EnviroEconomics.ca

The big climate policy news this week is the emergence of a new US climate policy from President GWB. This is the man who brought us in 2002 that oh so stringent 18% reduction in GHG intensity by 2012 — which just so happened to be the forecast baseline. And now we get this,

In reading the description of what is to come and comparing it to the President’s history on climate policy (See DOT Earth Post and Text here), one can’t help but chuckle at the above photo. It pretty much sums up the policy announcement.

But here is my take: stabilization of emissions by 2025, re-announce old stuff like vehicle and renewable fuel standards (ethanol and biodiesel), make vague gestures towards the power sector, reaffirm the love for nukes and coal, hate for regulations (and how they managed to weave in the link to Species at Risk legislation I will never know), and of course how technology is the key and should be subsidized. And oh yes the economy should be left harmless.

For Canada and competitiveness this stance is somewhat better than before, but still shows an implementation risk, where a majour trading partner’s climate policy stringency is not aligned with ours. But, with the US election to come, and all that is going on in Congress, it is too early to talk of implementation risk. But still, this shows movement, and in time other competitiveness challenges, notably the non-party risk (i.e. China without binding targets) could also become less of a concern.

But for now we can still chuckle over the image and perhaps the policy…”My reduction is this big”

If one looks back over the carbon policy discussions in Canada credit for early action figures prominently. Simply, under cap and trade, some argue that they should receive credit for action initiated in the lead-up to implementation. The core argument is that in expectation of a future carbon constraint, early action was undertaken to align with normal capital decisions. Thus, the argument goes, the early action should be recognized in setting the new carbon constraint to be less stringent. Now if you can follow all that, or it you know intuitively what I m talking about, you know why credit for early action is a mess – it is hard to sort out what is real or not. And so with a mechanism to enable credit for early action the regulator has to disentangle investment decisions and motives going back some years and then see how this influences the new allocation. Additionally and administrative burden both likely suffer with credit for early action.

Under the current Canadian plan, there is 5 MT allocated for early action. Not a lot, which is good, but still enough to trigger all kinds of positioning, and to require a few folks at Environment Canada to sort this all out.

And why am I ranting about this? Well there is a neat article here on how one BC municipality will see a carbon bill increase of $300,000 in 2012 under the BC carbon tax. And the link to credit for early action? The carbon tax will implicitly account for all early action undertaken through the lower emission intensity whereas trading may not.

In the case of Burnaby, a range of investments have lowered energy use, emissions intensity, and ultimately the carbon tax burden,

But the best example is Burnaby’s recent earth-friendly upgrades to 49 city-owned buildings. Completed by Honeywell Ltd., the $6-million project includes new light fixtures, water-saving measures and digital controls to keep heating, ventilation and air-conditioning costs down. “That cut down our energy consumption in total by 20 per cent for all of municipal operations”.

No need to sort out motives – the emission intensity does that. This is why a tax can be fairer than trading when one looks at early action. And certainly it is administratively simpler.

And what do rate payers in the municipality get? They get the great cost pass though,

Burnaby residents will be stuck with the bill. “We don’t have any other (funding) source but the property tax,”

But then again, the $300,000 cost in 2010 is less than 1% of Burnaby’s projected $333 million expenditures in 2010. Which makes me wonder why a 1% increase in operating costs four years from now is news.

Design matters. Just take a look at Manitoba. The government’s April 09, 2008 budget introduced a carbon tax on coal of $10/tonne starting in 2011. The casual observer, depending on their particular bias would say either: it is not enough; it is a good start; or why introduce another punitive tax? So, which is right? Well, none actually.

Coal accounts for about 1.3% of all energy consumed in Manitoba, 80% of which is in the electricity sector. For the province, coal totals about 2% of all energy and 7% of all carbon emissions from energy. So, at best a low carbon price will be targeted at about 7% of all emissions.

And oh did I mention the following (see here)

The decision comes as Crown-owned Manitoba Hydro prepares to phase out its last coal-fired electrical plant in Brandon.

So, I suspect we are seeing the emergence of the carbon tax coming full circle on the political acceptability front. Indeed our baby is growing up. It is taking its rightful place amongst other notable ineffective Canadian climate polices such as voluntary inaction, soft cap and rule (a description of the current federal cap and trade plan) and now the great disappearing carbon tax.

Which is why, as we all know, design matters but political will rules. Sure we can debate cap vs tax, allocations or revenue recycling design, but political will sets stringency. Period. So, without a push from the electorate, or that sudden and rare political epiphany as in the case of BC’s Premier Gordon Campbell, inaction will continue to define Canadian climate policy.

Drink anyone?

Forget Stern, forget Canada wide studies on the cost of inaction, forget debate over mitigation affordability, the real cost of inaction is …less beer,

The price of beer is likely to rise in coming decades because climate change will hamper the production of a key grain needed for the brew — especially in Australia, a scientist warned Tuesday.

