Pembina and CAN-RAC proposal for Large Final Emitters

Matthew Bramley of the Pembina Institute testified to the Clean Air Act Legislative Committee last week on behalf of Pembina and the Climate Action Network (CAN-RAC). They've published their briefing note on both websites. In a nutshell, it proposes that the forthcoming emissions trading system for big industry use absolute rather than intensity-based targets; set targets at 1990 -6% levels; keep a price cap but raise it to $30/tonne; include long term, gradually tightening targets; and move gradually from 100% free allocation to auctioning of permits. The overall 1990-5% target translates to 127 Mt for industry, roughly half of Canada's "Kyoto Gap", rather than the 45-55 Mt hoped for under the Liberal LFE system and the much anticipated Clean Air Industrial Regulatory Acronym (sorry, Agenda). Pembina and CAN-RAC say that costs will be reasonable - increases of less than 1.5 cents/kWh for coal-generated electricity and $1.50/barrel of oil sands oil at the worst.

Link to the briefing note

My comments: Great stuff. Another thorough, well-researched proposal from these folks. It turns the LFE system into something much closer to an ideal emissions trading system while still leaving industry room to breathe via the price cap and competitiveness allowances (forgot to mention this - their breakdown of industry into three sectors gives manufacturing much lower targets, reflecting their lower emissions growth since 1990. This reduces impacts on the LFEs with the most vulnerability to international competition).

Carbon taxes at the heart of FoE climate plan

Friends of the Earth Canada and Corporate Knights released a climate change plan today centred on carbon taxes. It takes the large final emitter carbon tax/carbon subsidy they proposed a month ago and adds a general carbon tax on fuels. Overall cost to an average family - 450-900$/year.

Zero Leakage Carbon Investment Fund

• 30$/tonne CO2e tax on LFE emissions (15$/tonne for manufacturing initially, and possibility of exemptions for businesses in dire straits)
• starting in 2008
  
• revenues from the tax held by the arms-length Carbon Innovation Fund
• Each LFE has 3 years to spend the tax revenue taken from it on CIF-approved reductions at its own facility.
• Use of unused revenue - not specified
• Anticipated earnings - $9.5 billion/year
• Increases to electricity costs: 1-3 cents/kWh
  

Transportation Fuel Carbon Tax

• $50/tonne CO2e on transportation fuels
• starting in 2008
• increases cost of gasoline 10 cents/litre
• annual revenues - $9 billion/year
• 50% used to reduce income taxes for households under $80 000 annual income
• 33% for transit pass subsidies and rail and transit infrastructure
• 17% for international Clean Development Mechanism credits

Heating Fuel Carbon Tax

• $50/tonne CO2e
• starting in 2008
• annual revenue of $4 billion/year
• funds used for a "Green Building Fund" providing zero-interest loans for efficiency/conservation measures

Link to FoE press release
Link to Globe coverage
Link to full FoE plan (10 pages)

My comments: Looks interesting, and I'm happy to see comprehensive new proposals, especially ones that include a carbon tax, complete with double dividend. I'm less sure of the carbon investment fund since I imagine it would be hard for many industries to use it effectively within a 3-year window. Re the carbon tax, I can see using some of it for CDM and infrastructure projects, but I would recycle as much of it as possible into the income tax reductions. Overall, it will be interesting to see what reaction they get.

Clean Air Act Legislative Committee on Target Setting

The transcripts are now available for meetings 7 through 10 of the legislative committee on Bill C-30. Here's a summary of meeting 7, which focused on target setting, with much additional discussion on policy. The committee heard from Greenpeace, the Canadian Chamber of Commerce (CCC), the National Round Table on the Environment and the Economy (NRTEE), and Dr. Marc Jaccard of SFU. Political sparring between the committee members was remarkably low.

Greenhouse Gas Emissions Targets: Greenpeace reiterated the long term CANet targets of 25% below 1990 by 2020 and 80% below 1990 by 2050. No one else advocated a specific target. NRTEE presented on its work on achieving a 60% reduction by 2050, and the CCC emphasized the need to respect investment cycles and Canada's energy-intense economy. Dr Jaccard made the point that setting targets is irrelevant if you don't have the policies in place to achieve them. Everyone agreed with a key NRTEE point - that long-term targets are needed ASAP, and that short-term targets have to be developed within a long-term plan.

