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…environmental economics and the implications of environmental policy

Archive for January, 2008

Trading is better than Carbon Taxes…for those with a vested interest that is

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Andrew’s comments from the last post dovetail nicely with my thoughts on this report in the Financial Post (here). Essentially, the article argues that emission trading is more effective than carbon taxes. Trouble is, this preference comes from constituents who are lining up to defend their stakes in the great carbon trading game:

“This is an industry that did not exist four or five years ago — an industry that has very rapidly emerged (with) products that you take for granted in other businesses are just being developed now.”

One of the NRTEE’s recommendations included the observation that an upstream trading regime would be more effective than a downstream trading regime (see the NRTEE report and Chris and Nic’s technical report available by request from NRTEE). Essentially, if you move the regime up closer to production and importation you get a wider transmission of the carbon price across the economy, a desirable outcome since costs tend to be more evenly distributed. With a broad based upstream system there is no need for a complementary tax as in the case of the current downstream large emitter system, where only 50% of Canada’s emissions see a price signal. Problem is, Canada would need to ultimately transition the current “proposed” downstream system to an upstream system sometime near 2020. But this would alter existing rights, and notably all those free allocations, trading fees and allied services making money off the downstream system (same^2 for offsets).

And thus the transition challenge — constituents. Like it or not trading is creating vested interests that will protect the status quo and lobby accordingly. This will make change hard, especially in time.

And now the fun…you have to love an article and a quote in the National Post, that bastion of conservative thinking, that basically says that individual decision makers need to be told what to do:

“You can tax me on gas, but I still consume gas and there’s nobody to tell me how much I should consume,”

I love it. Only in Canada, Eh.

Written by Dave Sawyer

January 10th, 2008 at 4:11 am

Singing and spitting around the Climate Policy camp fire…

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Huh? Seems somehow the NRTEE got the warriors holding hands (see here):

The report drew widespread accolades – including expressions of appreciation from both the Canadian Association of Petroleum Producers and the David Suzuki Foundation.

And then…

Pierre Alvarez, president and CEO of the Canadian Association of Petroleum Producers, lauded several of the policy principles stated in the report. “It’s very clear that this is not a shot at the oil and gas industry, or the coal industry; that it applies across the economy and across the country,”

Usually in environmental policy when you piss off industry and the ENGOs you have done something right. So, I am not quit sure what to make of all this singing around the NRTEE campfire. But before we all hold hands for another sing song, there are sobering reminders from politicians and the public that some are not prepared to pay a cent to reduce carbon emissions. This one is particularly good (here). There is a mindset here that needs more attention, and thus we may need slick advertising campaigns such as the one tonne challenge after all. Who would have thought?

But my personal favorite quote from all this is from the Minister himself:

“Every time a report comes out, you can’t change your mind.”

So its seems that all us economists and policy wonks who have been pushing this stuff for a while should step aside and make way for the spin doctors. Perhaps, it is their time.

Written by Dave Sawyer

January 8th, 2008 at 3:12 pm

Finally, some clarity in an otherwise muddled national climate debate….

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After about a year of beavering away, the NRTEE released its final advice note today to the Minister of Environment, and more importantly all Canadians (see “>Here). This piece of work sets down some fundamental principles that Canada should follow if longer-term and deeper GHG reductions are to be pursued. While there is some great stuff in the report (and the background paper prepared by Chris Bataille and Nic Rivers and others at MKJA – contact NRTEE for a copy, it is worth it), importantly, I think the report’s greatest contribution is to bring some “street cred” to two concepts:

First, the interim report released in June introduced the concept of an emission price to the media and hence Canadians. Before the June report, the use of this term was not so widespread, but now it is more widely used by the media;

Second, with this report, the carbon tax debate is effectively launched. There is now no hiding from an economy wide carbon tax as a realistic policy choice. I suspect we will now see more discussion at the political level on this. See here for some early evidence.

I think the next important step, as I have said in the past, is to make carbon tax synonymous with “carbon tax shift”, where revenue recycling and tax shifting further other goals. But for now I am just happy the report was (finally) released and is getting such favorable press. The report has legs, and NRTEE deserves credit for having the forsight to call a spade a carbon tax.

Written by Dave Sawyer

January 7th, 2008 at 9:53 pm

An Over Allocation of Holiday Cheer…

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Now that I am back from enjoying an over allocation of wealth that is the Holiday Season, my mind turns back to all things climate policy. I have long thought that a majour gap in the current climate policy debate in Canada is allocations — how the large final emitters will be granted emission rights. One can’t help but wonder how it will all shake out given the maturations in Europe over allocations during the first trading period. As many economists predicted, if firms can pass on the costs of the permits to consumers then firms could be better off. This is indeed happening in Europe as the electrical utilities simply pass all costs on to consumers. The result is windfall gains:

Electric utilities are passing on the costs of emission rights directly to the price of electricity, even though they get most of the emission rights for free, and even if the electricity is generated in ways that do not produce greenhouse gas emissions, such as nuclear energy and hydroelectric power.
The extra dividend has boosted both the price of electricity and the profits enjoyed by electric utilities.

The “cost pass through” is a tricky concept to get one’s head around, but essentially it is about opportunity cost. Although the permits are freely allocated, they have a value in the trading market and thus using them to emit a tonne involves a loss in potential earnings. This loss is like a cost of production, and hence firms, especially regulated utilities, add this to production costs and voila, a price increase for consumers. Now, in competitive markets, this value may not be passed on if market share is to be retained, but in markets that are less than competitive, it is likely that the consumer will see some portion of this cost. But, since there is not really a cost here given permits are freely allocated, firms are better off and profits rise to the extent the cost can be passed on.

This is what is happening in Europe and this could happen in Canada. Carolyn Fischer and I did some allocations work on the Ontario electrical market a few years ago and found that under free allocations and a regulated market, electricity producers could be better off under trading—even with abatement costs accounted. On average with free allocations in a monopolistic market, utility profits increased more than a little with the high emission intensity generating sources showing the highest increase. Perverse I know, but a reality nevertheless. The solution of course is to auction the rights, like we do with telecommunications, and capture some of that allocation rent. This is what is now proposed in Europe.

So, in the wake of all our collective holiday over allocation, we should be asking if Santa will be giving our wealth to some of the large emitters and leaving us to pay for that hypothetical cost embodied in that lump of coal.

Written by Dave Sawyer

January 4th, 2008 at 3:46 pm