EnviroEconomics.ca

When the Trade Ministers meet to talk climate change and trade, there is promise. These are the folks that generally get things done in government. Toby Heaps has a great account of a first, and very important meeting of international finance ministers on climate change and trade in Bali. One nugget from this account is a World Bank assertion that trade barriers could be removed that could improve the flow of “climate friendly goods” between countries by something like 7 to 13%. These are big numbers and underscore an area that needs more attention: the removal of non-price barriers to lower carbon emissions.

Despite the focus on emission pricing, there is also a need to systematically crawl through the way we regulate and control behavior and see what is distorting movement to a low emissions profile. In many cases, removing these barriers opens up a suite of low cost options.

One notable example that recently stuck me as significant are barriers in the cement sector to burning waste fuels and adding supplemental cementing materials (SCM’s are a cement “filler” that is waste fly-ash from burnt coal). In Canada, we regulate the industry’s ability to burn waste materials and add SCM’s, but in Europe things are different. With proper air pollutant controls, the European cement sector has become a waste burning powerhouse, while reducing emissions a tonne (ok many tonnes). Similarly, the industry is allowed to add waste materials to their cement products up to something like 30% while maintaining quality, which lessens total emissions (1/3 from energy and 2/3 process) on a ratio in the order of 1:1.

In Canada, our SCM standard is 1% and we burn about 5% waste fuels nationally. Changing these standards would mean we could reduce energy and process emissions from this GHG-intensive sector by a much larger number at a much lower cost than options such as fuel switching (more Nox) or upgrading the kilns (more cost). And banning the burning of tires in Ontario, but allowing them to be shipped to Michigan and burnt in Cement kilns owned by the same folks in the same airshed is absurd (yes we do this).

It is always puzzling to an economist to see something that makes economic sense but is undersupplied. But when we do, we generally know there is some sort of distortion at play. In Canada, finding and removing these distortions should be a priority for climate policy. So, while Canada’s climate change delegation drags our good name through the volcanic sand in Bali, take comfort. Some smart people are at least thinking about this stuff on our behalf, and when they are trade ministers, we may just be better off.

When the Canadian government laid down some long-term aspirational targets, many argued it was a ploy to detract from taking action in the present. At the time I thought the government should be applauded for looking beyond the next election and out to where we need to be mid-century. When we peer out that far, we can understand the breadth and depth of the change required to achieve the significant targets they announced (-20% below current in 2020 and -60 to 70% below in 2050). Importantly, looking out allowed Canada to see some risks, four of which are notable:

Delay is costly. Analysis indicates that when climate policy is delayed, it becomes more expensive later on. Simply, we are stuck with high emitting capital that is costly to convert to low emitting capital;

Delay has target attainment risk. Again, the longer you delay, the more risk there is that your high emitting capital stock can’t be switched out for lower emitting stock, and thus affordability and technological limits increase the risk that future targets can’t be obtained;

Technological change is slower. Without price certainty on carbon there is no incentive to innovate and invest in R&D. This means that new technologies may not emerge that can help later and reduce costs;

More cumulative emissions. While targets are fine carbon is a stock pollutant and with delay in action you emit more, even if targets are attained. Thus, delay results in more cumulative emissions, which is a bad thing.

With Canada’s position in Bala (see here), the underlying current, whether intentional or not, is delay. But delay on global action will end up costing everyone more and lessening environmental effectiveness. For now, I still think looking out to mid-century is a good thing. I am just wondering when a vision of the future will emerge in current climate policy.

Watching Canada’s international position unfold in the lead up to Bali I had to admit that getting the other large emitters to come on side makes perfect sense. Saying that China, India and others can pollute at increasingly higher rates unhindered now because the industrialized industrialized world did more in the past is absurd. Carbon emissions from newly industrialized countries will trigger future costs and all tonnes are created equally. And competitiveness impacts in some industries are important. So, emission reductions are justified and the world needs to bring China and India into the fold.

And then there is us. Yes you and me. Jeffrey Simpson has a column correctly pointing the finger at us consumers. If one takes the emissions embodied in China’s exports and allocates them to the industrialized world, we apparently account for a full third. Not surprising to anyone who uses a credit card in North America. So, we are also a big part of the problem outside of our borders.

So moving forward post-2012, the big challenge will be the newly industrialized world, as Simpson correctly points out:

An international climate-change treaty that somehow doesn’t include China (and India and the U.S.) agreeing to emissions reductions will be a failed treaty. When the real negotiations begin in 18 months or so — Bali not being serious talks — getting those countries to sign on will be the hardest part of all.

This is why leadership through action by the industrialized world is so important. One can’t occupy the international moral high ground when one is wallowing in domestic carbon. But so long as Canada and Canadians continue to point fingers at others, our international position will sound as shrill as a carbon policy debate in the House of Commons.

Canada’s real climate policy challenge, therefore, is to stop pointing fingers and do a little hard work for a change.

While we in Canada dig out from three cross-county storms and our GHG emissions peak as all those two stroke snowblowers and plows make life more mobile, one can only think wistfully of Bali and those lucky few climate intelligentsia. Of course there is serious work to be done, and those tasked with working through the current political minefield will be working 24/7. While visions of post-2012 allocation schemes dance in their heads, there is a new and perhaps interesting twist — a call for a global carbon tax that will emerge from Bali.

Given a past political bias towards emission taxes, the emissions price that will continue to dominate the international GHG mitigation regime is of course emission trading. But this bias is not universal, and has ameliorated over time, and thus we now see a range of national and sub-national polices that implement emission taxes. This means that we are moving into a climate policy world where emission pricing is conducted by a mix of carbon trading and carbon taxes, with instances of both implemented concurrently (BC for example). It is not just the economists who are advocating for global carbon tax as part of the post-2012 international regime, but politicians as well. But the question is, can these two emission price options — taxes and trading — be reconciled in a post-2012 global regime? In this post we argue there are a number of reason why the answer is yes.

From an economist’s perspective, the options are reconcilable since both can be designed to mimic each other to ensure similar economic and abatement outcomes are achieved. An oft cited example of this “mixing and matching” of design elements is where a “safety valve” can remove the price uncertainty associated with trading so that total abatement costs are limited. Similarly, an emission tax can be updated up or down so that observed emission outcomes align with desired reduction targets. The advice from economists, therefore, is that the decision to move forward with emission pricing is not an “either/or” decision, but instead how to mix and match these inherently complementary price signals.

This assertion has important implications for the feasibility of a global carbon tax, for if emission taxes and trading are complements, there is scope for a carbon tax in the international regime. But why would it would be appropriate to implement the emission price policies as complements in the post-2012 regime. There are a number of reasons:

• Post-2012 allocations will remain contentious and will take time to sort out, and hence there is an opportunity for a global carbon tax to speed the transition to broader and deeper carbon reductions.

• A global carbon tax could transition newly industrialized countries to the post-2012 regime with binding caps.

• Institutional feasibility in the developing world more closely aligns with taxes rather than trading.

• Competitiveness issues can be lessened if a global carbon tax can be implemented in advance of global emission constraints.

Of course, some political support for a global carbon tax may do little to address “carbon tax” as a four letter word in politics.