…environmental economics and the implications of environmental policy

Archive for the ‘carbon price’ tag

Running their spreadsheets again and again and again….cause it makes no sense even with the law of large numbers

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Of course lots of folks are lining up to capitalize on the great carbon economy shift that is coming. None more so than the nuclear industry. While this Globe article infers that nuclear may be cost-effective at higher carbon prices, it also highlights the cost obfuscation coming from the industry:

The (UK) White Paper glosses over this problem with a number of glib assumptions. In its economic analysis, which reckons that the all-in cost of nuclear power will be some £39 a megawatt-hour, compared with £38 for gas and £30 for coal, the government admits that nuclear is only marginally competitive. However, it has also used an important assumption, that the carbon price is €36 a tonne.

According to this, the cost of nuclear is just 2 dollars Canadian more per MWh relative to natural gas assuming an carbon price of about $72 CDN per tonne. This is crazy stuff. If the price gap was this small (CDN $76 for gas and CDN$78 for Nuclear), we would have widespread proliferation of nucs for electricity and all kinds of industrial applications. Indeed, with the price swings in natural gas, and the steady price appreciation since 1999 (140 percent or so in the delivered price), would we not have more nucs if costs were that competitive? (setting aside those little deployment barriers of 20-year build horizons and regulatory hurdles for a moment).

A more realistic figure is perhaps twice the purported cost, say $125 to 150 MWh, which means that at emission prices of about $200 dollars is required before nuclear is competitive with combined cycle gas. And there are lots of other reductions and deployment opportunities that should occur at carbon prices below $200.

So, cost-effectiveness is a good criterion for guiding carbon policy and is the reason why the nuclear folks are running all those Monte Carlo models seeking, desperately, to find a sweet spot. Unfortunately, it is the rate payer who will ultimately get skewed.

Written by Dave Sawyer

January 18th, 2008 at 4:32 pm

A harmonized carbon price? Please make it so Jim.

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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.

Written by Dave Sawyer

January 15th, 2008 at 5:50 am

A city [Toronto] carbon tax is a flexible way of addressing traffic congestion…and snake oil cures what ails yah

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As soon as we start purporting that emission pricing will solve wide ranging social woes, it is time to pause and reflect (see here for a carbon tax as a snake oil cure).

A city carbon tax would also be a flexible way of addressing traffic congestion, which has almost hit the saturation point. It already costs $15 or $20 to park your car in some parts of Toronto. Why not charge a similar amount to drive it around?

While the carbon tax will “drive” some reductions in vehicle kilometers traveled, we can’t expect much from a carbon tax or emission pricing in the transport sector. Sure, high fuel prices will change some behavoiur in the transport sector, but experience has shown that folks are simply insensitive to fuel prices, especially in the short term and somewhat in the longer-term. This means that carbon prices need to be complemented with vehicle standards, California style.

In the NRTEE modelling, and indeed in most carbon abatement assessment, the transport sector is the last to respond, and one of the reasons why deep GHG reductions result in exponentially rising abatement cost curves at emission prices above $200. The insensitivity to the transport sector to high emission prices is one reason why international trading looks really good and fuel economy standards even better.

So, while a carbon tax or carbon price is a corner stone of effective climate policy, complementary vehicle fuel standards are a necessity to address our collective addiction to the car….

And if you want to address congestion, well then price congestion directly. And if you want to fund social programs, well keep it to yourself and perhaps lets talk after we implement a economy-wide carbon price, collect revenue, have effective tax shifting and revenue recycling and reduce some emissions. Then maybe lets think about diverting some revenue to other purposes.

Written by Dave Sawyer

January 12th, 2008 at 5:50 am

NRTEE and the Carbon Tax redux: pushing the climate yardsticks one obscure article at a time

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Here is a nice tight overview of what transpired this week with the NRTEE release. A surprising shot of clarity from an obscure source in Edmonton:

Sadly, ideology and partisan bluster continues to trump meaningful action on climate change based on sound advice—even when it’s advice the Conservatives asked for.

While we really can’t expect much from politicians in the short term, the NRTEE report has done an important service for the climate policy debate…refocused the national debate from one of questioning affordability (what I call Globe and Mail climate policy) to one also focused on the risks of inaction — both economic and environmental.

And speaking of risk, no news service highlighted the benefits of reduced air pollutants with climate policy. These are real and local and well NRTEE did not have enough time or space to explore these. But, check out the report, the reductions in air pollutants are large and so too then are the associated health benefits- which occur immediately and within Canada.

So by continuing to oppose efficient policies, politicians are not just thumbing their nose at getting things done cheaply, they are also thumbing their nose at clean air and oh yes, that little thing called climate stability.

Written by Dave Sawyer

January 11th, 2008 at 4:47 am

Freaking out about GHG targets and not Bali

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This Globe piece got me thinking about what the Canadian private sector should be freaking out over with respect to climate policy. Is it the emission targets to 2015? No, the price cap for the Technology Fund effectively caps the financial obligation for a given target out to 2017. One simply multiplies forecast emissions by the Technology Fund’s allowable contribution limit to approximate one’s obligation. Is it Bali? Clearly not, since Bali is more surreal than real at this point.

Then what? I think it is uncertainty and that 2020 “aspirational” target of -20% below current levels. Why? If I am sitting down now to plan a project I need an expectation of the price of carbon in the future. I need to know what this variable cost called “carbon liability” will do to my project economics and how I can minimize the liability through design.

But, what is that price? Recent modeling (thanks Chris and Nic) suggests that the carbon price will need to climb from $25 in 2015, the approximate price cap under the Technology Fund, to about $80 to $100 in 2020 to hit a -20% below current target (see thumb). This means that if policy is implemented to hit the target, the liability grows fast and in the order of three to four times between 2015 and 2020. And thus the uncertainty — will climate policy add a carbon liability of this magnitude to my project in 2020?

So I think industry is faced with a very open question and therefore stuck in some sort of mental loop that goes something like this:

The carbon liability could be significant. But, there is so much uncertainty right now I need to discount this liability somewhat. But, the risk is still there. But what is the size of the risk, and by how much do I discount it…repeat loop…

I think “no one is uttering a word about Bali” because they are to busy muttering incoherently to themselves.
Carbon Price to Hit -20% in 2020

Written by Dave Sawyer

December 19th, 2007 at 10:27 pm