…environmental economics and the implications of environmental policy

Archive for February, 2008

If “Cap and trade isn’t the solution” decreasing abatement flexibility is certainly worse.

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I am not sure what this writer was thinking when this article was published in the Globe and Mail. Essentially the author argues that cap and trade will necessarily result in freeriders and hot air and therefore should be scrapped. While the case on freeriders and offsets may be a good one, railing against cap and trade seems dubious,

“with the shutdown of numerous uncompetitive industrial facilities following the demise of the Soviet Union, Russia has enormous carbon credits for sale. With little that can be done to reduce emissions from their already state-of-the-art facilities, economically struggling European manufacturers end up sending billions of dollars to Russia.”

Russian hot air was created because Russia was over allocated. Simply, there was no adaptive capacity in the cap setting to allow for the collapse of the soviet economy and the subsequent creation of fake emission reduction credits that could theoretically be used for Kyoto compliance by other Annex I countries. Most well designed cap and trade systems have closure provisions, where there are “use of loss” rules that require credits from closure to essentially be clawed back. So, design could have dealt with the hot air, and it was not an inherent flaw in cap and trade that led to this particular outcome but rather poor policy design.

The article then goes on to say that instead of cap and trade, a series of performance based regulations should be set for individual plants. A provision for a technology type fund is then mentioned, which is good for cost containment (i.e. a price cap that mimics a carbon tax),

The first step is to implement predictable, long-term, progressive targets for emissions reduction tied to each unit of a plant’s output. … Canadian businesses who fail to meet their targets could pay a set price per excess tonne to a federally administered emissions fund. This pool of cash would be designated to specific national environmental objectives; for example global warming adaptation and mitigation studies, energy-efficient city design including densification and public transit, or programs to encourage personal emissions reduction such as home energy efficiency improvements.

But, this is essentially a transfer to government and not between industry, which has obvious political and frankly economic efficiency questions. Adopting the freerider argument one can see a technology fund leading to all kinds of weird and whacky calls on revenue (see post here on carbon tax for Toronto) and high cost and low effectiveness investments. A technology type fund is good, but we are talking billions and billions of dollars in revenue.

Perhaps of bigger concern in this article is the rallying against abatement flexibility. The central premise of cap and trade is to allow emitters to smooth marginal costs. One emitter over complies, one under complies, the latter compensates the former and both are better off. This flexibility leads to innovation and continuous improvement and other good stuff. Stifle this flexibility and higher costs are inevitable.

So, if Canada is to achieve the reductions laid down by the federal governments or the provinces, flexibility is required. Flexibility in policy, flexibility in access to cheap reductions either domestically or internationally and flexibility to adapt to changing circumstances. And domestic reductions at increasingly stringent targets are really really expensive. So before we collectively dis those foreigners, perhaps we should shake their hand and see if there are credible and cheap reductions to trade.

Written by Dave Sawyer

February 5th, 2008 at 4:15 am

Kicking a Climate Change Solution….CCS has warts but it also has legs

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Quietly, the ecoENERGY Carbon Capture and Storage Task Force released its report on the viability and prospects for Carbon Capture and Storage (CCS) (see coverage here download report here: EcoEneregy CCS Report ). But, there is a continued notion out there that CCS should not be supported,

The Sierra Club of Canada has also criticized the technology as an excuse for industry to increase production rather than efficiency….”It’s in Canada’s best interest to be more efficient,”

This kind of thinking is not helpful. As part of a comprehensive strategy to tackle GHG emissions, CCS has a place along with conservation, efficiency, renewables, and lots more (see my previous post here). CCS therefore needs to be viewed as such, and supported as one way to work ourselves out of the carbon mess we now face. The CCS report released yesterday pegs public cost of CCS at $2 billion, with that much or more coming from industry:

The cash is needed to close “a financial gap” between Tory good intentions and energy firms’ ability to build a carbon capture and storage network….Industry would respond by kicking in $2 billion to $4 billion towards waste-gas cleanup equipment, pipelines and disposal sites if the taxpayers’ money is made available for an array of potential projects,

A 50% subsidy may on face value seem like a lot, but in the grand scheme of things it is not so bad, especially if it reduces carbon and other nasty emissions. With CCS, we see local and immediate air quality benefits, which are important. And it is not just the oil industry that benefits. CCS in Alberta will benefit a whack of emitters including refiners that make our gas and heating oil. And the price, at about $100/tonne (4 billion annualized at 12% capital recovery factor and 5 MT annually) seems to be about where we need to go if large national reductions are to be achieved.

Lets face it, oil sands emissions are large, the industry is growing and international demand has strong long-term prospects. CCS is a viable solution, along with efficiency, but even if we tap all the efficiency in the oil and gas sector emissions will continue to climb and international demand will remain unchecked. Is then nuclear the answer? Do we ban production and lose all those public royalties and jobs? Good luck with movement in either of those directions. So, like it or not we are stuck with CCS.

And yes it is a nascent technology, with uncertain cost and benefits (permanence being one and intergenerational transfers of risk being another), but it is at the top of the mitigation opportunity ladder. And so, it needs pubic support to get it going, to set the rules of the game and to ensure it proceeds with the public interest in mind.

And importantly the sector is willing to make investments, which is more than can be said for the majority of emissions in Canada (that is, you, me and our cars).

Written by Dave Sawyer

February 1st, 2008 at 5:03 pm