…environmental economics and the implications of environmental policy

Archive for December, 2007

In Bali, Canada said there must be a “balance” between the environment and “economic prosperity” …Just not now

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When the Canadian government laid down some long-term aspirational targets, many argued it was a ploy to detract from taking action in the present. At the time I thought the government should be applauded for looking beyond the next election and out to where we need to be mid-century. When we peer out that far, we can understand the breadth and depth of the change required to achieve the significant targets they announced (-20% below current in 2020 and -60 to 70% below in 2050). Importantly, looking out allowed Canada to see some risks, four of which are notable:

Delay is costly. Analysis indicates that when climate policy is delayed, it becomes more expensive later on. Simply, we are stuck with high emitting capital that is costly to convert to low emitting capital;

Delay has target attainment risk. Again, the longer you delay, the more risk there is that your high emitting capital stock can’t be switched out for lower emitting stock, and thus affordability and technological limits increase the risk that future targets can’t be obtained;

Technological change is slower. Without price certainty on carbon there is no incentive to innovate and invest in R&D. This means that new technologies may not emerge that can help later and reduce costs;

More cumulative emissions. While targets are fine carbon is a stock pollutant and with delay in action you emit more, even if targets are attained. Thus, delay results in more cumulative emissions, which is a bad thing.

With Canada’s position in Bala (see here), the underlying current, whether intentional or not, is delay. But delay on global action will end up costing everyone more and lessening environmental effectiveness. For now, I still think looking out to mid-century is a good thing. I am just wondering when a vision of the future will emerge in current climate policy.

Written by Dave Sawyer

December 6th, 2007 at 3:46 pm

Canada’s Position in Bali is not so Absurd, but mostly it is….

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Watching Canada’s international position unfold in the lead up to Bali I had to admit that getting the other large emitters to come on side makes perfect sense. Saying that China, India and others can pollute at increasingly higher rates unhindered now because the industrialized industrialized world did more in the past is absurd. Carbon emissions from newly industrialized countries will trigger future costs and all tonnes are created equally. And competitiveness impacts in some industries are important. So, emission reductions are justified and the world needs to bring China and India into the fold.

And then there is us. Yes you and me. Jeffrey Simpson has a column correctly pointing the finger at us consumers. If one takes the emissions embodied in China’s exports and allocates them to the industrialized world, we apparently account for a full third. Not surprising to anyone who uses a credit card in North America. So, we are also a big part of the problem outside of our borders.

So moving forward post-2012, the big challenge will be the newly industrialized world, as Simpson correctly points out:

An international climate-change treaty that somehow doesn’t include China (and India and the U.S.) agreeing to emissions reductions will be a failed treaty. When the real negotiations begin in 18 months or so — Bali not being serious talks — getting those countries to sign on will be the hardest part of all.

This is why leadership through action by the industrialized world is so important. One can’t occupy the international moral high ground when one is wallowing in domestic carbon. But so long as Canada and Canadians continue to point fingers at others, our international position will sound as shrill as a carbon policy debate in the House of Commons.

Canada’s real climate policy challenge, therefore, is to stop pointing fingers and do a little hard work for a change.

Written by Dave Sawyer

December 5th, 2007 at 3:23 pm

The Techno-optimists are Right for a Change: Canada Needs Carbon Capture and Storage

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Oh those cornucopians. Their teachings to economic grad students everywhere has led to the entrenched belief that simple constraints like environmental quality and finite resources can be solved through technological change and emerging backstop technology. For climate policy, this has led many to advocate delay in action until some radical technological breakthrough emerges to solve our climate woes. But this is bad policy. The time period for technologies to move from R&D to commercialization is long, which means that we can’t expect much before mid-century. And the sheer depth of reductions required to stabilize atmospheric carbon globally across virtually all economic sectors means that no single technology will provide the technological silver bullet.

In Canada, however, the cornucopians at least have got it partially right. Canada needs carbon capture and storage (CCS) and big oil knows it:

An alliance of 15 Canadian oilsands, chemical and power companies proposed yesterday a multi-billion-dollar plan to capture and store greenhouse gases in what would be the country’s single-largest carbon dioxide-reduction initiative. They say they are willing to pay their part — billions, in fact — to get this off the ground. It’s time for governments to do theirs — with the same urgency and conviction with which they embraced the green agenda or, in the case of Alberta, demanded a bigger share of the oils ands’ industry by jacking up royalties.

