EnviroEconomics.ca

Ok, so in reading all the doom and gloom about what Alberta is and is not doing about climate policy, a ray of sunshine emerged today. Andrew Leach from the U of A fired a number of quotable zingers in an Edmonton Sun article (see here) that bare repeating:

“A big part of the problem with climate change is that we’ve been sold a free lunch,”

“We’ve constantly been told that reducing energy consumption is both good for the environment and will save us money. What we’ve never been told by government is that if we want to take this seriously, it’s going to cost us.”

And referring to the reliance on CCS for all reductions,

“What worries me most about this plan is that they’re betting on one horse,”

While these got me chuckling, more importantly they are spot on. And they were published in the Edmonton Sun, which continues to provide a nice window on that segment of Canadian society that thinks climate action is a crock.

But perhaps of more relevance to the state of climate policy in Canada, Andrew sent along these quotes from, I think, an American Economic Review article by Schelling, 1984:

The most a government can commit to is an input, not an output – a program, not a result. A government can attempt to commit itself on the variables it controls, but the promised results are only as credible as the commitment and the theory that generates the results.

This is a weakness of any effort to control inflation (or emissions) through expectations. It is hard enough for a government to commit itself reliably over a protracted period to what may be painful and unpopular; translating even a confidently shared expectation of government action into a shared expectation of results requires that a decisive subset of economic agents confidently share a theory, identical to the government’s theory, of how program inputs relate to inflationary (or emissions reductions) outputs. Without the shared theory, only the inputs can be credible.

Who says economics is dismal? And oh yes expectations matter if you want folks to reduce emissions.

Now, this is getting interesting. As many had predicted, and as some teach to first year economics students (see here), consumers and not the regulated community are experiencing the “cost pass though”:

Gaz Métro passes it on $15 per year for residential customers… When the provincial government imposed the country’s first carbon tax last fall, it wanted producers to pay….[But Gaz Métro has] began charging 0.67 cents per cubic metre of natural gas that it sells to its 170,000 customers. It will then remit $38 million to Quebec this year for its new $200-million annual green fund, aimed at reducing greenhouse gases. The hike means about $15 more per year for the typical Gaz Métro residential customer.

(article here)

Is the firm worse off with this climate policy? Perhaps not, and in fact, if the total’s are not reconciled, they could be better off. And is the household worse-off? $15 is eight double-double’s at Tim’s, a weeks worth of coffee for the average Joe. Hmmmm, not so bad maybe. Can we afford this? So far it seems like a yes. Are we getting reductions? Probably not many, but let’s wait and see.

Perhaps it is better, after all, that consumers see the cost increase since carbon taxes are about reductions and not just revenue. In other energy markets, say gasoline, folks are insensitive to price increases, and carbon related increases may not stimulate reductions, but can raise revenue, as gas taxes demonstrate. In this case, the revenue can then be recycled back for any host of objectives, my favorite being reducing other taxes in a neutral shift or for investing in areas where markets fail, like R&D and some technology deployment.

But the big message from the article is that blanket assumptions that carbon costs will adversely hurt industry are clearly wrong. It all depends on the ability of the firm to pass on costs. Affordability is then the next question — can the firm or the consumer afford the cost increase? The only way to answer this question is to compare the cost with income (profits) or sales and determine if the Hit is large.

But in the case of the Quebec carbon tax, it is only Tim’s that will suffer since the value of carbon in Canada continues to be measured in “coffees lost” and not tonnes reduced.

In reading about Alberta’s climate plan this week (see here) and scanning the reaction in the press, it struck me that new thinking on climate policy is required. Indeed, with the proliferation of targets, targets and more targets, I got thinking. Since climate policy has been really good at inventing new fangled jargon like fungability and additionality, I thought we all need a new addition to the vernacular:

Targetality, the propagation of carbon targets that serve as a proxy for real action for the sole purpose of stimulating widespread indignation.

Think about it. With a definition like targetality, we can justify our collective and ongoing focus over words and not deeds. With targetality,

– Some can decry, with great indignation, that too much action is undertaken;
– Some can decry, with even greater indignation, that not enough action is undertaken;
– And the proponents of said target are smug in their announcement that the problem is solved and all factions are dissatisfied.

Ok, I am being flippant. So, check out Chris Greene’ excellent article on why the focus on targets is not, perhaps so good for climate policy (see my post here) .

So, lets get off the targetality bus. Focusing on 2050 is a nice roadmap for where we need to go and how we need to transition to a low carbon future. It also serves as a nice benchmark to compare the stringency of a government policy. But, perhaps more helpful is to figure out how we get somewhere, anywhere, and what we should do sooner rather than later.

