EnviroEconomics.ca

In reading this one would think that we are on the verge of the next great ponzi scheming structured financing debacle,

The next big scam: carbon dioxide

In referring to the $7.4-billion in fraud that have occurred in the last 18 months in the EU’s carbon market: “It is clear that [carbon trading] fraudsters are fully aware of the potential that trading in intangible commodities has to further their ends. Such goods or services can be traded without the need to be physically moved or transported, which represents an obvious opportunity to frustrate Law Enforcement efforts to track and trace transactions.” So much fraud has been occurring that, Europol estimates, up to 90% of all carbon market volume in some EU nations was related to fraudulent activities.

Permits for CO2, a tasteless, colourless and odourless gas, epitomize an “intangible commodity.” The underlying commodity for these permits, CO2, until recently had few producers, few customers and few commercial uses. With the rise of fears over global warming, governments decided to turn this niche gas into what could soon be the world’s most traded commodity

Can we minimize gaming in the trading market? Probably, given stock market regulators routinely set the conditions to minimize fraud and then enforce these. And does the “intangibility” of carbon necessarily lead to fraud? If carbon can be counted and then reconciled, is it truly intangible? Company valuations are typically based on intangibles, like goodwill, and product pipelines are always intangible as in pharmaceuticals. And don’t get me going on how the magic of technology drives tech valuations. So the fact that carbon is “intangible” does not necessarily lend itself to fraud. Stock markets work on intangibles on a minute-by-minute basis.

In the end, the prevalence of fraud is about instrument choice: with the choice of carbon markets over carbon tax, one is necessarily trading off market gaming for inept government spending. Trading is what most people want given aversion to tax, and so one has to live with immature markets, speculation, volatility and gaming. With each layer of the carbon trading onion revealed, it is no wonder folks are drifting back to carbon taxes.

The climate policy intelligentsia gets all knotted up on key aspects of climate policy design from targets to coverage, to allocation to auction and then recycling. But, I would argue that none of this really matters. Instead, what matters is what emitters believe. And so the most important question in climate policy is not the target, or the instrument or overcompensating through free allocations or technology subsidies but “do emitter believe?”. All else then flows from this and all else becomes secondary.

Getting going with credibility matters, period. And then expectations drive outcomes. Which brings me to this today,

Carbon Falls as Climate Failure Is Oil Polluter Boon

The inability of government leaders to agree on stricter pollution controls at meetings in Copenhagen last month is showing up in commodity markets, where it’s getting cheaper to emit greenhouse gasses.

The price of permits to emit a ton of carbon dioxide sank 10 percent in London, while oil gained 6 percent in New York since Dec. 7, when 8,000 delegates attended a summit in the Danish capital to prepare for a successor to the Kyoto Protocol, the climate treaty that expires in 2012. Not only did the summit fail to increase regulation on polluters, it also reduced incentives to invest in clean energy.
“There are surely two factors impacting carbon prices: the failed summit in Copenhagen and a probable surplus in the EU emissions-trading system,” said Jacek Kaczorowski, chief executive officer of Poland’s Belchatow coal-fired power plant, the biggest polluter in Europe, according to EU data. Any “sustainable recovery” in carbon markets is unlikely this year, he said.

The work a number of folks did for NRTEE on expecations and outcomes is illustrative, so if you are feeling teckey see here

But this graph says lots. Simply, with low expectations there are low reductions and so one of two things happen: either you don’t hit your targets as the graph from the NRTEE modelling suggests, or carbon prices must climb in the future to knock out all that high emitting capital that is the result of unbelievable policy. But either way, delay is costly, and policy credibility is key.

Lots of traffic on climategate, but the New York times has some good stuff,

The Copenhagen conference itself reflects increasing acceptance of the scientific arguments: the negotiations leading to the talks were conducted by high-ranking officials of the world’s governments rather than the scientists and environment ministers who largely shaped the 1997 Kyoto Protocol. Late last week, President Obama changed the date of his visit to Copenhagen to Dec. 18, the last day of the talks.

For many, a 2007 report by the Intergovernmental Panel on Climate Change was a marker of a shift in the global warming debate. In it, the panel — a volunteer network of hundreds of scientists from many disciplines who meet periodically to review climate studies and translate the results into language useful to policy makers — concluded that no doubt remained that human-caused warming was under way and that, if unabated, it would pose rising risks.

Over the last several decades, other reviews, by the National Academy of Sciences and other institutions, have largely echoed the panel’s findings and said the remaining uncertainties should not be an excuse for inaction.

The panel’s report was built on two decades of intensive scientific study of climate patterns.

