emitting capital with low expectations that they will see real carbon prices,

I think there is certainly hope in the industry that they can see some clarity in the near future,” Dunbar said.

“They don’t want to see this situation with all this uncertainty drag on for years. I think the sooner they can have clarity, the better off they are and the easier it will be for people to make decisions.”

He said there are many points of view on the subject –some players wouldn’t even mind a carbon tax, for instance –but most agree they want a fair regime that applies equally to all emitters, without picking winners and losers.

Some $100 billion worth of oilsands projects for northern Alberta were deferred or canceled last year as credit markets froze and commodity prices tanked.

The only certainty in Canadian climate policy is inaction.

Written by Dave Sawyer

November 8th, 2009 at 7:46 pm

The Speediness Criterion: Is cap-and-trade always inferior to carbon tax?

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There is an article today indicating more delays with rules for California’s cap-and-trade program (here)

California’s blueprint to address global warming won’t include details of an emissions-trading program as regulators try to build consensus on how best to organize the market-based system….”They were a long way off at approaching consensus on the major design elements.”

This outcome is hardly surprising given the administrative complexity of cap-and-trade systems. Indeed, this is a major reason why carbon taxes tend to be preferred — complexity. But, do cap-and-trade systems necessarily take more time to implement than carbon taxes?

To answer this, one can look to the differences in the decisions required to implement the two emission pricing options. Regardless of the emission pricing policy, cap-and-trade or tax, there are a series of common questions that must be addressed by decision-makers. These include questions of who is covered and what is the desired goal, be it certainty in emission reductions or containing costs. Questions of revenue need are also common to both, with a need indicating a preference for auctioning in cap and trade. Similarly, linking with other jurisdictions must be considered under both cases, wherever it is a question of the two-way linking to allow trading or simply to ensure that carbon prices align to minimize competitiveness impacts.

While carbon taxes tend to align more closely with existing institutional functions, cap-and-trade systems are not that different. Auctioning telecommunications rights is standard practice, as is emission monitoring and verification and allocating transferable rights in the fishery. But as in the fishery, it is this last function that requires time. Allocation is really the source of why cap- and-trade systems are relatively slower to implement. The source of this is uncertainty is over both economic gain and possible economic loss. Since cap and trade systems have unknown prices in advance of implementation, there is price uncertainty, and therefore more policy caution as well as constituent engagement. This engagement slows implementation through opening the door to gaming by both participants and policy makers alike. Contrasting allocation decision making to setting a common tax rate and one can readily see why cap-and-trade is less speedy to implement.

But is this necessarily a given outcome? Likely not under at least two conditions:

• First, if policy makers decide that allocations will be set on rules over discretion then these rules simply need to be established and the allocations made. But still, the rules must be contemplated and set; and,

• Second, if cost uncertainty is taken off the table through an over allocation of permits, prices will be low, and the threat of adverse cost outcomes minimized. Of course the trade-off is lower emission reductions, but really this is analogous to a low tax rate that can be ratcheted up (or the cap down) in time.

And is slow implementation necessarily bad? Likely not given that CO2 is a stock pollutant and cumulative emissions matter. We would likely be indifferent between a fast to start carbon tax system versus a slower to start cap and trade system as long as cumulative emission reductions are the same. What matters here is the cumulative emission reductions, and with a stringent future cap, perhaps speediness is not necessarily better relative to a low tax given the cumulative reductions.

So while cap and trade is is more likely a slower option to implement, it is not necessarily inferior to cap and trade when considering a stock pollutant such as CO2. And design and policy choice can blur the lines on the speediness criterion, thus making us indifferent between the two.

Written by Dave Sawyer

November 11th, 2008 at 1:40 pm

Linking to a Star is fun, but the ride may be wild…

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Ok, so cap and trade with the US just got really interesting:

Canada to seek climate deal with Obama

Here

There was talk of this post election, including morphing the current intensity based system (in the Regularly Framework) to something with a hard or binding cap before 2015. Linking a national cap and trade program to the US is likely a step in the right direction since with the US involvement, competitiveness issues largely fall away (if we all have the same carbon price there are not cost differentials in product markets). This issue has been a major stumbling block to moving forward and resolving it will help. But, new excuses will likely arise that will lead to more inaction, notably our current economic and financial poverty, and what about China and India? But still, this seems to be a good omen from Canadian Climate Policy.

