EnviroEconomics.ca

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.

In reading about Alberta’s climate plan this week (see here) and scanning the reaction in the press, it struck me that new thinking on climate policy is required. Indeed, with the proliferation of targets, targets and more targets, I got thinking. Since climate policy has been really good at inventing new fangled jargon like fungability and additionality, I thought we all need a new addition to the vernacular:

Targetality, the propagation of carbon targets that serve as a proxy for real action for the sole purpose of stimulating widespread indignation.

Think about it. With a definition like targetality, we can justify our collective and ongoing focus over words and not deeds. With targetality,

– Some can decry, with great indignation, that too much action is undertaken;
– Some can decry, with even greater indignation, that not enough action is undertaken;
– And the proponents of said target are smug in their announcement that the problem is solved and all factions are dissatisfied.

Ok, I am being flippant. So, check out Chris Greene’ excellent article on why the focus on targets is not, perhaps so good for climate policy (see my post here) .

So, lets get off the targetality bus. Focusing on 2050 is a nice roadmap for where we need to go and how we need to transition to a low carbon future. It also serves as a nice benchmark to compare the stringency of a government policy. But, perhaps more helpful is to figure out how we get somewhere, anywhere, and what we should do sooner rather than later.

The argument that carbon taxes are nothing but a tax grab is disingenuous (see here). No government seriously considering carbon pricing can afford, politically, to say anything but a carbon pricing package will be revenue neutral, at least mostly anyway. Reductions in other taxes, notably income, and subsidies to the “little” guy, like building retrofits are the political reality with carbon taxes. And free allocations of permits will be the order of the day, at least that is until the utilities start making windfall profits as they pass on the theoretical cost of the permits and their regulated 9% ROI to you and me. So, it is disheartening to see such irresponsible reporting at a time when markets are in chaos:

With all the talk about the need to stimulate growth and keep the economy humming, how many policy leaders are going to be keen on new green and carbon taxes? Despite all the talk…no politicians I’ve heard are raising the idea. And what will Prime Minister Stephen Harper do with his various carbon initiatives now that the economy is teetering on the brink of diffucult (sic) times and growth forecasts are falling by the minute? We’re in a new economic ball game, and the short-term rules are changing around economic and political policy. The first to go, I predict, will be talk of carbon taxes.

And this focus on the short-term will end up costing more in the future. Inaction results in higher costs later on, assuming one will eventually take action on carbon mitigation. Get going now and you avoid technology lock-in, that is, more stock of higher emitting technology that is long lived, and you stimulate, somewhat, technology development through both R&D but also learning by doing (cause we have more stock installed and learn as we go). Plus lower operating costs will eventually make some, but not all, more productive and thus competitive.

For those with real impacts, carbon policy can address the income hit though, for example, output-based recycling recycling which basically subsidizes output while maintaining the carbon price signal. This lessens the economic hit by returning revenue to industry assuming they have taken action to reduce emissions (i.e. they “see” the mitigation cost and reduce emissions and then are returned the tax on the remaining emissions since abatement occurred). Simply, policy design matters and preordained outcomes are therefore not certain.

So, myopia may sell ink, but it is no way to make rationale, economic decisions. And oh yes, markets tend to go up after they go down.

With all the talk of energy security, I would expect that many in the oil patch discounted talk of limited energy imports to the US based on carbon content. After all, is not Canada a good friend with stable long-term energy supply prospects? Seems though this is not the case (see here), with the US now passing into law a carbon performance standard for all fuel consumed by US government operations, which are large,

… the provision covers new contracts for all government operations, including the military and the postal service, which together operate thousands of vehicles and are considered the No. 1 and No. 2 vehicle fuel users in the country.

And since oil sands emissions are higher than conventional sources there could be real and significant trade barriers to Alberta’s synthetic gold. Of course this all needs to shake out and be tested, but one can see the writing on the wall. Even if Canada does not take domestic action, our exports could be facing trade barriers internationally in large and important markets. Recall that France was pushing to erect border taxes on imports from countries without carbon policies just last year.

So while Canada and Canadians continue to cite increasing export costs and lost international market share as the reason for domestic inaction, it seems that the trade barriers are much more of a threat,

“Canada’s oil sands will face large-market risk unless the Canadian government, or the Alberta government, take this challenge seriously,”

All this says that the risks of inaction are greater than just avoiding domestic costs over the long-term or higher cumulative emissions. It means the outcome most cited as the reason for inaction, that of reduced international competitiveness, could occur regardless of our domestic carbon policy. While sticking one’s head in the (oil) sand is an effective strategy to avoid reality, there is a chance you will be eaten.