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…environmental economics and the implications of environmental policy

Archive for the ‘GHGs’ tag

Some are “Not Impressed by Quebec’s Emisison Rules”, But I am.

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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.

Written by Dave Sawyer

December 14th, 2007 at 3:17 pm

“A Focus on the Promise of Trade to Combat Climate Change Rather than the Potential for Conflict”

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When the Trade Ministers meet to talk climate change and trade, there is promise. These are the folks that generally get things done in government. Toby Heaps has a great account of a first, and very important meeting of international finance ministers on climate change and trade in Bali. One nugget from this account is a World Bank assertion that trade barriers could be removed that could improve the flow of “climate friendly goods” between countries by something like 7 to 13%. These are big numbers and underscore an area that needs more attention: the removal of non-price barriers to lower carbon emissions.

Despite the focus on emission pricing, there is also a need to systematically crawl through the way we regulate and control behavior and see what is distorting movement to a low emissions profile. In many cases, removing these barriers opens up a suite of low cost options.

One notable example that recently stuck me as significant are barriers in the cement sector to burning waste fuels and adding supplemental cementing materials (SCM’s are a cement “filler” that is waste fly-ash from burnt coal). In Canada, we regulate the industry’s ability to burn waste materials and add SCM’s, but in Europe things are different. With proper air pollutant controls, the European cement sector has become a waste burning powerhouse, while reducing emissions a tonne (ok many tonnes). Similarly, the industry is allowed to add waste materials to their cement products up to something like 30% while maintaining quality, which lessens total emissions (1/3 from energy and 2/3 process) on a ratio in the order of 1:1.

In Canada, our SCM standard is 1% and we burn about 5% waste fuels nationally. Changing these standards would mean we could reduce energy and process emissions from this GHG-intensive sector by a much larger number at a much lower cost than options such as fuel switching (more Nox) or upgrading the kilns (more cost). And banning the burning of tires in Ontario, but allowing them to be shipped to Michigan and burnt in Cement kilns owned by the same folks in the same airshed is absurd (yes we do this).

It is always puzzling to an economist to see something that makes economic sense but is undersupplied. But when we do, we generally know there is some sort of distortion at play. In Canada, finding and removing these distortions should be a priority for climate policy. So, while Canada’s climate change delegation drags our good name through the volcanic sand in Bali, take comfort. Some smart people are at least thinking about this stuff on our behalf, and when they are trade ministers, we may just be better off.

Written by Dave Sawyer

December 11th, 2007 at 2:23 pm

“Acting on climate change is a drag on economic growth”… But so is inaction

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The climate change policy debate in the media and behind closed doors goes something like this…”it is too expensive, we can’t afford it.” I call this “globe and mail” economics, where questions of affordability dominate and questions of benefits aren’t asked. This is happening in Bali now (see here) and it is certainly going on in Canada. But does this focus on affordability matter?

From an economist’s narrow efficiency lens, it does. The economist would prefer a policy that enables cost-effective reductions at the level of abatement where the costs and benefits are balanced. While economists have said quite a lot about the merits of emission pricing to enable cost-effective reductions, there is less of a contribution to the policy discourse on the desired level of abatement. Simply, information on the scope and scale of the possible benefits of action are too uncertain to lead to recommendations of policy stringency.

As a result, our climate debate is informed by a conceptual understanding of the abatement or adaptation benefits but a very acute understanding of the costs.

Because of this information asymmetry, it is likely that we will continue to be locked into a policy cycle of questioning the appropriateness of action to attain targets, regardless of their stringency. Indeed, without a balanced view of what we get for what we spend, we will continue to set targets, discuss policy options, reveal the associated costs and then ultimately question the affordability and distributive impacts of target attainment.

As climate policy transitions to a longer view, as it has under the Regulatory Framework’s (Turning the Corner) that aspires to substantial reductions by 2020 (-20% below current) and 2050 (-60% to 70% below current), this lack of a balanced view will become particularly acute. This is because the scale of the action implied under these longer-term targets is substantial. With a Canadian economy about doubling bymid-century and a GHG intensity that is only moderately declining, total Canadian emissions will about double by mid-century. To achieve the mid-century objective, therefore, GHG intensity improvements will need to be 20 times greater annually than the forecast no climate policy levels. And recent modeling suggests that emission prices will need to rapidly climb to in excess of $200 per tonne of CO2e to hit the targets. The need for such costs to achieve domestic abatement targets will only intensify domestic questions of cost, affordability and distributional impact.

So, an important climate policy challenge for Canada and indeed globally is to reveal the benefits of action and then, perhaps, the climate debate in Canada can proceed in more balanced and measured fashion. But then again, economic ruin is a better story.

Written by Dave Sawyer

December 9th, 2007 at 12:39 am