EnviroEconomics.ca

There is a good article (here) on CCS. It is essentaially a rebuttal to the CBC article blogged below. What I like about this article is the observation that the climate debate is now one that wrongly equates climate change to oil sands. Clearly, other emissions are important and other emission reduction opportunities are likely cheaper than CCS. The graph below provides a forecast of three large sources of emissions in Canada: oil and gas, buildings and transport. As can be seen, transport emissions are much larger than all oil and gas emissions. So, the observation holds: yes oil and gas emissions are large, but transport emissions are larger. And don’t forget all our buildings.

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.

There is an article today indicating more delays with rules for California’s cap-and-trade program (here)

California’s blueprint to address global warming won’t include details of an emissions-trading program as regulators try to build consensus on how best to organize the market-based system….”They were a long way off at approaching consensus on the major design elements.”

This outcome is hardly surprising given the administrative complexity of cap-and-trade systems. Indeed, this is a major reason why carbon taxes tend to be preferred — complexity. But, do cap-and-trade systems necessarily take more time to implement than carbon taxes?

To answer this, one can look to the differences in the decisions required to implement the two emission pricing options. Regardless of the emission pricing policy, cap-and-trade or tax, there are a series of common questions that must be addressed by decision-makers. These include questions of who is covered and what is the desired goal, be it certainty in emission reductions or containing costs. Questions of revenue need are also common to both, with a need indicating a preference for auctioning in cap and trade. Similarly, linking with other jurisdictions must be considered under both cases, wherever it is a question of the two-way linking to allow trading or simply to ensure that carbon prices align to minimize competitiveness impacts.

While carbon taxes tend to align more closely with existing institutional functions, cap-and-trade systems are not that different. Auctioning telecommunications rights is standard practice, as is emission monitoring and verification and allocating transferable rights in the fishery. But as in the fishery, it is this last function that requires time. Allocation is really the source of why cap- and-trade systems are relatively slower to implement. The source of this is uncertainty is over both economic gain and possible economic loss. Since cap and trade systems have unknown prices in advance of implementation, there is price uncertainty, and therefore more policy caution as well as constituent engagement. This engagement slows implementation through opening the door to gaming by both participants and policy makers alike. Contrasting allocation decision making to setting a common tax rate and one can readily see why cap-and-trade is less speedy to implement.

But is this necessarily a given outcome? Likely not under at least two conditions:

• First, if policy makers decide that allocations will be set on rules over discretion then these rules simply need to be established and the allocations made. But still, the rules must be contemplated and set; and,

• Second, if cost uncertainty is taken off the table through an over allocation of permits, prices will be low, and the threat of adverse cost outcomes minimized. Of course the trade-off is lower emission reductions, but really this is analogous to a low tax rate that can be ratcheted up (or the cap down) in time.

And is slow implementation necessarily bad? Likely not given that CO2 is a stock pollutant and cumulative emissions matter. We would likely be indifferent between a fast to start carbon tax system versus a slower to start cap and trade system as long as cumulative emission reductions are the same. What matters here is the cumulative emission reductions, and with a stringent future cap, perhaps speediness is not necessarily better relative to a low tax given the cumulative reductions.

So while cap and trade is is more likely a slower option to implement, it is not necessarily inferior to cap and trade when considering a stock pollutant such as CO2. And design and policy choice can blur the lines on the speediness criterion, thus making us indifferent between the two.

I have been wrestling on a daily basis about not killing the carbon tax by taking the low road and supporting an upstream cap and trade system for emissions from buildings, transport and manufacturing. UCT essentially assigns caps to fuel wholesalers who then simply pass on the value of purchased permits downstream to fuel users, who see a signal a lot like a carbon tax.

But then I came across this quote from what looks to be Obama’s Treasury Secretary, a known fixer in the financial world:

“Most consequential choices involve shades of gray, and some fog is often useful in getting things done.”

(here)

Many have been saying this of upstream cap and trade, but the fog analogy hit home for some reason. So, perhaps it is time to blow some smoke. As my Scottish grandma would say, Lang may yer lum reek!

Ok, so cap and trade with the US just got really interesting:

Canada to seek climate deal with Obama

Here

There was talk of this post election, including morphing the current intensity based system (in the Regularly Framework) to something with a hard or binding cap before 2015. Linking a national cap and trade program to the US is likely a step in the right direction since with the US involvement, competitiveness issues largely fall away (if we all have the same carbon price there are not cost differentials in product markets). This issue has been a major stumbling block to moving forward and resolving it will help. But, new excuses will likely arise that will lead to more inaction, notably our current economic and financial poverty, and what about China and India? But still, this seems to be a good omen from Canadian Climate Policy.

And most US proposals bring under the cap and trade program emissions from buildings, transportation and other manufacturing, which is something Canadian policy has not done (i.e. the Regulatory Framework covers about 50% of Canada’s emissions).

But I think the more important question is can we assume linking cap and trade systems is always good? I can think of a number of reason why linking initially with the US could be problematic:

Policy sovereignty. For anyone who has reviewed the WCI design document knows, once you sign on, you have to adopt what others have developed. And in the case of say Manitoba with 3 MT of reductions and California with 300 MT, whose interests do you think matter? This has been the case with WCI and it could be the case with Canada and the US.

Governance. With the provinces forging ahead, this sudden resurgence from the feds can’t make the Canadian WCI partners too happy. And with multiple trading systems emerging, it could be a real nightmare for large emitters.

More distributive impacts. While economic theory says linking is good since it lowers overall compliance costs, the incidence of trading is not uniform between buyers and sellers. Simply, linking permit trade to a larger market will change domestic permit prices, and if you are a buyer or seller, this matters. So, some may be better off and some worse.

Volatility. A larger market with voracious (and ahem, unregulated) traders will drive price volatility, which results in uncertain permit prices and inefficient outcomes. Something industry hates.

So, linking can be good but it can be bad, so one needs to proceed with caution. In other words, when you hitch yourself to star, be prepared for a wild ride.

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.

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.