EnviroEconomics.ca

Not sure how one squares this,

Killing Canada’s cash cow not the answer (here)

A report funded by TD Bank on the regional economic impact of climate change should be viewed with a jaundiced eye…it tells us that only by punishing Alberta with massive carbon taxes can the federal government meet its climate-change goal of reducing greenhouse-gas emissions by 20 per cent below 1990 levels by 2020….Shooting the cash cow is not the answer.

With this…

Oil sands billions expected to be unlocked (here)

Steadily rising oil prices will combine with lower costs to put some of the more than $100 billion in canceled oilsands projects back on the front burner, according to a new study.

It seems the golden goose can not be killed. And even if some oil sands projects become marginal with carbon pricing, as production costs fall, and oil prices rise due to scarcity, will not more wealth be left in the ground? But then again, we expect more income now and our kids can fend for themselves.

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.

This article comes as no surprise to anyone looking at the CCS issue:

Secret advice to politicians: oilsands emissions hard to scrub

…Little of the oilsands’ carbon dioxide can be captured because most emissions aren’t concentrated enough, the notes say. For efficient capture, there must be a high concentration of CO2 coming out of a smoke stack.

The article is correct to state that the streams of CO2 coming off the power units is not concentrated. Most In-Situ Steam Assisted Gravity Drainage (SAG-D) units are running on natural gas (gas produces steam which is injected in the ground to loosen oil in the sand, which is then pumped to the surface). In these plants, natural gas powers a couple of co-generators and upwards of eight power boilers. Given the high efficiency of the co-generators and the low carbon content of the natural gas, emission rates are low and so CO2 is less concentrated. Total emission rates of CO2 from SAG-D facilities are in the order of 60 kg/bbl, but these units produce 100,000 plus barrels per day, so total emissions can approach 2 to 5 MT. This is a big number, and so it seems appropriate to target these facilities. But, what reductions do we get for what cost?

The article implies that capturing CO2 is not feasible from SAG-D units. But this is not right: CCS is technically feasible for SAG-D units, it just costs lots. Federal regulations, for example, require emission performance from new SAG-D units to match that of CCS. Cost estimates for these units could then be upwards of $200/tonne removed CO2 to achieve the 90% removal efficiency. Feasible yes, cost-effective, perhaps not.

And here is the problem. While most of Canada’s emissions remain unpriced, these units will be facing costs of upwards of $200/tonne. Equity aside, this leads to high cost abatement strategies. That is, we are requiring high cost reductions from these units while other emissions remained unpriced and lower cost abatement opportunities ignored. And oh yes, the embodied carbon emissions in a barrel of oil is roughly 340 kg, or 6 times that of SAG-D extraction. So, we can assume the moral high ground about oil sands needing to reduce emissions right up to the point when we turn the ignition. The real story implied in the article is the misaligned carbon prices across Canadian emissions. This needs to be fixed. This is the challenge for Canadian carbon policy.

My attention turned to perverse subsides recently for a number of reasons (see here).
Subsidies are obviously a bad thing, especially if they promote more of something we are spending cash to reduce. In Canada when one thinks of fossil fuel subsidies, one thinks oil and gas. Pembina has done a lot of work on oil and gas subsidies, resulting in a Green Budget Coalition recommendation (see a short summary here).

Pembina estimates direct tax expenditures on the oil and gas sector by the feds to be about $1.4 billion annually (here). But this is likely decreasing due to the federal government’s repeal of the oil sands development expenditures valued at about $300 million annually (see here).

So, say $1.1 to $1.4 billion annually rolling forward in time.

Is this a big number? Initially, I thought not given that oil and gas GDP was about $76 billion in 2005, so the tax subsidy was about 1.8% of annual GDP. But then I looked at emissions. Oil and gas emissions were about 130 MT in 2005. This means that the effective subsidy is equivalent to a carbon price of $11/tonne. This caught my eye. Enough so that I thought it worth modeling what it could mean for emissions.

The best way to model the subsidy is to reduce production costs by the rate of the effective subsidy to production, and not as a carbon price. But, just for fun, and because it is easier, I simply put a carbon price of $11/tonne into the sector and modeled the results (in CIMS). Essentially the policy case would be: what happens if we drop subsidies to the sector and price emissions the equivalent value?