Recent analysis completed (by MKJA and myself) using the CIMS national energy and emissions model indicates that CCS is a big deal. As the graph below indicates, when all foreseeable technologies are competed in the face of an ever increasing emission price, CCS is the cost-effective technology that delivers a large and increasing share of national reductions. This is not surprising given the trajectory of emissions in oil sands and allied industries, and the CCS opportunities in Alberta and elsewhere. Our modeling indicates that without viable CCS, national emission reduction costs at any emission price rise rapidly.

But, CCS is not quit commercial, given the low price of carbon, and the high capital costs to start, and thus there is a justification for government support. But, government is not the best at picking winners and thus with the private sector involved, perhaps an equity position by government is a good start. Demonstration projects are another. And getting the regulatory frameworks, and rules of the game established are yet another.

So, while economists push for an emission price, there is economic justification to pitch CCS as a climate change technology winner in Canada. Indeed, CCS seems to be one silver bullet that we should all bite.


Written by Dave Sawyer

December 4th, 2007 at 4:00 pm

A Taxing Time In Bali

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While we in Canada dig out from three cross-county storms and our GHG emissions peak as all those two stroke snowblowers and plows make life more mobile, one can only think wistfully of Bali and those lucky few climate intelligentsia. Of course there is serious work to be done, and those tasked with working through the current political minefield will be working 24/7. While visions of post-2012 allocation schemes dance in their heads, there is a new and perhaps interesting twist — a call for a global carbon tax that will emerge from Bali.

Given a past political bias towards emission taxes, the emissions price that will continue to dominate the international GHG mitigation regime is of course emission trading. But this bias is not universal, and has ameliorated over time, and thus we now see a range of national and sub-national polices that implement emission taxes. This means that we are moving into a climate policy world where emission pricing is conducted by a mix of carbon trading and carbon taxes, with instances of both implemented concurrently (BC for example). It is not just the economists who are advocating for global carbon tax as part of the post-2012 international regime, but politicians as well. But the question is, can these two emission price options — taxes and trading — be reconciled in a post-2012 global regime? In this post we argue there are a number of reason why the answer is yes.

From an economist’s perspective, the options are reconcilable since both can be designed to mimic each other to ensure similar economic and abatement outcomes are achieved. An oft cited example of this “mixing and matching” of design elements is where a “safety valve” can remove the price uncertainty associated with trading so that total abatement costs are limited. Similarly, an emission tax can be updated up or down so that observed emission outcomes align with desired reduction targets. The advice from economists, therefore, is that the decision to move forward with emission pricing is not an “either/or” decision, but instead how to mix and match these inherently complementary price signals.

This assertion has important implications for the feasibility of a global carbon tax, for if emission taxes and trading are complements, there is scope for a carbon tax in the international regime. But why would it would be appropriate to implement the emission price policies as complements in the post-2012 regime. There are a number of reasons:

• Post-2012 allocations will remain contentious and will take time to sort out, and hence there is an opportunity for a global carbon tax to speed the transition to broader and deeper carbon reductions.

• A global carbon tax could transition newly industrialized countries to the post-2012 regime with binding caps.

• Institutional feasibility in the developing world more closely aligns with taxes rather than trading.

• Competitiveness issues can be lessened if a global carbon tax can be implemented in advance of global emission constraints.

Of course, some political support for a global carbon tax may do little to address “carbon tax” as a four letter word in politics.

Written by Dave Sawyer

December 3rd, 2007 at 3:20 pm

Make that a large double double….a (low) “price on carbon is inevitable, one way or another”

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There seems to be a misconception out there (see here) that Canada does not have a carbon price yet needs one badly…well, that’s not quit right. First, the Regulatory Framework will place a price on carbon through a domestic emission trading scheme starting in 2010 for 50% of Canada’s emissions. Plus, there is emission pricing in Quebec vis a carbon tax, and BC is toying with both cap and trade and an emission tax. And you can’t swing a tonne of carbon without worrying about some sort of future carbon cost. So, expectations theory in economics would argue that we have a price on carbon now that is driving technology choice to some degree.

The problem is not, therefore, that we don’t price carbon in Canada, it is that we do it badly. Policy uncertainty (Tech fund anyone?), bad policy design and well a lack of leadership all lead to decision making myopia where the expected cost of carbon is low, and technology choice today is weakly influenced. So, we have priced emissions in Canada, its just that a large double double from Tim’s has more value.

Written by Dave Sawyer

December 2nd, 2007 at 3:42 am