And most US proposals bring under the cap and trade program emissions from buildings, transportation and other manufacturing, which is something Canadian policy has not done (i.e. the Regulatory Framework covers about 50% of Canada’s emissions).

But I think the more important question is can we assume linking cap and trade systems is always good? I can think of a number of reason why linking initially with the US could be problematic:

Policy sovereignty. For anyone who has reviewed the WCI design document knows, once you sign on, you have to adopt what others have developed. And in the case of say Manitoba with 3 MT of reductions and California with 300 MT, whose interests do you think matter? This has been the case with WCI and it could be the case with Canada and the US.

Governance. With the provinces forging ahead, this sudden resurgence from the feds can’t make the Canadian WCI partners too happy. And with multiple trading systems emerging, it could be a real nightmare for large emitters.

More distributive impacts. While economic theory says linking is good since it lowers overall compliance costs, the incidence of trading is not uniform between buyers and sellers. Simply, linking permit trade to a larger market will change domestic permit prices, and if you are a buyer or seller, this matters. So, some may be better off and some worse.

Volatility. A larger market with voracious (and ahem, unregulated) traders will drive price volatility, which results in uncertain permit prices and inefficient outcomes. Something industry hates.

So, linking can be good but it can be bad, so one needs to proceed with caution. In other words, when you hitch yourself to star, be prepared for a wild ride.

Written by Dave Sawyer

November 5th, 2008 at 10:24 pm

Putting the Army Boots to Federal Climate Policy

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A neat little piece of climate policy work was just released, albeit quietly, during the federal election. Nic Rivers and Mark Jaccard have been taking analytical jabs at various climate policies for a very long time. Their central theme has been to compare, from an analytical perspective, what government’s say they will achieve and what their policies will most likely deliver. Their latest contribution, with Jotham Peters, can be found here and provides this nice conclusion:

We conclude that, as currently designed, it is highly unlikely that the policies of the government of Canada will achieve the target of reducing national emissions 20% below 2006 levels by 2020. The lack of an economy-wide emissions price and the allowance for 100% offsets for industrial emitters make it highly likely that emissions will be significantly higher than target levels in 2020 and indeed might even be close to today’s levels. Since the government claims that it is intent on achieving its 2020 emissions reduction target, it is difficult to understand why it does not immediately convert the intensity cap to an absolute cap and eliminate or severely reduce the offset provision. It also needs to extend its cap to cover all emissions in the economy.

The bottom line is that politicians have been promising to save the world for a very very long time but have instead been burning our cash while getting very little done (see Nic and Marks other paper here: Burning Our Money to Warm the Planet).

All climate policy by addressing energy use and production can have wide-ranging and long-term effects in the economy, touching virtually everyone as costs get passed through prices. This is why the election climate policy “debate” , and I use this term loosely, deserves more serious attention. But then again in politics, and especially in this campaign, thoughtfulness is in short supply — “Says who… and your Mom wears Army Boots”. Too bad, cause their political gain is our economic and environmental loss.

Written by Dave Sawyer

October 2nd, 2008 at 2:42 pm

The Financial Crisis and Harpernomics: Bad Climate Policy is Here to Stay

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While my computer spins away churning out some carbon capture and storage modelling numbers, I was scanning the news and it struck me: the good times are here to stay! That is if you are working in climate policy. For everyone else, it seems to be all doom and gloom. Not sure why? Let me explain.

Uncertainty leads to questions that need to be answered and importantly inaction. With this comes a need for more talk, more time and more money to navel gaze. Crass I know, but true. And two events are conspiring to make climate policy uncertainty enter the stratosphere and inaction become the renewed climate policy watchword: the financial meltdown and subsequent economic train wreck and Harpernomics.

