EnviroEconomics.ca

NRTEE released yesterday a good read on climate change and northern impacts (here).

TRUE NORTH: Adapting Infrastructure to Climate Change in Northern Canada
…First, make existing institutions work better now by mainstreaming adaptation into government policies, processes, and mechanisms and ensuring northern views are “at the table”, and second, build northern climate change adaptation capacity in science and at the community level, so the region is more resilient, self reliant, and less vulnerable in meeting the challenges of climate change adaptation in the years ahead.

Repositioning the climate debate to be less about globe and mail economics (mitigation is too costly) and more about avoiding on-going damages can only help.

Jack Layton has a priceless quote here from question period today

“We are glad that the Prime Minister is finally taking this issue seriously and has taken his head out of the tar sands,” Mr. Layton said. “The question is: Is he going with any plan? So far, we have seen no plan even though it was promised by the Minister of the Environment.”

Of course referring to this,

Harper heads for Copenhagen after all

Fun times, eh.

Word on the street is new Federal targets will be announced at Copenhagen. Most likely PM Harper is playing follow the leader, literally following Obama to Copenhagen, So, expect harmonized targets with the US, which is -17% below 2005.

But anything can happen, cause target trash talk is way easier than action.

The need to poke your finger in your neighbors eye runs deep in politics. How else does one explain another jurisdiction making target trash talk? Yesterday, Quebec stood up, and was counted — as another jurisdiction that has made a promises that it can’t keep.

Quebec breaks from Ottawa in plan to cut greenhouse gases

Quebec is taking the final step in its break from Ottawa on climate change, unveiling an ambitious plan to reduce greenhouse gases and blasting the federal government for inaction only a few weeks before a major international environmental conference.

Premier Jean Charest announced yesterday that, by 2020, the province will reduce greenhouse-gas emissions by 20 per cent below 1990 levels, a goal similar to the target the European Union has adopted.

The ambitious target-setting is the latest in a series of policy moves on the environment from the provinces, with Quebec and B.C. leading a surge ahead of the cautious position of the Harper government.

Quebec premier says Ottawa needs to do more to cut greenhouse gas emissions

Quebec Premier Jean Charest says Ottawa needs to do more to reduce Canada’s greenhouse emissions, as he committed Quebec to take a leadership role by accelerating its own efforts.
Charest said Monday the province will cut its emissions by at least 20 per cent from 1990 levels by 2020 and urged the federal Conservative government to raise its target above the three per cent it has set.
“It is in the interests of Canada, whose prosperity rests in large part on exportation, to give as much effort as its partners in this global fight,” he said in a speech attended by the who’s who of Quebec business leaders.

Or won’t keep once it sees what it will cost.

The announced target at 20% below 1990 levels seems to be much bolder than what others are saying, and notably the feds. It sounds deep, but it is not really since Quebec’s emissions have been more or less flat since 1990, growing only 5% in fifteen years. (see here).

But still it is bold, and to achieve reductions of this magnitude will require credible policy. I did some simple modeling of what it will take to hit the target. Assuming an economy-wide cap and trade system ala WCI (full coverage that includes vehicles and buildings), the following emerges,

Compliance Target. The target is 68Mt (-20 %/1990). This means that 28 Mt will need to be found in 2002, or a reduction of about 30% below BAU.

Permit Price. The permit price assuming action is taken in 2012 will need to be in the order of $135 tonne, with some pretty supped-up vehicle regulations, vroom vroom.

Total Cost. About $2 billion in capital, energy and operating costs in 2020 or about 0.5% of forecast GDP in 2020.

Distribution. Vehicles costs will rise 25% and electricity costs 10% (above forecast norms).

This is transformative stuff that requires real policies and real pain for some. Modeling has shown that these costs are doable, and actually not all that bad relative to the total economy. Indeed, the targets are technically and economically feasible, and policy can do it. But all too often we trip or rather choke on the types of costs outlined above.

