…environmental economics and the implications of environmental policy

Archive for the ‘climate economics’ tag

The Bali footnote that roared

with 23 comments

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.

Written by Dave Sawyer

December 21st, 2007 at 7:24 pm