EnviroEconomics.ca

Of course lots of folks are lining up to capitalize on the great carbon economy shift that is coming. None more so than the nuclear industry. While this Globe article infers that nuclear may be cost-effective at higher carbon prices, it also highlights the cost obfuscation coming from the industry:

The (UK) White Paper glosses over this problem with a number of glib assumptions. In its economic analysis, which reckons that the all-in cost of nuclear power will be some £39 a megawatt-hour, compared with £38 for gas and £30 for coal, the government admits that nuclear is only marginally competitive. However, it has also used an important assumption, that the carbon price is €36 a tonne.

According to this, the cost of nuclear is just 2 dollars Canadian more per MWh relative to natural gas assuming an carbon price of about $72 CDN per tonne. This is crazy stuff. If the price gap was this small (CDN $76 for gas and CDN$78 for Nuclear), we would have widespread proliferation of nucs for electricity and all kinds of industrial applications. Indeed, with the price swings in natural gas, and the steady price appreciation since 1999 (140 percent or so in the delivered price), would we not have more nucs if costs were that competitive? (setting aside those little deployment barriers of 20-year build horizons and regulatory hurdles for a moment).

A more realistic figure is perhaps twice the purported cost, say $125 to 150 MWh, which means that at emission prices of about $200 dollars is required before nuclear is competitive with combined cycle gas. And there are lots of other reductions and deployment opportunities that should occur at carbon prices below $200.

So, cost-effectiveness is a good criterion for guiding carbon policy and is the reason why the nuclear folks are running all those Monte Carlo models seeking, desperately, to find a sweet spot. Unfortunately, it is the rate payer who will ultimately get skewed.

On instrument choice, there has been a long-standing view of alternatives as substitutes. You either tax, trade or regulate a standard, or stage instruments in time say by taxing first to get movement in advance of a technology standard. This view is not surprising given much of the early environmental economics literature focused on the benefits of say trading over regulations and technology standards. But this has changed as the theorists have prodded and probed their analytical models and concluded that indeed there is a blurring of the lines, and that often, design elements can be merged to produce some sort of uber instrument. While theory says one thing, we can expect a lag in policy adoption as the policy wonks catch up. But in Quebec, somebody is paying attention:

Quebec Environment Minister Line Beauchamp announced Wednesday that her government has approved regulations to make the province the first in Canada to enforce the tougher emissions standards in cars, starting in 2010. The regulations require manufacturers to improve by 30 per cent the average emissions from their entire fleet of new cars by 2017…..Under Quebec’s plan, automakers would be forced to pay fines into the government’s green fund if they don’t meet their targets, while those that exceed the standard would be able to sell carbon credits to other companies.

What is astonishing about this is that we have elements of trading and taxes concurrently supporting a stringent regulatory standard in Canada. The monetary fines are a safety value that acts like a tax to recycle revenue and improve environmental performance, the trading provides cost-effective compliance through equalizing the marginal costs of producers and an on-going incentive through continuous improvement and the standard, well it is a North American first. And recall, Quebec has a carbon tax that is visible at the pump. Quebec through this “mixing and matching” of instruments seems to have technology change and consumer behaviour in transportation sector cornered. It’s all enough to make an environmental economist swoon.

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.

Oh those cornucopians. Their teachings to economic grad students everywhere has led to the entrenched belief that simple constraints like environmental quality and finite resources can be solved through technological change and emerging backstop technology. For climate policy, this has led many to advocate delay in action until some radical technological breakthrough emerges to solve our climate woes. But this is bad policy. The time period for technologies to move from R&D to commercialization is long, which means that we can’t expect much before mid-century. And the sheer depth of reductions required to stabilize atmospheric carbon globally across virtually all economic sectors means that no single technology will provide the technological silver bullet.

In Canada, however, the cornucopians at least have got it partially right. Canada needs carbon capture and storage (CCS) and big oil knows it:

An alliance of 15 Canadian oilsands, chemical and power companies proposed yesterday a multi-billion-dollar plan to capture and store greenhouse gases in what would be the country’s single-largest carbon dioxide-reduction initiative. They say they are willing to pay their part — billions, in fact — to get this off the ground. It’s time for governments to do theirs — with the same urgency and conviction with which they embraced the green agenda or, in the case of Alberta, demanded a bigger share of the oils ands’ industry by jacking up royalties.

Recent analysis completed (by MKJA and myself) using the CIMS national energy and emissions model indicates that CCS is a big deal. As the graph below indicates, when all foreseeable technologies are competed in the face of an ever increasing emission price, CCS is the cost-effective technology that delivers a large and increasing share of national reductions. This is not surprising given the trajectory of emissions in oil sands and allied industries, and the CCS opportunities in Alberta and elsewhere. Our modeling indicates that without viable CCS, national emission reduction costs at any emission price rise rapidly.

But, CCS is not quit commercial, given the low price of carbon, and the high capital costs to start, and thus there is a justification for government support. But, government is not the best at picking winners and thus with the private sector involved, perhaps an equity position by government is a good start. Demonstration projects are another. And getting the regulatory frameworks, and rules of the game established are yet another.

So, while economists push for an emission price, there is economic justification to pitch CCS as a climate change technology winner in Canada. Indeed, CCS seems to be one silver bullet that we should all bite.