So, why these jurisdictions continue to climate trash talk I will never ever understand. Once they start to look closely at what it will take to achieve what they have promised, they balk. Setting bold targets has proven time and again to result in non-polices and bold inaction.

Carbon tariffs are trade distorting period. They help those that may need help due to relative product price differences attributable to carbon pricing. But all others are worse off, and the economic models show that welfare is always decreased.

So, when I see this I cringe.

We need another carbon tariff

…We don’t need another Kyoto-type protocol in Copenhagen. What we need is to put a price on our own carbon emissions and a carbon tariff on everyone else’s.

First I ask another tariff? We have one already? But that aside, the basic economics are wonky and so Rubin’s assertion is wrong at worst and incomplete at best.

Three points support this. First, who we trade with, second, what we trade in and finally the emission intensity of all this stuff.

Who we trade with. Canada mostly trades with “western” countries who are all contemplating carbon polices. Canadian trade data shows that Canada exported about 85% to 90% of our total exports to Annex 1 type countries (under Kyoto), all of which are working towards carbon pricing of some sort (except of course Canada which speaks to a different risk). On imports, about 80% come from Annex 1 countries. So the risk, and the need for a carbon tariff accounts for a very small share of our imports and exports. Indeed China, that dastardly emitter, accounted for 3% of our exports and 10% of imports in 2008.

What we trade in? Major exports include oil, gas and their derivatives, electricity, a whack of car stuff, smelting products and aerospace. On imports, it is mostly the same, reflecting an integrated Canada-US market. China, on the other hand sends us golf bags, shoes and computers by the container. Not so big a competing overlap here with Canadian firms.

Emissions intensity. The emission intensity of our exports is much larger than of our imports, reflecting energy trade south and imports of manufacturing stuff north. Of our top 25 commodities, energy intensive exports account for about half of total exports whereas it is less than a third for imports. But when you compare what we import from China, the comparison stops cold. Simply the embodied carbon in oil and gas is a tad larger than that of computers.

So, border adjustments can help some, but as a major policy thrust they fall short in Canada. Their widespread use would only distort trade and reduce welfare. They sound sexy, have populous appeal, but from an economic perspective are unwarranted. Which perhaps explains why we may get border adjustments before we get a real carbon policy.

See here and here for an elaboration of this,

Ottawa will delay the release of climate regulations until there is a firm agreement on a global approach and clarity on how the United States intends to regulate emissions – which could take until late 2010,

and the Minister’s comments

“In the absence of an international understanding, and in the absence of an international framework, it is difficult for any country to finalize domestic policies and to put in place its domestic approach — whether that’s a regulatory approach or a cap and trade, or something else,”

I guess if Canada developed a Regulatory Framework on Industrial Emissions when the US said it would do nothing and we had clear international commitments under Kyoto, then it would only make sense to abandon the Regulatory Framework in light of US action and a uncertain international agreement.

And they called Prime Minister Martin Mr. Dithers.

Ah, it must be Spring in Copenhagen with all that talk of linking in the air. See Minister Prentice press release here for a good review of what he, or perhaps more precisely the PM is thinking.

I too have been all consumed lately with thinking on linking Canada-US permit trade. And I have come to a simple conclusion. Linked permit trade is not the answer.

Instead, we should go it alone with aligned carbon prices. Huh you say? Swimming against conventional wisdom am I? Well lets see….

My most recent modeling tumbles of the American Clean Energy Act (ACES09) and Canada’s Regulatory Framework for Industrial Emitters reveals that with linked permit trade carbon prices in 2020 will drop in Canada from $60 to $31 or so. This is basically noise for the US as our puny demand for US permits raises their permit price $1 from $30. The US carbon price under the ACES09 is so low because of all those low international offsets, which means we are also indirectly buying a whack of cheap offshore imports. Essentially, with linked permit trade Canadian oil and gas ceases to buy permits from Canadian electricity and domestic offsets and instead imports permits from US electricity. Regardless, a big $900 million sucking sound is heard south of the border as Alberta subsidizes US electricity through permit imports, which for some may be better than feeding those latte sippers in Ontario.

