EnviroEconomics.ca

The climate policy intelligentsia gets all knotted up on key aspects of climate policy design from targets to coverage, to allocation to auction and then recycling. But, I would argue that none of this really matters. Instead, what matters is what emitters believe. And so the most important question in climate policy is not the target, or the instrument or overcompensating through free allocations or technology subsidies but “do emitter believe?”. All else then flows from this and all else becomes secondary.

Getting going with credibility matters, period. And then expectations drive outcomes. Which brings me to this today,

Carbon Falls as Climate Failure Is Oil Polluter Boon

The inability of government leaders to agree on stricter pollution controls at meetings in Copenhagen last month is showing up in commodity markets, where it’s getting cheaper to emit greenhouse gasses.

The price of permits to emit a ton of carbon dioxide sank 10 percent in London, while oil gained 6 percent in New York since Dec. 7, when 8,000 delegates attended a summit in the Danish capital to prepare for a successor to the Kyoto Protocol, the climate treaty that expires in 2012. Not only did the summit fail to increase regulation on polluters, it also reduced incentives to invest in clean energy.
“There are surely two factors impacting carbon prices: the failed summit in Copenhagen and a probable surplus in the EU emissions-trading system,” said Jacek Kaczorowski, chief executive officer of Poland’s Belchatow coal-fired power plant, the biggest polluter in Europe, according to EU data. Any “sustainable recovery” in carbon markets is unlikely this year, he said.

The work a number of folks did for NRTEE on expecations and outcomes is illustrative, so if you are feeling teckey see here

But this graph says lots. Simply, with low expectations there are low reductions and so one of two things happen: either you don’t hit your targets as the graph from the NRTEE modelling suggests, or carbon prices must climb in the future to knock out all that high emitting capital that is the result of unbelievable policy. But either way, delay is costly, and policy credibility is key.

See here and here for an elaboration of this,

Ottawa will delay the release of climate regulations until there is a firm agreement on a global approach and clarity on how the United States intends to regulate emissions – which could take until late 2010,

and the Minister’s comments

“In the absence of an international understanding, and in the absence of an international framework, it is difficult for any country to finalize domestic policies and to put in place its domestic approach — whether that’s a regulatory approach or a cap and trade, or something else,”

I guess if Canada developed a Regulatory Framework on Industrial Emissions when the US said it would do nothing and we had clear international commitments under Kyoto, then it would only make sense to abandon the Regulatory Framework in light of US action and a uncertain international agreement.

And they called Prime Minister Martin Mr. Dithers.

A senior federal cabinet minister has added some long awaited clarity on where Canada is going with climate policy in advance of Copenhagen,

“I don’t think we’ve been ambiguous on this issue…”

(here)

This picture, and indeed the whole federal policy, is eerily paralleling the Bush administrations bold forays into climate policy … see post here

As always, while the feds fiddle, energy intensive industries are rolling out high emitting capital with low expectations that they will see real carbon prices,

I think there is certainly hope in the industry that they can see some clarity in the near future,” Dunbar said.

“They don’t want to see this situation with all this uncertainty drag on for years. I think the sooner they can have clarity, the better off they are and the easier it will be for people to make decisions.”

He said there are many points of view on the subject –some players wouldn’t even mind a carbon tax, for instance –but most agree they want a fair regime that applies equally to all emitters, without picking winners and losers.

Some $100 billion worth of oilsands projects for northern Alberta were deferred or canceled last year as credit markets froze and commodity prices tanked.

The only certainty in Canadian climate policy is inaction.

Apparently some shrooms can sequester more carbon as temperatures rise…

Because the fungi in the dry northern areas are off their feed, they process less of the greenhouse gas carbon dioxide, leaving more of it locked in the soil and less of it in the atmosphere, (here)

Well if only we could get some of these little babies to help with climate policy … we might just get a coherent policy vision. Says our intrepid BC harvester Bad Weed (see here for his last quote):

Dude, I have had a long-term climate policy vision, and it rocks.

Indeed.