Achieving Canadian Kyoto targets: Greenpeace says its achievable, but when pressed didn't have a detailed analysis of how. The CCC says it is impossible without doing very serious damage to the economy. Dr. Jaccard says at this point it isn't doable - domestically it is impossible and international credits will be in short supply, potentially causing price spikes. He also talked about his work in 98-99 for the feds, where it looked like the only way to achieve Kyoto domestically would have been the equivalent of a $120-150$/tonne carbon tax starting in 2000.

Emissions intensity targets: Lots of discussion on this. Greenpeace says its a bad idea and often gets used to mask lack of absolute reductions. They cited Canada's 1990-2004 intensity gain of 14% while absolute emissions rose 27%. The CCC supports the intensity approach because it doesn't penalize emitter growth. Dr. Jaccard says that intensity targets can work but you will need the capacity to increase them if growth exceeds predictions.

Emissions trading: Some discussion of the large final emitters system (now of course the "Clean Air Industrial Regulatory Framework"...who comes up with these zingy names? so catchy!) Greenpeace advocates absolute targets, no permit price cap, and having industry cover 50% of our reductions (this would make for a much more ambitious target than the 45-55 Mt aimed at right now). Dr Jaccard points out that the LFE/CAIRF system will be compulsory and so will probably achieve some reductions, but that still leaves the other half of the economy.

Policy effectiveness: Dr Jaccard focused on this issue. He cited a few big trends based on global experience to date with climate change policy:

• voluntary policies don't work - we can't depend on subsidies, information campaigns and moral suasion
• we can't count on energy efficiency - its more expensive to implement than thought, and there is evidence that the energy saved just gets used up by new energy-using devices

So:

• we need compulsory policies - his biggest point - be it cap and trade, a carbon tax, or standards, policy needs to have teeth
• focus on emissions rather than efficiency.
• the likely winners - he sees them as a mix of zero-emissions fossil fuels, renewables, nuclear, and some efficiency. ( I should point out that he's well-known and somewhat controversial for his writing on clean coal and other fossil fuels technology)

Link to all transcripts.

My comments: The most interesting thing for me here was Jaccard's comments on policy effectiveness, especially the key point that we need to focus on compulsory policies. I found his point on energy efficiency interesting; its also been made by George Monbiot in his book Heat. I haven't had a chance to look at energy efficiency in depth so I won't comment on it further. Re our Kyoto targets, I'm pretty much convinced by the mountain of respected Canadian environmental analysts chiming in to say its just not possible at this point. What I'd like to see now, though, are some proposals for achievable domestic reductions. How close to Kyoto can we get?

the Clean Air Industrial Regulatory Agenda

The Globe and Mail has been analyzing leaked documents describing the Conservative plan for an emissions trading system for big industry. Basically, it looks like the Liberals' old Large Final Emitters (LFE) system, with slightly tougher targets and of course a brand new name. Unfortunately, this means that most of the flaws of the old LFE system could still be present:

• intensity targets - the biggest flaw - no guarantee that absolute emissions will decline. It also makes for a more complex system to set up (you need to set targets for all kinds of industrial products), and leaves a lot of room for industries to negotiate relatively soft targets without the general public noticing.
  
• free permits - the emitters in the system will (I am assuming here) once again get their permits free. Given international experience so far with emissions trading, this is a big transfer of wealth to industry, and will likely give many emitters a windfall profit, without necessarily rewarding good work.
• an offset system - again, I'm assuming the Conservative model will reflect the Liberal original, here. The LFE system included a complementary offset system, where farmers, landfill operators, etc. could sell credits to the big emitters based on carbon sequestration or methane capture. An offset system can in theory be a great market-based tool, but is very complex to set up and administer (lots of project evaluation methodologies) and creates opportunities for double-counting reductions and diluting the emissions trading system itself.
• a price cap on emissions - the Liberals promised industry that they would sell unlimited permits at 15$/tonne if the price rose that high. This amounted to a fairly low-set safety valve and would have eliminated a lot of emissions reductions from the market. If Canada's market had ever been linked to international carbon markets, then it could have also led to arbitrage (traders buying Canadian permits as a hedge against market volatility, etc.)

On top of these problems, the Conservative system won't go into effect until 2010. Back in 2004 when the LFE system was nearing completion, industry was already ready for a 2008 roll-out, so this seems like an unnecessary delay.

One plus of the draft Conservative system: long term, gradually tightening targets - it sets out targets for not only 201-2015, but stricter targets for 2015-2020. This gives predictability to industry, particularly for capital investment decisions.