The argument that carbon taxes are nothing but a tax grab is disingenuous (see here). No government seriously considering carbon pricing can afford, politically, to say anything but a carbon pricing package will be revenue neutral, at least mostly anyway. Reductions in other taxes, notably income, and subsidies to the “little” guy, like building retrofits are the political reality with carbon taxes. And free allocations of permits will be the order of the day, at least that is until the utilities start making windfall profits as they pass on the theoretical cost of the permits and their regulated 9% ROI to you and me. So, it is disheartening to see such irresponsible reporting at a time when markets are in chaos:

With all the talk about the need to stimulate growth and keep the economy humming, how many policy leaders are going to be keen on new green and carbon taxes? Despite all the talk…no politicians I’ve heard are raising the idea. And what will Prime Minister Stephen Harper do with his various carbon initiatives now that the economy is teetering on the brink of diffucult (sic) times and growth forecasts are falling by the minute? We’re in a new economic ball game, and the short-term rules are changing around economic and political policy. The first to go, I predict, will be talk of carbon taxes.

And this focus on the short-term will end up costing more in the future. Inaction results in higher costs later on, assuming one will eventually take action on carbon mitigation. Get going now and you avoid technology lock-in, that is, more stock of higher emitting technology that is long lived, and you stimulate, somewhat, technology development through both R&D but also learning by doing (cause we have more stock installed and learn as we go). Plus lower operating costs will eventually make some, but not all, more productive and thus competitive.

For those with real impacts, carbon policy can address the income hit though, for example, output-based recycling recycling which basically subsidizes output while maintaining the carbon price signal. This lessens the economic hit by returning revenue to industry assuming they have taken action to reduce emissions (i.e. they “see” the mitigation cost and reduce emissions and then are returned the tax on the remaining emissions since abatement occurred). Simply, policy design matters and preordained outcomes are therefore not certain.

So, myopia may sell ink, but it is no way to make rationale, economic decisions. And oh yes, markets tend to go up after they go down.

As usual, good ideas hatched in capital cities all over the world were not well thought out and perhaps a tad too rushed. While biofuels have a place is climate policy, the zeal with which renewable fuel standards are being rolled out is growing into one big mess. A leaked paper from the EU’s own research folks says much:

The unpublished working paper by the Joint Research Centre, the commission’s in-house scientific body, says current EU proposals will cost the taxpayer 33-65 bln eur between now and 2020.
The cost-benefit study looks at whether using biofuels reduces greenhouse gas emissions, improves security of supply and creates jobs. It delivers an unenthusiastic opinion on all three counts.
‘What the cost-benefit analysis shows is that there are better ways to achieve greenhouse gas savings and security of supply enhancements than to produce biofuels,’ the report says.
‘The costs of EU biofuels outweigh the benefits,’ the researchers stated.

The big concern is of course the scale of it all. Growing the share of renewable fuels from very small to a large share in just 13 years places massive distortions in all kinds of markets – agriculture, food, refining, distribution (transport, storage and blending) and of course end use. Importantly, trade distortions seem inevitable. Simply, the large quantities required for compliance of say a 5% ethanol content will require imports of international feedstock. And those folks internationally are gearing up for it (see here).

But, one of the main policy thrusts of biofuels is of course getting more cash into farmers pockets, and thus the coming rise in biofuel protectionism. This is already happening (see here):

Malaysia, along with Indonesia, will be closely monitoring developments within the European Union (EU) regarding a draft law that proposes to ban imports of certain biofuels.

While the trade folks understand the implications of this stuff better than I, I can’t help but think the rising protectionism will lead to more problems. How does one label the product, differentiate it and enforce the ban? And what about trade law and protectionism, would there not be challenges? And how about the cost, would not intentionally acquired feedstock lower overall costs? Finally, while concern for degrading ecosystems is a sound basis for trade discrimination, it also seems a bit patronizing given western cropping practices.

So, while lots of folks hold out for the biofuel promise, it seems the worldwide policy enthusiasm has blight.

Of course lots of folks are lining up to capitalize on the great carbon economy shift that is coming. None more so than the nuclear industry. While this Globe article infers that nuclear may be cost-effective at higher carbon prices, it also highlights the cost obfuscation coming from the industry:

The (UK) White Paper glosses over this problem with a number of glib assumptions. In its economic analysis, which reckons that the all-in cost of nuclear power will be some £39 a megawatt-hour, compared with £38 for gas and £30 for coal, the government admits that nuclear is only marginally competitive. However, it has also used an important assumption, that the carbon price is €36 a tonne.

According to this, the cost of nuclear is just 2 dollars Canadian more per MWh relative to natural gas assuming an carbon price of about $72 CDN per tonne. This is crazy stuff. If the price gap was this small (CDN $76 for gas and CDN$78 for Nuclear), we would have widespread proliferation of nucs for electricity and all kinds of industrial applications. Indeed, with the price swings in natural gas, and the steady price appreciation since 1999 (140 percent or so in the delivered price), would we not have more nucs if costs were that competitive? (setting aside those little deployment barriers of 20-year build horizons and regulatory hurdles for a moment).

A more realistic figure is perhaps twice the purported cost, say $125 to 150 MWh, which means that at emission prices of about $200 dollars is required before nuclear is competitive with combined cycle gas. And there are lots of other reductions and deployment opportunities that should occur at carbon prices below $200.

