EnviroEconomics.ca

Ok, so I am back …. not sure why I left….

Below is a unedited version of a Letter to the Globe I submitted (see Here).

Standing in Wal-Mart, looking around at the Halloween mayhem, I realized just how bad it is. No, it is not consumer confidence, because the lineups were 15 deep, with all manner of folk clamoring to spend. And no it is not the brinks and mortar economy, because the shelves and isles were positively chocked full.

No, I realized that our expectations are all wrong. We expect mounds of cheap stuff to be available and ready to take home in a moments notice. And yes, we expect someone to cart it away once it crumbles shortly thereafter. And herein lies the real root problem with our Wal-Mart expectations — disposal.

All this junk has to be made, shipped, stored, bought, taken home and then dumped. All of it except for the soft bits that hit the sewage facility and then the river. And all of this activity emits carbon and other nastiness, loads of it. But no matter, the greatest trash heap of them all, our atmosphere, is handling that for free.

So, standing there in the Wal-Mart mayhem, it became clear to me that at the root of the Globe’s editorial response to the so-called “landmark climate change study” is Wal-Mart expectations. Labeling the report’s economic conclusions as “devastating” fits well with our collective expectation that we expect more for less. Or even better, we expect a free lunch.

But are we worse off with action to manage carbon and other environmental nastiness? Based on the report, I think not. Even with aggressive action on climate change as outlined in the report, and no linked permit trade with the United States to reduce our domestic costs, Canada’s economy will still be much larger than today. All economic sectors will increase in size and wealth, including that great Canadian cash cow, oil and gas. Under aggressive climate action, even Alberta’s economy is still a third larger than today.

In this “devastated” economic future, Canada will all be richer, Wal-Mart will be bigger and we can all buy more stuff.

So are we better off with action on climate change? Economically we may be marginally worse off, but our wellbeing is so much more than just economics. For starters, the growing trash heap in which we all live in may be a little smaller. And that, my friends, may just make us all better off.

There is a good article (here) on CCS. It is essentaially a rebuttal to the CBC article blogged below. What I like about this article is the observation that the climate debate is now one that wrongly equates climate change to oil sands. Clearly, other emissions are important and other emission reduction opportunities are likely cheaper than CCS. The graph below provides a forecast of three large sources of emissions in Canada: oil and gas, buildings and transport. As can be seen, transport emissions are much larger than all oil and gas emissions. So, the observation holds: yes oil and gas emissions are large, but transport emissions are larger. And don’t forget all our buildings.

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.

Carolyn Fischer sent me a news story that went on something like this,

“Cap and trade is a charade to continue business as usual,” said Angela Johnson Meszaros, director of the California Environmental Rights Alliance.

Environmental justice groups instead favor carbon fees on polluting industries, a strategy endorsed by many economists as simpler and more transparent, although politically tough to enact.

Her hilarious response was this,

Buying your way out of pollution reductions with permits = bad.
Buying your way out with taxes = good.
Logic = priceless.

Once I stopped laughing I started crying, cause this, unfortunately sums up the federal government’s position, although their logic is reversed and slightly more distorted,

Taxes = bad
Permits = good
Regulations > good
Logic = priceless

BC has demonstrated that a carbon tax shift is politically feasible. The reactions in the press are not bad, and are actually downright supportive (when the only complaint is that ferry tickets will go up, BC has hit a home run). Why? I suspect the carbon tax shift. In Canada the reason is simply, I think, that folks despise income taxes more than carbon taxes. So, if you throw a few dollars my way though a tax credit, and then reduce my income tax, well, that sounds rather nice. And people start to think, “hey, this BC carbon tax thingy is not a money grab after all”. Kewl stuff.

And it makes economic sense. Nic Rivers and I have just finished a revenue recycling assessment of a national carbon tax and found that GDP impacts could be considerably reduced with smart tax shifting. This is the main thrust of a David Suzuki Foundation paper to be released this Monday (keep an eye out, and check back, I will post it here).

So, carbon tax with recycling is economically efficient, results in real reductions and can be politically acceptable. So, why are the provinces going it alone (see article here). Well cause the federal logic is priceless. But don’t let me sway you, let’s let minister Baird speak,

“We have a different focus, our approach is on industrial regulation”

You can’t script this stuff. We have a left leaning province implementing a carbon tax shift, a perceived left leaning organization, the David Suzuki Foundation, supporting a national carbon tax shift and a conservative government preferring regulations. Only in Canada, Eh. Priceless.

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.

There is a good interview here with Gregory Mankiw, an economist and former chairman of President Bush’s Council of Economic Advisors. What I like about this short interview is the focus on tax shifting and revenue recycling — they are presented as integral to carbon tax design. This definition of a carbon tax also explicitly differentiates the income effect from the price signal on carbon. This quote says it all:

“There’s no question that, politically, tax is a four-letter word. But we have to really convince voters that this is not an overall tax increase; it’s really a tax shift,”

So, when we speak of a carbon tax we are really speaking of a “carbon tax shift”. Bundling this notion of a tax shift with carbon tax seems to be an important and fundamental first step in marketing a carbon tax shift to politicians and their constituents.

While most of us usually ignore the footnotes, for the “Bali Roadmap”, one footnote is worth closer examination. This footnote emerged when consensus on “binding targets” was not reached and there was a need to compromise. What then emerged was an implication that industrializated nations would consider making reductions of -20% to -40% below 1990. And so this seemingly innocuous footnote will be a focus of international climate policy for some time.

With some time on my hands during this Christmas slowdown, I thought I would take a first stab at what this footnote could mean for Canadian GHG reductions, GDP and climate policy. So here goes…

To hit the least stringent Bali -25% target (implied in the footnote):

Canadian GHG emission will need to drop 48% below the BAU in 2020 from a forecast level of about 865 MT in 2020 to ~455 MT;

Carbon prices need to climb in excess of $245 in 2020 (using the CIMS energy and emissions model coupled with the macroeconomic Canadian General Equilibrium and Emissions Model (C-GEEM developed by Nic Rivers and myself)). This carbon price assumes the most economically efficient policy scenario, an economy-wide price on GHG emissions. This would most likely include cap and trade for the large emitters (50% of emissions) and a carbon tax on the remaining emission (transport, buildings and manufacturing, etc.). And yes, other regulatory standards would also be needed on transportation and buildings, and incentives to CCS and renewables;

Technology deployment will need to be massive. CCS in upstream oil would have to hit 65MT and in the electrical sector would need to be another 42MT. Grid-power renewable electricity would have to grow to account for about 20% of all electricity supplied nationally;

Fuel switching would be unprecedented: domestic coal consumption would need to virtually disappear (down 90%), low-emitting electricity would need to expand by 40%, gas consumption would drop by 40% and petroleum would drop 25%;

GDP impacts for all this could be in the order of 1.9% annually, assuming no tax shifting or recycling by the federal government and emission trading with no auctioning (i.e. permit wealth is transferred between trading entities). This drop is about equivalent to the forecast GDP growth in 2020 without climate policy (See thumb);

And to get all this done, climate policy would have to get real serious real fast. The “optimal” emissions price path that minimizes GDP losses would look very different from the current policy path. This implies that starting today, policy stringency would have to be much higher and then ramp up post-2010 (see Thumb);

While Canada needs to take action, its hard to envision the political and perhaps economic system delivering reductions of this magnitude. All this leads me to observe, yet again that the whole Bali thing may have been more surreal than real.