Greenhouse gases warm the planet by letting in sunlight and blocking the escape of some of the resulting heat. “The physics of the greenhouse effect is so basic that instead of asking whether it would happen, it makes more sense to ask what on earth could make it not happen,” said Spencer Weart, a physicist and historian. “So far, nobody has been able to come up with anything plausible in that line.”

Good questions, but perhaps a more base line of inquiry is better,

How can one refute this?

Word on the street is new Federal targets will be announced at Copenhagen. Most likely PM Harper is playing follow the leader, literally following Obama to Copenhagen, So, expect harmonized targets with the US, which is -17% below 2005.

But anything can happen, cause target trash talk is way easier than action.

The need to poke your finger in your neighbors eye runs deep in politics. How else does one explain another jurisdiction making target trash talk? Yesterday, Quebec stood up, and was counted — as another jurisdiction that has made a promises that it can’t keep.

Quebec breaks from Ottawa in plan to cut greenhouse gases

Quebec is taking the final step in its break from Ottawa on climate change, unveiling an ambitious plan to reduce greenhouse gases and blasting the federal government for inaction only a few weeks before a major international environmental conference.

Premier Jean Charest announced yesterday that, by 2020, the province will reduce greenhouse-gas emissions by 20 per cent below 1990 levels, a goal similar to the target the European Union has adopted.

The ambitious target-setting is the latest in a series of policy moves on the environment from the provinces, with Quebec and B.C. leading a surge ahead of the cautious position of the Harper government.

Quebec premier says Ottawa needs to do more to cut greenhouse gas emissions

Quebec Premier Jean Charest says Ottawa needs to do more to reduce Canada’s greenhouse emissions, as he committed Quebec to take a leadership role by accelerating its own efforts.
Charest said Monday the province will cut its emissions by at least 20 per cent from 1990 levels by 2020 and urged the federal Conservative government to raise its target above the three per cent it has set.
“It is in the interests of Canada, whose prosperity rests in large part on exportation, to give as much effort as its partners in this global fight,” he said in a speech attended by the who’s who of Quebec business leaders.

Or won’t keep once it sees what it will cost.

The announced target at 20% below 1990 levels seems to be much bolder than what others are saying, and notably the feds. It sounds deep, but it is not really since Quebec’s emissions have been more or less flat since 1990, growing only 5% in fifteen years. (see here).

But still it is bold, and to achieve reductions of this magnitude will require credible policy. I did some simple modeling of what it will take to hit the target. Assuming an economy-wide cap and trade system ala WCI (full coverage that includes vehicles and buildings), the following emerges,

Compliance Target. The target is 68Mt (-20 %/1990). This means that 28 Mt will need to be found in 2002, or a reduction of about 30% below BAU.

Permit Price. The permit price assuming action is taken in 2012 will need to be in the order of $135 tonne, with some pretty supped-up vehicle regulations, vroom vroom.

Total Cost. About $2 billion in capital, energy and operating costs in 2020 or about 0.5% of forecast GDP in 2020.

Distribution. Vehicles costs will rise 25% and electricity costs 10% (above forecast norms).

This is transformative stuff that requires real policies and real pain for some. Modeling has shown that these costs are doable, and actually not all that bad relative to the total economy. Indeed, the targets are technically and economically feasible, and policy can do it. But all too often we trip or rather choke on the types of costs outlined above.

So, why these jurisdictions continue to climate trash talk I will never ever understand. Once they start to look closely at what it will take to achieve what they have promised, they balk. Setting bold targets has proven time and again to result in non-polices and bold inaction.

Carbon tariffs are trade distorting period. They help those that may need help due to relative product price differences attributable to carbon pricing. But all others are worse off, and the economic models show that welfare is always decreased.

So, when I see this I cringe.

We need another carbon tariff

…We don’t need another Kyoto-type protocol in Copenhagen. What we need is to put a price on our own carbon emissions and a carbon tariff on everyone else’s.

First I ask another tariff? We have one already? But that aside, the basic economics are wonky and so Rubin’s assertion is wrong at worst and incomplete at best.

Three points support this. First, who we trade with, second, what we trade in and finally the emission intensity of all this stuff.

Who we trade with. Canada mostly trades with “western” countries who are all contemplating carbon polices. Canadian trade data shows that Canada exported about 85% to 90% of our total exports to Annex 1 type countries (under Kyoto), all of which are working towards carbon pricing of some sort (except of course Canada which speaks to a different risk). On imports, about 80% come from Annex 1 countries. So the risk, and the need for a carbon tariff accounts for a very small share of our imports and exports. Indeed China, that dastardly emitter, accounted for 3% of our exports and 10% of imports in 2008.