A neat little piece of climate policy work was just released, albeit quietly, during the federal election. Nic Rivers and Mark Jaccard have been taking analytical jabs at various climate policies for a very long time. Their central theme has been to compare, from an analytical perspective, what government’s say they will achieve and what their policies will most likely deliver. Their latest contribution, with Jotham Peters, can be found here and provides this nice conclusion:

We conclude that, as currently designed, it is highly unlikely that the policies of the government of Canada will achieve the target of reducing national emissions 20% below 2006 levels by 2020. The lack of an economy-wide emissions price and the allowance for 100% offsets for industrial emitters make it highly likely that emissions will be significantly higher than target levels in 2020 and indeed might even be close to today’s levels. Since the government claims that it is intent on achieving its 2020 emissions reduction target, it is difficult to understand why it does not immediately convert the intensity cap to an absolute cap and eliminate or severely reduce the offset provision. It also needs to extend its cap to cover all emissions in the economy.

The bottom line is that politicians have been promising to save the world for a very very long time but have instead been burning our cash while getting very little done (see Nic and Marks other paper here: Burning Our Money to Warm the Planet).

All climate policy by addressing energy use and production can have wide-ranging and long-term effects in the economy, touching virtually everyone as costs get passed through prices. This is why the election climate policy “debate” , and I use this term loosely, deserves more serious attention. But then again in politics, and especially in this campaign, thoughtfulness is in short supply — “Says who… and your Mom wears Army Boots”. Too bad, cause their political gain is our economic and environmental loss.

Jack Mintz provides an nice overview of the key issues facing Canada with respect to carbon taxation (see here). I like the article because it is somewhat boring…it reveals some key issues, nestles carbon taxation within existing tax structures in Canada and generally points to why a carbon tax is likely the way to go – it works within existing structures.

Assignment of taxing powers in a federation is an old question that Canadians have endlessly debated. …As a rule, the taxes best assigned to the provinces are those that do not interfere much with the free flow of goods and services within Canada, are relatively easy for provinces to collect and are related to their spending powers, such as regarding health, education and infrastructure. Gasoline excise taxes, for example, have been viewed as a relatively good tax to assign to provinces since their payment is (albeit imperfectly) related to the use of roads and highways, and does not disrupt much the integration of the Canadian economy…A carbon tax, such as the one recently imposed in British Columbia, is a typical excise tax, as it is applied to carbon emissions generated by fossil fuels consumed by consumers and businesses within the province.

Broadly, economic instruments can be transitional, that is work within existing structures such as taxation or resource (water) pricing or transformational, which requires a wholesale change in how governments manage, say to a cap and trade system with new administrative functions.

Administrative simplicity is important since governments have limited budgets, and well adding new administrative functions generally means that other priorities such as toxics or water management are left cannibalized. This is particularly the case for municipalities and provinces, but if one speaks with folks managing the environment at the national level, and designing climate policy in particular, it is clear that there is a real lack of resources to get the job done.

So, with Canada’s new soft cap and rule program, the transformation required for implementation can’t be overstated – it will continue to chew up resources from Environment Canada and other priorities will suffer. Toxics management, species at risk and water issues all come to mind. In all policy there are trade-offs, and it is important that we recognize these. In Canada’s emerging jungle of carbon pricing and regulations, many will get eaten.

The federal Minister of Finance again needs to be commended for his statements that Canada needs some sort of climate policy consistency at the federal and provincial levels (here),

“It’s probably inevitable we have some different approaches now that don’t fit together,” Mr. Flaherty told reporters at a news conference, after a speech to the Vancouver Board of Trade…But he said it will be in Canada’s interest to eventually reconcile the various approaches. “We need to do that for our economy,”

The problem is that Canada does not have leadership on this issue,

Mr. Flaherty did not speak to the question of who would lead this convergence.

