EnviroEconomics.ca

Ah, it must be Spring in Copenhagen with all that talk of linking in the air. See Minister Prentice press release here for a good review of what he, or perhaps more precisely the PM is thinking.

I too have been all consumed lately with thinking on linking Canada-US permit trade. And I have come to a simple conclusion. Linked permit trade is not the answer.

Instead, we should go it alone with aligned carbon prices. Huh you say? Swimming against conventional wisdom am I? Well lets see….

My most recent modeling tumbles of the American Clean Energy Act (ACES09) and Canada’s Regulatory Framework for Industrial Emitters reveals that with linked permit trade carbon prices in 2020 will drop in Canada from $60 to $31 or so. This is basically noise for the US as our puny demand for US permits raises their permit price $1 from $30. The US carbon price under the ACES09 is so low because of all those low international offsets, which means we are also indirectly buying a whack of cheap offshore imports. Essentially, with linked permit trade Canadian oil and gas ceases to buy permits from Canadian electricity and domestic offsets and instead imports permits from US electricity. Regardless, a big $900 million sucking sound is heard south of the border as Alberta subsidizes US electricity through permit imports, which for some may be better than feeding those latte sippers in Ontario.

Now linking does reduce the GDP and sector hits, by more than half relative to a case if we do not link. When the numbers are tumbled, linking is really good as we avoid some high cost demonic I mean domestic abatement in oil and gas.
But with expectations to go deeper with climate policy, and reduce more in the long-term, the low price under linking reduces the incentive for transformative technologies such as CCS. No incentive for learning by doing, no innovation and hence no declining costs in time. And when we do want to go deeper in the future, CCS will be more expensive.

So, instead of permit trade with the US, we peg a technology tech fund that floats with the US permit price. This makes us comparable on stringency, and so perhaps we avoid some of the countervailing border nastiness lurking in ACES09. But importantly it allows us to invest in CSS and other transformative technologies. Because they are important (see graph above).

The more I muck about with models, the more I am convinced oil and gas drive all things climate policy. They account for about 25% of national emissions in 2020, and have nothing but high abatement costs. They will access any safety valve we can throw at them to avoid those high costs, from offsets, to domestic permit purchases to cross border permit imports. But eventually they will have to reduce. And this means CCS.

So, bottom link, linked permit trade with the US drops the incentive to innovate and so might raise our long-term abatement costs. We can smooth relative prices to avoid high domestic abatement costs with cross-border permit trade, but pegging a technology fund to US permit prices is better.