Now linking does reduce the GDP and sector hits, by more than half relative to a case if we do not link. When the numbers are tumbled, linking is really good as we avoid some high cost demonic I mean domestic abatement in oil and gas.
But with expectations to go deeper with climate policy, and reduce more in the long-term, the low price under linking reduces the incentive for transformative technologies such as CCS. No incentive for learning by doing, no innovation and hence no declining costs in time. And when we do want to go deeper in the future, CCS will be more expensive.

So, instead of permit trade with the US, we peg a technology tech fund that floats with the US permit price. This makes us comparable on stringency, and so perhaps we avoid some of the countervailing border nastiness lurking in ACES09. But importantly it allows us to invest in CSS and other transformative technologies. Because they are important (see graph above).

The more I muck about with models, the more I am convinced oil and gas drive all things climate policy. They account for about 25% of national emissions in 2020, and have nothing but high abatement costs. They will access any safety valve we can throw at them to avoid those high costs, from offsets, to domestic permit purchases to cross border permit imports. But eventually they will have to reduce. And this means CCS.

So, bottom link, linked permit trade with the US drops the incentive to innovate and so might raise our long-term abatement costs. We can smooth relative prices to avoid high domestic abatement costs with cross-border permit trade, but pegging a technology fund to US permit prices is better.

While looking at some wonky modeling results, I received an email from the author of said results simply entitled

Whacky Shit

Which of course immediately got me thinking of Monty Python, and I stumbled on these,

The Climate Policy Argument

and this

The Ministry of Climate Policy and CCS Subsidization

To be fair to the ENGO community, I should post a link to “every ‘tonne’ is sacred”, but I think I will pass.

Never a dull moment in Canadian climate policy, eh.

I had the pleasure of listening to Alberta’s Minister of Finance recently. She gave a good, but apologetic speech about how Alberta had to dip into the rainy day heritage (oil) fund to balance the books in the face of the global slowdown. While she is one of the luckiest finance ministers in the world, to not have to take her jurisdiction further into debt (ala Ontario), she is also one of the unluckiest. Why?

Economic obesity

At the end of the speech, she recognized an important oil type in the audience, and asked him a very good social planning question — what would you do to improve the welfare of Albertans? Well, this rather large balloon of a man slowly rose his hulk out of the chair and rumbled simply, “fix the oil royalty regime”.

And so it is no surprise to see today that the oil industry has launched a full scale marketing blitz looking for more oil subsides.

Big Oil makes case for carbon-capture subsidies

Based on calculations contained in the report, the ask is at least $3 billion in 2020, assuming a CCS cost of $150 tonne. With no national carbon price, the highest emitting sector in the country is asking for a subsidy of $85/ tonne.

While there is economic rationale due to market failures to support CCS innovation and learning by doing, the sheer size of this ask is ridiculous. Especially when so many Canadian emissions remain unpriced.

A senior federal cabinet minister has added some long awaited clarity on where Canada is going with climate policy in advance of Copenhagen,

“I don’t think we’ve been ambiguous on this issue…”

(here)

Be patient cause we have no policy....

This picture, and indeed the whole federal policy, is eerily paralleling the Bush administrations bold forays into climate policy … see post here

Our climate policy is this big...

As always, while the feds fiddle, energy intensive industries are rolling out high emitting capital with low expectations that they will see real carbon prices,

I think there is certainly hope in the industry that they can see some clarity in the near future,” Dunbar said.

“They don’t want to see this situation with all this uncertainty drag on for years. I think the sooner they can have clarity, the better off they are and the easier it will be for people to make decisions.”

He said there are many points of view on the subject –some players wouldn’t even mind a carbon tax, for instance –but most agree they want a fair regime that applies equally to all emitters, without picking winners and losers.

Some $100 billion worth of oilsands projects for northern Alberta were deferred or canceled last year as credit markets froze and commodity prices tanked.

The only certainty in Canadian climate policy is inaction.