But perhaps even more troubling is the shots at Ontario, the praise for BC, and the incongruence between economic policy and climate policy in the federal government’s mind

“It’s not helpful for Ontario to be the jurisdiction in Canada with the highest business taxes and I am going to continue to say to the government of Ontario that, ‘You’re discouraging business investment,’ ” he said, calling those policies “unhealthy” for Ontario’s economy and the Canadian economy as a whole.
He praised B.C. for its move to cut the corporate income tax rate from 12 per cent to 11 en route to 10 per cent by 2011.
“Congratulations to the government of the province of British Columbia for doing that. It will help brand Canada. It will help attract investment to Canada, but the province of Ontario has shown no indication of going in that direction to reduce their business tax.”

The current federal plan provides no mechanism to raise revenue and therefore there is no chance for further drops in federal corporate income tax. Add to this the observation of many that the federal cupboard is bar due to unproductive tax relief such as the GST cut and unchecked federal spending and well, there is no room for the Ministers prized policy – that of further reducing corporate taxes.

So, not only is the current federal plan likely to be high cost, due to its focus on regulatory approaches, subsides and offsets, but there is no opportunity to further reduce unproductive taxes on corporations and personal income. Simply, climate policy is not being integrated with economic policy, a shortcoming that will necessarily lead to higher costs.

Perhaps when the minister asks “ Mirror, mirror on the wall, who has the lowest climate policy cost of all” the minister will be surprised to find that he has the urge to send poison apples to more folks than just Premier McGuinty.

BC’s speech from the throne had some interesting words on climate policy (see here), but the line that got me chuckling was this one,

“Every molecule of carbon dioxide released into our atmosphere by human activities matters”

While this is a great line to counter the argument that Canada’s share of global emissions are only 2% and therefore inconsequential, more fun perhaps is that it echoes a great Monte Python Sketch (see YouTube here).

And indeed there are already signs of farce. A Globe Article today (here) has this to say about the BC Liberal Party’s internal maturations,

A number of Liberal MLAs have tried to bring the business community’s concerns forward as well. They echoed concerns that the government has created uncertainty by announcing carbon-cutting targets before the planning has taken place.
“I ask what the cost of this is going to be,” said Ralph Sultan, MLA for West Vancouver-Capilano. “I’m waiting [for an answer].”…there has been “lively discussion” within the Liberal government caucus on the climate-change agenda, and he noted that uncertainty around the government’s plans is hurting business….The environmental community is clamouring for a carbon tax, I don’t hear anyone else clamouring for one,”

Pressure here comes in part from the downturn in the provincial economy, which is linked strongly to the US and international markets like China,

Recently, representatives of industries have pointed out to Mr. Campbell that the economy is not as strong now as when he announced his plan a year ago.

But never mind that on the same day there is an article on BC’s booming economy (here)

Even so, the concern over afforabiltiy and uncertainty are linked. If the climate policy is designed to float with economic circumstances there is an erosion of expectations. Simply, folks will not know where they are going and perhaps more importantly will avoid taking action if they know a downturn provides an escape clause. The result of this gaming would be higher costs and fewer reductions. Better to provide flexibility to allow for unanticipated outcomes like recessions. And better perhaps to ramp up the policy so that incremental costs are smooth and not lumpy.

And from next door in Alberta there was another take on affordability from the leader of the Liberal party who is posturing for an upcoming election. He had this to say on mitigation (see here),

And if it costs a billion, so be it. This fabulously rich province has a gross domestic product of $242-billion, he says, and “we’re willing to bet Albertans will be willing to have one dollar out of 242 invested in addressing climate change.”

Kind of puts it all into perspective. But still, the affordability card in the climate game is a trump card and the ongoing challenge for climate policy is that the deck is stacked full of them.

There are two articles in the Globe today that perpetuate bad thoughts on carbon policy and carbon costs. The first article (see here) pegs costs way too high by assuming that every single molecule of carbon results in a uniform costs at the highest carbon price, say $50,

At $15 a tonne, if Keephills were to fail to cut 12 per cent of its emissions, or 360,000 tonnes, the price tag on the facility’s emissions would be a mere $5-million…But at $50 a tonne, the price for Keephills would rise to $18-million. For all of TransAlta’s Canadian operations, the total penalty at $50 a tonne would rise to about $170-million.