So, cost-effectiveness is a good criterion for guiding carbon policy and is the reason why the nuclear folks are running all those Monte Carlo models seeking, desperately, to find a sweet spot. Unfortunately, it is the rate payer who will ultimately get skewed.

With all the talk of energy security, I would expect that many in the oil patch discounted talk of limited energy imports to the US based on carbon content. After all, is not Canada a good friend with stable long-term energy supply prospects? Seems though this is not the case (see here), with the US now passing into law a carbon performance standard for all fuel consumed by US government operations, which are large,

… the provision covers new contracts for all government operations, including the military and the postal service, which together operate thousands of vehicles and are considered the No. 1 and No. 2 vehicle fuel users in the country.

And since oil sands emissions are higher than conventional sources there could be real and significant trade barriers to Alberta’s synthetic gold. Of course this all needs to shake out and be tested, but one can see the writing on the wall. Even if Canada does not take domestic action, our exports could be facing trade barriers internationally in large and important markets. Recall that France was pushing to erect border taxes on imports from countries without carbon policies just last year.

So while Canada and Canadians continue to cite increasing export costs and lost international market share as the reason for domestic inaction, it seems that the trade barriers are much more of a threat,

“Canada’s oil sands will face large-market risk unless the Canadian government, or the Alberta government, take this challenge seriously,”

All this says that the risks of inaction are greater than just avoiding domestic costs over the long-term or higher cumulative emissions. It means the outcome most cited as the reason for inaction, that of reduced international competitiveness, could occur regardless of our domestic carbon policy. While sticking one’s head in the (oil) sand is an effective strategy to avoid reality, there is a chance you will be eaten.

When Jim Flaherty, the Federal Minister of Finance makes very public comments about climate policy, it is important. (see here). All too recently all things climate policy seemed to be the exclusive purview of Environment Canada. While Environment Canada is the logical lead on the file, the lack of visibility of others Ministers in the government on the file has been troubling. Climate policy is truly cross-cutting with important thinking required on industrial policy, international relations, energy and lots lots more. Look to Bali and Canada’s “results” for a good example of when a single department and Minister covers the entire file.

So it is interesting to see the Federal Finance Minister wade into the climate policy realm in a public way. The Minister’s key point is about federal-provincial cooperation:

“Generally speaking, the consensus I would say is that it is desirable in Canada not to have multiple regulators in various areas of the economy,”

This is a good signal since the proliferation of a hodge-podge of carbon policies has to have industry and others doing business in multiple jurisdictions worried and could perhaps lead to higher overall costs (as the minister states in the article).

So while the Department of Finance has likely been beavering away assessing the possible macroeconomic impacts associated with carbon pricing, it is good to see the Finance Minister shake the tree bit. Lets just hope more consultation does not lead to inaction.

As soon as we start purporting that emission pricing will solve wide ranging social woes, it is time to pause and reflect (see here for a carbon tax as a snake oil cure).

A city carbon tax would also be a flexible way of addressing traffic congestion, which has almost hit the saturation point. It already costs $15 or $20 to park your car in some parts of Toronto. Why not charge a similar amount to drive it around?

While the carbon tax will “drive” some reductions in vehicle kilometers traveled, we can’t expect much from a carbon tax or emission pricing in the transport sector. Sure, high fuel prices will change some behavoiur in the transport sector, but experience has shown that folks are simply insensitive to fuel prices, especially in the short term and somewhat in the longer-term. This means that carbon prices need to be complemented with vehicle standards, California style.

In the NRTEE modelling, and indeed in most carbon abatement assessment, the transport sector is the last to respond, and one of the reasons why deep GHG reductions result in exponentially rising abatement cost curves at emission prices above $200. The insensitivity to the transport sector to high emission prices is one reason why international trading looks really good and fuel economy standards even better.

So, while a carbon tax or carbon price is a corner stone of effective climate policy, complementary vehicle fuel standards are a necessity to address our collective addiction to the car….

And if you want to address congestion, well then price congestion directly. And if you want to fund social programs, well keep it to yourself and perhaps lets talk after we implement a economy-wide carbon price, collect revenue, have effective tax shifting and revenue recycling and reduce some emissions. Then maybe lets think about diverting some revenue to other purposes.

Here is a nice tight overview of what transpired this week with the NRTEE release. A surprising shot of clarity from an obscure source in Edmonton:

Sadly, ideology and partisan bluster continues to trump meaningful action on climate change based on sound advice—even when it’s advice the Conservatives asked for.

While we really can’t expect much from politicians in the short term, the NRTEE report has done an important service for the climate policy debate…refocused the national debate from one of questioning affordability (what I call Globe and Mail climate policy) to one also focused on the risks of inaction — both economic and environmental.

And speaking of risk, no news service highlighted the benefits of reduced air pollutants with climate policy. These are real and local and well NRTEE did not have enough time or space to explore these. But, check out the report, the reductions in air pollutants are large and so too then are the associated health benefits- which occur immediately and within Canada.

So by continuing to oppose efficient policies, politicians are not just thumbing their nose at getting things done cheaply, they are also thumbing their nose at clean air and oh yes, that little thing called climate stability.