Lets start with the financial train wreck. With all the financial doom and gloom one can’t help but project that climate policy, and certainly anything that actually reduces GHGs, will grind to a global halt. That well worn Affordability ace will again be played and it will trump all thoughts of action. And instead of learning that short term thinking and economic gain is bad (dah how did we get here?), we will instead retreat further into short term thinking. See this interesting Boston Globe Article here.

The fiscal crisis on Wall Street is a painful lesson in how entire industries can delude themselves into ignoring the most fundamental issues – in this case, the hidden risks from subprime mortgages. It also reveals the vast pitfalls of an economic system obsessed with short-term gains and growth at all costs while ignoring essentials such as building long-term shareholder value and protecting the future of the planet….

The result will be a halt of current plans, or at least a considerable slowing, which will mean the last 10 years of learning will be lost and we will need to start all over again (or at least start somewhere new).

And What Can I can about the Prime Minister’s new climate policy….well perhaps I will let some one else say it instead:

I have never heard of such a poorly considered policy in my life.

(see here)

If the oil patch was nervous before, they all just called their therapist, or their favorite climate policy consultant…..

So, while I should be rejoicing at the growth field that is climate policy, I am actually totally disheartened. A simple and strait forward carbon tax with recycling to households and business would make this all go away. We would get something done, at a reasonable cost, while containing the upside risk. But instead, we will get fights in the WTO and NAFTA over half baked policies that are perceived to resonate in Tim Horton’s. Trouble is that double double may just be a little more expensive than a simpler alternative. But then again it’s not a tax! Pass an Apple Fritter.

Written by Dave Sawyer

September 29th, 2008 at 9:35 pm

An Election Primer on Cap-and-trade vs Carbon Tax

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Ok, I am back at it, after a long absence. And to kick off, I am posting a rather long diatribe on cap-and-trade vs tax. At this point in the federal election, I thought it would be good to post a good look at the differences between cap and trade and tax. Cause the federal parties are certainly not going to shed any light on the differences, since they are stuck in a perpetual school yard tiff — “your climate policy sucks” “Oh yah, yours sucks more”. So this primer is not to be confused with the current primary school debate between the parties. And these guys are to be awarded the keys to the Treasury. Yikes.

So, here goes…

A national debate has exploded in this federal election surrounding the preferred mix of climate policy instruments – should Canada have cap-and-trade or carbon tax? In this post I look at what is likely driving this shift. A second objective is to provide an overview of how this shift is perceived by stakeholders. I conclude that design matters, and in every policy there will be winners and losers, and thus the policy preference is rooted in perceived interests and bias.

Since the early 1970’s economists have argued that either cap and trade or a tax on emissions can be equally desirable at achieving cost-effective emission reductions. Over time, economists have further muddled the instrument choice distinction by advocating a mixing and matching of design elements of both so that cap and trade systems adopt the desirable elements of a carbon tax and vice versa. Notably, concern over cost containment (price certainty) has led cap and trade systems to have price safety values, like the Liberal government’s $15 price guarantee and the Regulatory Framework’s Technology Fund. Taxes have similarly been designed to be adjustable so that emission reduction certainty (quantity certainly) is achieved through adjusting tax rates. This blurring of the lines between cap and trade and tax has led many economists to observe that policy design more than the choice of instrument is the major driver of economic, environmental and distributive outcomes.

Of course economists are not the decision-makers and cap and trade has become the dominant pricing policy due to political acceptability. But as the Canadian cap and trade system has been slowly revealed, there is a growing concern amongst the regulated community and ENGO’s alike due to complexity and uncertainty. Issues of environmental effectiveness, administrative simplicity, transaction costs, risk and uncertainty and the equitable sharing of the burden of reductions all lead to questioning the current design of cap and trade. But, make no mistake, the inertia behind cap and trade in Canada, typified by many years of consultation, and the need for linkages to regional and international trading systems likely means that cap and trade is here to stay. The question is then not a matter of cap versus tax, but when can a carbon tax be complementary?