But, there will be lower cost opportunities at the facility. So they will take abatement action and make carbon reducing investments up to the point where they can either get cheaper reductions elsewhere through trading or pay some sort of fee like that enabled under the Technology Fund or a carbon tax. And if there is recycling even this cost would be reduced on remaining emissions.

As a very general rule of thumb, since the marginal cost curve is rising (that is more reductions are more expensive), the total cost of reductions is total emissions times the carbon price divided by 2 or

Total costs = ~(Qemissions * Pcarbon)/2

This is essentially the area under the marginal abatement cost curve fixed by the price (tax) or quantity (cap/allocation) constraint. So, in the example cited, the costs are more like $8 million for the facility and $85 million for all TransAlta’s operations. And most likely there is a facility target and therefore no cost for remaining emissions of if the target emissions are achieved the fee on remaining emissions is returned (as in the case of Sweden). Suppose there is a 25% reduction required from 360,000 tonnes. This then lowers actual costs of about $2.25 million. Not trivial but not nearly as high as reported.

And where to start on the second article (see here). Here are a few samples from the article,

A much better, more effective route is a cap-and-trade system with auctioned allowances, under which government sets the future target for emissions – the cap – and turns to free market mechanisms to achieve those targets… government then has to make a guess as to where to allocate all of the carbon-tax revenues, hopefully avoiding the appearance of pork barrel politics and special interests.

With auctioning of permits, the firm must buy their allocations, which transfers cash to the regulator, and thus the cap and trade behaves a lot like a taxes. Government still has to deal with the revenue.

And then this,

A tax is simply not the best way to create effective incentives to cut emissions, and it’s not the right mechanism for promoting innovation that will abate human-caused climate change.

This argues that taxes will not result in continuous improvement, that is an ongoing incentive to reduce emissions. Not likely, since the firm will continue to see the tax and thus seek ways to avoid paying it though making investments that lower emission while minimizing the tax burden.

And perhaps most challenging,

…That’s because a carbon tax puts the government into a nearly impossible Goldilocks scenario: It must set the price of carbon just right. Not too high, meaning everyone overpays and the economy is damaged. And not too low, in which case emissions reductions are not maximized. Additionally, as we move forward, we cannot afford a system where carbon prices remained static in such a dynamic environment.

But if we set a cap too high and there is no cost constraint (i.e. price cap), costs emerge that are unanticipated. Government then has to release more permits to reduce compliance costs, which dilutes the cap (more emissions) and reduces the real value of permits (like printing money and causing inflation). In practice, the regulator will have to adjust either the cap or the tax rate as new information on climate science, cost and abatement responses emerge.

Both cap and trade and a carbon tax have challenges that need to be sorted out. But we need better reporting on this stuff. Otherwise we will continue to muddled and mired in debate…but then again that suits some folks just fine.

When Jim Flaherty, the Federal Minister of Finance makes very public comments about climate policy, it is important. (see here). All too recently all things climate policy seemed to be the exclusive purview of Environment Canada. While Environment Canada is the logical lead on the file, the lack of visibility of others Ministers in the government on the file has been troubling. Climate policy is truly cross-cutting with important thinking required on industrial policy, international relations, energy and lots lots more. Look to Bali and Canada’s “results” for a good example of when a single department and Minister covers the entire file.

So it is interesting to see the Federal Finance Minister wade into the climate policy realm in a public way. The Minister’s key point is about federal-provincial cooperation:

“Generally speaking, the consensus I would say is that it is desirable in Canada not to have multiple regulators in various areas of the economy,”

This is a good signal since the proliferation of a hodge-podge of carbon policies has to have industry and others doing business in multiple jurisdictions worried and could perhaps lead to higher overall costs (as the minister states in the article).

So while the Department of Finance has likely been beavering away assessing the possible macroeconomic impacts associated with carbon pricing, it is good to see the Finance Minister shake the tree bit. Lets just hope more consultation does not lead to inaction.