What we trade in? Major exports include oil, gas and their derivatives, electricity, a whack of car stuff, smelting products and aerospace. On imports, it is mostly the same, reflecting an integrated Canada-US market. China, on the other hand sends us golf bags, shoes and computers by the container. Not so big a competing overlap here with Canadian firms.

Emissions intensity. The emission intensity of our exports is much larger than of our imports, reflecting energy trade south and imports of manufacturing stuff north. Of our top 25 commodities, energy intensive exports account for about half of total exports whereas it is less than a third for imports. But when you compare what we import from China, the comparison stops cold. Simply the embodied carbon in oil and gas is a tad larger than that of computers.

So, border adjustments can help some, but as a major policy thrust they fall short in Canada. Their widespread use would only distort trade and reduce welfare. They sound sexy, have populous appeal, but from an economic perspective are unwarranted. Which perhaps explains why we may get border adjustments before we get a real carbon policy.

See here and here for an elaboration of this,

Ottawa will delay the release of climate regulations until there is a firm agreement on a global approach and clarity on how the United States intends to regulate emissions – which could take until late 2010,

and the Minister’s comments

“In the absence of an international understanding, and in the absence of an international framework, it is difficult for any country to finalize domestic policies and to put in place its domestic approach — whether that’s a regulatory approach or a cap and trade, or something else,”

I guess if Canada developed a Regulatory Framework on Industrial Emissions when the US said it would do nothing and we had clear international commitments under Kyoto, then it would only make sense to abandon the Regulatory Framework in light of US action and a uncertain international agreement.

And they called Prime Minister Martin Mr. Dithers.

Make no mistake, the Pembina/Suzuki paper was a landmine, I mean landmark for Canadian climate policy. It has effectively unleashed the polarity that exists between those that think action is rubbish with those that think a changing climate is dangerous.

While this has always been the case in Canada, what has changed is the Harper government. They have moved from paying lip service to action, as in the case of all previous governments, to calling action “irresponsible“.

It all changed when the Pembina/Suzuki report forced the government’s hand, through bringing out into the open the contradiction between the Government’s “target trash talk” and its policy inaction. As the Government suspected, they have been outed. See here for example,

Time for Tories to come clean on emissions

But this aside, the polarization is the real issue. This article sums it up nicely

The Harper government would argue it has no choice — because of hardship that would befall Alberta and Saskatchewan, in particular, should it take a hacksaw to GHG emissions, with national unity implications.

Meanwhile, environmental activists are arguing it’s time to stop coddling western energy-producing provinces and face up to the dire climate consequences of continued inaction.

The two sides have consolidated their respective positions in the wake of a report.

Now, those special interests who have been whispering in the PM’s ear, and quietly turning Canada into the North Korea of climate change, can safely come out to bask in the glow of the gas flares. So, we are back where we started folks. Take off your red leather ties and drop your Adidas bags, cause there is going to be another fight behind the school.

Not sure how one squares this,

Killing Canada’s cash cow not the answer (here)

A report funded by TD Bank on the regional economic impact of climate change should be viewed with a jaundiced eye…it tells us that only by punishing Alberta with massive carbon taxes can the federal government meet its climate-change goal of reducing greenhouse-gas emissions by 20 per cent below 1990 levels by 2020….Shooting the cash cow is not the answer.

With this…

Oil sands billions expected to be unlocked (here)

Steadily rising oil prices will combine with lower costs to put some of the more than $100 billion in canceled oilsands projects back on the front burner, according to a new study.

It seems the golden goose can not be killed. And even if some oil sands projects become marginal with carbon pricing, as production costs fall, and oil prices rise due to scarcity, will not more wealth be left in the ground? But then again, we expect more income now and our kids can fend for themselves.

Ross McKitrick has a good response to the Pembina/Suzuki paper here.

Ross is the type of guy to go after everything, and indeed that is what he does in this editorial – the government, the targets, the models, the ENGOS, and the science. Funny thing is, he is mostly right on all accounts. Indeed, his gives a great overview of why one should be sceptical in looking at all things climate policy.

But, does his argument mean everything is wrong? I think not. He makes an argument for precaution when thinking about climate policy and climate science, but when it comes to climate outcomes that could be really really bad, he prefers skepticism over precaution. Strange because he clearly believes risk and uncertainty dominate climate policy and science, but then implies that a little climate policy insurance is unwarranted.

This position then gives fodder to the Rhino Party Whips of the world, which perhaps says it all. (see comment 23, 8:37 pm). In the end, this all serves to drag the misery out a few years longer.