With the inability of a cap and trade system to include all emissions in the economy, and notably small emitters, cars and buildings, cap and trade in Canada has emerged as a cap, credit, trade and rule system. With carbon tax as a politically unacceptable option, the designers of Canada’s cap and trade system have had to design a complex carbon policy by enabling broad-based offset credits and other regulatory rules in an attempt to obtain widespread reductions. In theory, broadening the scope of emission reductions through broad-based offsets lowers costs for the regulated emitters. In practice however, there are real concerns over additionality, which is how to demonstrate that reductions for sale as credits are real, and permanence, or how to account for agricultural or forestry sinks which will release emissions in the future. Also, regulations tend to be technology prescriptive, thus taking away decision making flexibility that can lead to cost-effective reductions. Many are now arguing that a simpler approach would be to have a complementary carbon tax that covers emissions outside of the 50% of the large emitters under cap and trade.

The rise of cap, credit, and trade has obviously led to new business opportunities for those involved in credit supply either directly through credit sale or indirectly through transactions. But while sellers see opportunities, buyers face more complexity adding both risk and cost. This then explains why there are splits within industries on the preferred policy mix — sellers of emissions such as small emitters or those with relatively lower emission intensities may perceive themselves benefiting while those larger emitters and higher intensity emitters face compliance risk and higher cost. Given the complexity of the trading system that is emerging, and the associated risks and costs, it is no wonder that many large regulated emitters are looking to alternative compliance options such as the Technology Fund under the federal government’s Regulatory Framework. These flexibility mechanisms define cost and minimize uncertainty while avoiding the complexity and uncertainty of the trading and offsets markets. The one glaring gap in the Technology Fund, of course, is that it is unable to define, with any reasonable degree of certainty, actual GHG reductions as a result of such investments.

This perceived complexity and uncertainty of cap, credit and trade has led a surprising cross-section of interests to advocate a carbon tax. Administratively simple, the carbon tax can work within existing tax structures, can be applied at the point of fuels sales based on carbon content and virtually cuts away many of the decisions and structures around cap setting, allocations and offset. Issues of revenue recycling can be resolved, but do raise legitimate concerns about equity, with industries or regions receiving possibly less than they may pay. It is also more equitable, as it sends a price signal to those not facing a carbon price under the cap, credit and trade system.

Further supporting the argument for a carbon levy/tax measure, there continues to be a perception by many in industry that cap and trade places a check/limit on production. Whether or not this is a real concern is an open question, and a function of how the cap and trade system is designed. Indeed, a carbon tax could be designed to act like a binding or hard cap with both systems more or less influencing output the same if they send an equivalent emission price. Any impact on output would then be related to how emission permits are allocated in cap and trade or how tax revenue was recycled under a carbon levy. But if allocations or recycling are tied to economic output in a sector, there would be an incentive to expand output since compensation, in the form of free allocations or recycled carbon tax revenue is tied to output. Again, from an environmental perspective, there is a trade off to the extent that with more output comes more emissions. This is another example of how cap and trade and tax can be designed to operate similarly, where differences really stem from how they are designed and implemented.

While business is worried about containing costs, ENGOs are focused on emissions reductions and policy effectiveness. While in theory cap and trade addresses emissions certainty through cap setting, again design matters and rising emissions under the current intensity based system and the associated suite of compliance options such as the Technology Fund has ENGOs concerned. This, coupled with the perceived ineffectiveness of offsets and the lack of a broad based price signal on business, buildings and transportation have further give rise to ENGO support for carbon taxation. ENGO proposals that seek economy-wide emission pricing through a carbon tax also introduce revenue recycling to address regressive impacts on households and to incent new emissions reducing technologies in transit and buildings. While cap and trade can raise revenue from auctioning, a carbon tax is seen as a more expedient means to raise revenue.

While many outside of government have looked to a carbon tax, it is not until very recently that both federal and provincial politicians have pondered the possibility of a carbon tax. While many motives likely drive this, a number can be readily identified:

• The ability of the tax to raise funds for additional priorities;
• The relative administrative simplicity of a tax is more closely aligned with existing administrative functions and tax authorities;
• A broad based signal, where all in the economy can targeted; and,
• Reduced compliance costs through revenue recycling and tax shifting, where distortionary labour and capital taxes can be reduced.