“It will mean either there will be pubs without beer or the cost of beer will go up,” Mr. Salinger told the Institute of Brewing and Distilling convention.

(see here)

Eee Gads, BC would implode if the bud harvest suffered due to increased climate variability. Indeed, the economic and social impacts of US softwood lumber protectionism and the pine beetle would pale in comparison. Says BC harvester Brad Weed,

“Dude, this is bad”

Which perhaps explains why BC has been so active on climate policy.

When a government commits to a policy, any policy, one can usually expect some deviation from the initial stance as the constituent’s line up with their grievances. That is after all how public policy is implemented. Which is why there are some surprising words coming from the BC Finance Minister on how the BC carbon tax will be implemented and why BC may get cost-effective carbon policy (see here):

“There are so many sectors, not just geographic, that have been asking for some sort of special treatment or exemption that … if you go down the road of starting to make exceptions and exemptions then you would have to, at some point, just give up on the idea of pricing carbon,” Ms. Taylor said in an interview yesterday.

Excluding some from the carbon policy is expensive as it transfers the burden of reductions to some and not others. These policy “carve-outs” can ultimately increase costs since low cost options are not sought from all, which is also inequitable. Randy Wigle a professor at the University of Wilfred Laurier has a nice paper from some years ago on why exclusions are expensive for a given abatement target (see a short summary here). He states,

If any carbon restrictions are focused narrowly, the resulting plans can be extremely costly when all abatement occurs within Canada. The narrower the focus of implementation plans, the higher the cost to Canada…In the case where the most energy-intensive sectors alone are targeted, the welfare cost roughly doubles, but this result relies on the availability of a backstop technology which could provide added abatement at constant cost.

Twice as expensive you say? Hmmm…now where have we seen a plan that targets large emitters alone and relies on a backstop technology such as CCS?

And then there are these additional comments from the BC Finance Minister to further indicate that the BC policy may just be implemented with style:

“From our point of view, putting in a broad-based tax so it is equal for all users of carbon-emitting fuels, and doing it at a very low level so people have lots of time to think about whether or not they want to make any adjustments, is the right policy and we will stay with that policy.”

A broad-based application is central to cost-effective reductions. Plus ramping up the policy allows folks to plan capital upgrades to more closely align with normal capital stock turn-over. So, some strikingly clear words from a government facing pressure over a new policy.

Politicians are not known for weathering a barrage of grievances, and so if BC’s deeds echo their words, climate policy in Canada may just have that gold carbon standard from which other policies are compared. While it is early days for the BC policy, they seem to keep getting it right.

Well I have been a one armed economist for some time now, courtesy of a skiing accident, but am now on the mend and ready to get back at posting. And what got my thoughts flowing this morning is a number of articles in response to this piece from Nature (here):

The article is co-authored by Chris Green, a Canadian economist from McGill who has some quirky thoughts on climate policy that just so happen to be insightful (see my post here on an earlier response to Chris’s article in the Globe “that wacky economist”).

What I really like about the article is it’s focus on technology deployment and what is really required to get the job done. Yes we need broad-based carbon pricing and yes we need technology standards, but those are just the start. The sheer scale of the technology roll-out to hit deep and medium-term targets is truly astounding and will need a whole host of policies and programmes to enable the transition. The article quotes:

Enormous advances in energy technology will be needed to stabilize atmospheric carbon-dioxide concentrations at acceptable levels. If much of these advances occur spontaneously, as suggested by the scenarios used by the IPCC, then the challenge of stabilization might be less complicated and costly. However, if most decarbonization does not occur automatically, then the challenge to stabilization could in fact be much larger than presented by the IPCC.

Now some folks see demons in this sort of analysis, and some provide rather visceral responses (see here).

I am not so cynical to think that the authors of “Dangerous Assumptions” are climate skeptics using the techno-boondoggle argument to delay action. Quit the contrary, they are advocating a real wake-up call for policy to respond to the challenge. So the conclusions of the Nature piece seem to make sense:

There is no question about whether technological innovation is necessary — it is. The question is, to what degree should policy focus directly on motivating such innovation? The IPCC plays a risky game in assuming that spontaneous advances in technological innovation will carry most of the burden of achieving future emissions reductions, rather than focusing on creating the conditions for such innovations to occur.

In looking Canadian climate policy, what is the value of this sort of article? Well, a lot actually. It reminds us of the sheer scale of the challenge ahead. A recent CCS Taskforce called for $2 billion in federal funding and the same from the private sector to gain about 5 MT of CCS (see article here). But, modelling suggests that under Turning the Corner (-20% below 2006 in 2020) CCS deployment will need to be upwards of 75MT and under the Bali targets 150 MT (-25% below 1990). And this investment and deployment will need to occur in the Alberta capital projects world characterized by labour and materials shortages with rising costs. Yikes.

So, once again a little more climate policy reality is revealed. I know, the truth hurts.