In this policy case, national GHG emissions from oil and gas drop significantly in time, from a BAU of about 214 MT in 2020 to 179MT. Over the long-term, emissions drop by 2050 from 230MT to 169 MT. See chart below. These are significant reductions.

So, it is great to be proven wrong and it seems there is scope to look at this subsidy issue a lot closer. Indeed, $11/tonne is a crazy number, and put in context with the federal government’s Technology Fund safety valve price of $15 to $22, it seems the Feds are pricing emissions even less than we thought.

The third largest user of transportation fuels is California, behind the rest of the US and China. And apparently noises of a Low Carbon Fuel Standard in California, similar to the US defense fuel standard banning oil sands oil in federal vehicles, have the Alberta oilmen scared. See here:

the Low Carbon Fuel Standard, a new regulation that could fast-forward Canada’s carbon-intensive deposits into extinction before they reach their potential….

… The Alberta oilmen are there for damage control. Canadian producers are investing billions of dollars on new oil sands projects aimed at supplying oil primarily to the U.S. market, but which generate more greenhouse gases than other sources.

Scary stuff if you are sitting on billions invested…or is it? The article goes on to say that currently no Canadian oil is being exported to California. If this is the case, one has to wonder why this is a big deal? The way current Alberta and CND federal policy is going, new oil sands facilities will be required to significantly reduce their emission intensity through carbon capture, or some other lower carbon energy (nukes). So you have to wonder why get uptight over a potential export constraint that may actually be an export opportunity for new facilities who have lower emission intensities. phew.

And herein lays the myth. If California is such a goldmine for selling low carbon fuel, then why worry? With CCS coming, is there not unlimited opportunity to sell low intensity oil to California? Is this not a benefit of cleaning up our emissions and the current regulations? It seems that a more balanced view is US low carbon US fuel standards present an opportunity. But no, I guess that would not sell newspapers. And yes, you have to also believe in the credibility of the CCS regulations and the California policy.

Perhaps the only clear observation from this is that oil sands project planners must down Tylenol by the handful.

Ok, so the Conservative Plan is good for oil sands and the Liberal plan is not. This must be the case because the National Post says so:

..his (Dion) “Green Shift” carbon-tax scheme is, by itself, enough to persuade us that he is the wrong man to be running this country. As our banking and financial-services sectors become strained by the worldwide credit crunch, this country is increasingly dependant on our oil and gas sector to sustain us through rough waters. Yet these are exactly the industries Mr. Dion wants to soak.

Huh?

Have not the smart folks on the Editorial Board read the Conservative Plan? Here are a few tidbits that show why the Conservative Plan, which is heavily based on regulations, could impose higher costs on the sector:

– The current biofuel standard requires 5% of all gasoline to come from ethanol, which will reduce refining output correspondingly (lost profits anyone?). With the price differential between ethanol and fossil fuel supplied gasoline running at about 15% to 50% higher, the biofuel standard could raise gasoline prices 3 to 5 cents per litre thereby further suppressing demand somewhat (and recall the Liberals are exempting gasoline from the Carbon Tax);

– CCS requirement on all new facilities will impose costs upwards of $100/tonne on new facilities, compared to the $40 liberal tax, before recycling to income tax;

– It is not clear what the permit costs will be for the intensity trading system but the Technology Fund is capped at about $23 in 2017. So, these costs are not far off the Liberal $40 tax rate and when compared with CCS for new projects, and the recycling under the Liberal Plan, it is not clear the Conservative Plan is a clear cost winner;

– And while the China and India ban on oil sands related exports would not cost producing facilities since there are no exports, it will distort investment decisions, and therefore lead to higher costs. That is, folks were planning pipelines to Vancouver to ship oil.

And this is a straight up comparison on economic impacts and not emission reductions – that is, what do we get for all this spending? Well, I am not in a position to say, but lots of smart folks think the Conservative Plan will be less effective. I am not so sure since the coverage of the Liberal Plan is limited, and so may deliver a limited set of reductions.

But perhaps I will let the National Post have the last word on the inherent contradiction that permeates the election coverage on carbon policy (here):

What regulators never tell anybody is that regulatory regimes, in practice, are always going to be wrong in the long run — mainly because they undermine and destroy markets.

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.