Finally the public (yes you) is much more fickle in their preference. Generally, there is a perception that carbon reductions will be costless. Social marketing has led many to believe that technology investment in hybrid vehicles and compact florescent lights, for example, are both sufficient to meet the challenge and are costless through energy savings. But in reality, the emission reductions contemplated by most governments come with a price that consumers will ultimately bear to some extent. This then leads to emerging public perception that carbon policy will cost, and perhaps a carbon tax is relatively more punitive than technology standards. But with tax shifting in British Columbia this perception is likely changing. After all, Canadians may just dislike income taxes more than carbon taxes. But then again, perhaps not.

While support for a carbon tax is growing, it is unlikely to displace cap and trade given its inertia. A more realistic policy package that could emerge is cap and trade for large emitters with offsets. But this would narrow the scope of application of the carbon policy leading to higher abatement costs and likely a level of complexity that would become onerous in time. A more cost-effective policy would shift towards a carbon tax focused on the remaining 50% of national emissions outside of the large emitters. Offsets would still have a place in the policy given emissions from agriculture and forestry, and targeted regulations in buildings and transport would be required to address emissions insensitive to emission pricing. This policy package would then retain the benefits of cap and trade while enabling an equitable price signal throughout the energy economy with a complementary carbon tax.

A final balancing of cap and trade versus tax then comes down to design and perceived interest. In Canada, the perception that a cap and trade would place a real cap on production along with the rise in complexity of a cap and trade system that contains an intensity target, broad range of offsets and a technology fund (ironically, these are features developed at the behest of industry in the first place) has led many to argue that a carbon tax is preferred. But regardless of instrument design, it is the perceived cost burden that really drives instrument choice preferences. This then indicates that preference over cap and trade or a carbon tax requires a careful examination of the financial implications of the policy on an operation.

But then again, knee jerk reactions to the word “tax”, which is being dogmatically perpetuated for political gain, will mean we get just what we want least — a high cost climate policy.

Written by Dave Sawyer

September 25th, 2008 at 3:48 pm

The Rise of the Safety Value — Cost Containment and Rising Emissions

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While academic economists have long argued for a carbon tax, the political realities have driven policy to cap and trade. In response, those smart folks thinking of good policy design came up with the “safety valve” to allow for cost containment. The safety value concept has political appeal since it essentially caps the upside costs of a cap and trade system and so takes away the uncertainty of what cap and trade may end up costing emitters. It also has had appeal in the past since the climate fight was thought to be a marathon and not a sprint where cost containment seemed more important than short term action. But this has changed as new climate science points to the need for deeper action sooner. And so the rise of the safety valve is worth considering and needs a closer look.

The safely value is a significant component of Canada’s current climate policy in the form of the technology fund (payments to the feds for technology development and deployment) and the recently refined pre-certified projects mechanisms (i.e. payments for CCS). Both of these allow for some share of emissions to be paid into the two compliance mechanisms on a declining balance to 2018. They are in effect a tax that is accessed 100% up to 2018 if compliance costs or permit prices rise above the access price of these compliance mechanisms, capped at about $23 in 2017 (see thumb below). How the 65$ per tonne cost announced recently by the feds interacts with the pre-certified projects list is not yet clear to me, but still it is well below the costs of CCS for the reductions required under the government’s 2020 target of -20% below current emissions.

Given its prominence in Canadian climate policy and indeed worldwide, it is useful to better understand the safety value. An excellent article emerged recently on the history and development of the safety value (see here),

What started as an obscure, almost monastic dispute among economists three decades ago has now emerged as a potential make-or-break point for the proposed legislation. Tracking its tangled history may now be essential to outsiders who want to understand this issue — and the huge economic stakes involved — as champions on both sides of the political arena saddle up to do battle over it.

As well as a good post at Common Tragedies (see here),

The key issue with the safety value will be the tension between those that want it to be very high, and so ensure emission reductions and those who define cost containment as no cost at all and so want a low value. In the Canadian case, the safety value has been set very low, and so emission reductions during to 2012 to 2018 period will be correspondingly low. This is not pure conjecture but rather based on modelling, where Canadian compliance costs indicate that the technology fund will be fully subscribed at the current price caps.

And so, we are left with a tax layered on a cap and trade system. While the policy skeptics decry that a tax will not work, by extension neither will cap and trade, at least not how it is being implemented in Canada. And with the science arguing for more reductions, the current design of the safety value will leave Canada with a growing stock of high emitting technology that will be costly to alter in future years. That is, if politicians eventually decide to take action, future compliance costs will be higher due to short-term inaction. Canada’s use of the safety valve, it seems, is about shifting the cost and therefore political burden in time.

tech_fund.JPG

Written by Dave Sawyer

March 21st, 2008 at 3:25 pm

With Soft Cap and Rule, Equivalency Looks oh so Much Brighter

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I had the good fortune of being briefed on the details of the federal government’s climate plan this week. What is interesting is that the briefing occurred during a break in discussions of how a carbon tax might be applied nationally and might complement cap and trade. As I sat listening to the government official, and all the complexity of the new federal plan was revealed, all I could think about was the equivalency clause. Simply, equivalency allows the provinces to implement their own plan if it is somehow equivalent to the federal program. While this will need some sorting out, the comparisons between the elegance of the BC climate plan based primarily on a carbon tax shift and the sheer complexity of the “soft cap and rule” federal plan led me to think of equivalency as the great hope for Canadian climate policy. That is, provinces and their industries will look to the federal plan, try to get their head around all it entails and I suspect instead will start planning their own simplified approach.

The other big observation is that of cumulative emissions, where the latest additions, and especially the focus on Carbon Capture and Storage (CCS) and the technology fund extension called “certified projects” will result in a step change in reductions around 2018 or 2020. And this points to a problem with targets in a GHG setting – target attainment says nothing about cumulative emissions. One can emit like crazy and then hit a target with a step change reduction in a single year, and voila the target is attained. But total emissions over the proceeding period will be high, which is why early and sustained action reduces total emissions and hence the climate risk. And modelling also shows early and sustained action is cheaper since technology decisions that are not influenced today are expensive to deal with later.

Which is why equivalency could be good for Canadian climate policy. In the face of a soft cap and rule regime, a carbon tax shift looks oh so much brighter.

Written by Dave Sawyer

March 15th, 2008 at 4:13 pm

Yoda advocates a carbon tax….he wants a level playing field cause he is smart

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David Suzuki today released a carbon pricing and revenue recycling report today authored by Nic Rivers and myself (suzuki-carbon-report-en-web.pdf). In the report we apply a carbon price of varying levels within a general equilibrium model of the Canadian economy and then test alternative revenue recycling and tax shifting options. We find that with smart revenue recycling that the GDP impact can be halved if other taxes are reduced. How much? Well lots actually.

At $100 per tonne, the Government’s Turning the Corner target is more or less achieved with a GDP loss in 2020 ranging between 1.3% and 0.5%. If taxes are reduced like payroll or income, the GDP impact is lower, and in the range of 0.5%. With a carbon tax or fully auctioned permits, but with no recycling, the GDP impacts are higher, and could double the cost of attaining the same target. Again design matters to the efficiency outcome.

What else happens?

The economy continues to grow. Even with carbon pricing, the Canadian economy will continue to grow and expand;

Income taxes could be halved from an average rate of 22% to 13% (not the marginal rate)

Exports fall but so do imports and thus Canada’s balance of trade actually improves.

And Canada’s exchange rate improves.

So, lots of outcomes to explore, but I think the most interesting finding is that even with carbon pricing the costs of the policy can be very different. And if we implement regulations as the primary policy, I suspect all bets are off, with very high costs indeed.

What this report really does is highlight that with carbon policy there are more questions than answers. I am just glad folks like Dr. Suzuki are asking questions.

Written by Dave Sawyer

February 25th, 2008 at 4:25 pm