So what would the ideal Canadian emissions trading system look like? Here are some key points:

• an absolute target - forget the intensity targets and replace them with an overall, absolute cap on emissions, to guarantee real reductions.
  
• auctioned permits - auctioning permits is more economically efficient, a lot simpler to set up and administer, and removes most opportunities to hide favouritism towards particular industries. It also creates revenue that can be used to run the program AND create a double dividend (see my post) by using it to reduce income taxes or what have you.
• simplicity and clarity - a simple system makes for more liquid markets, more participant confidence, and more transparency. Using an absolute target and permit auctioning would get rid of a lot of the unnecessary complexity of the LFE system. Eliminating the offset system would also help, but this would also remove a big incentive for offset-type reductions - the compromise solution would be to design as simple an offset system as possible.
• no/higher caps on permit price - the 15$/tonne permit price cap was too low and will stifle innovation if its reinstated. Either remove the cap altogether, or announce a much higher cap - 80-125$/tonne (I use these figures since they've been cited as approximating the true costs of CO2e emissions)
  
• long term, gradually tightening targets
  
• roll-out as soon as possible - 2008 if possible.
  

Link to Globe article
Link to further Globe coverage
Link to a US EPA Guide to desigining and operating a cap and trade program - a great resource covering all of the topics discussed above.

Growing the economy with carbon taxes

Another freely available policy article from the journal Canadian Public Policy, this time from 1997. University of Guelph prof Ross McKitrick looked at the effects of different options for recycling the revenue from a carbon tax. The conclusion - if you recycle tax revenue the right way, you end up increasing overall welfare and GNP beyond the business-as-usual model, even without taking any benefits of climate change mitigation into account. I.E., we would be better off with a revenue-neutral carbon tax even if global climate change didn't exist.

So how do you recycle tax revenue "the right way"? By reducing the most distortionary of your existing taxes. As long as the tax being replaced/reduced is more distortionary to the market than a carbon tax, you will increase net economic growth and/or overall welfare simply by collecting government revenue in a more efficient way. As an added bonus, carbon taxes are already increasing net welfare by bringing an externality into the market, i.e. making polluters pay for the costs caused by their pollution.

Which is the best tax to reduce in Canada using carbon tax revenue? McKitrick modelled five recycling options: a lump-sum payment to all households; reducing the GST; reduced corporate income taxes; reduced personal income taxes; and reduced payroll taxes. All except payroll taxes reduced aggregate consumer welfare by 0.3%, and reduced GNP by 0.3 to 0.9%. Payroll reductions, on the other hand, had no effect on consumer welfare and boosted GNP by 0.6%. Note that none of this takes the benefits of reducing GHG emissions into account, so the effect on aggregate welfare is actually much less.

Link to the article

My comments: First of all, I recommend the article to anyone interested in the double dividend idea simply for the clear and concise overview of work on the concept. I had heard the idea many times before but the one thing I hadn't heard argued was that a carbon tax could be a good idea even without the climate change problem. I'd love to see a political campaign that actually conveys this idea to the public - its frustrating to read again how carbon taxes are a key and almost cost-free (or profitable) policy, and then see the idea so marginal in mainstream political debate.

A note on McKitrick - he's a global warming skeptic, has written a prize-winning critique of climate change science (Taken by Storm, 2002) and more recently coordinated the Fraser Institute's just-released Independent Summary for Policy Makers, an alternative summary of the fourth IPCC report. As the wikipedia article linked above indicates, his critiques have been also criticized (and no doubt counter criticized, etc...) Guess this side of things wasn't yet on his mind back in 1997?

1994 study on the distributional effects of a Canadian Carbon Tax

Back, back, to the distant first rumblings of interest in carbon taxes...or maybe not that far back. Once the Rio Convention was signed back in 1992, many countries started looking at carbon taxes as one option for controlling greenhouse gas emissions. This article ("Simulating the Distributional Effects of a Canadian Carbon Tax" describes one of Canada's early modelling attempts, done by Statistics Canada.
The model looked at a tax on the carbon content of fossil fuels, administered at the production level, and aimed at stabilizing Canadian emissions at the 1990 level by the year 2000 (this was the original Rio goal). The basic conclusions: a) the tax level would have to be set at 101.56$/tonne of carbon content in the fuel (note, not per tonne of CO2e) b)this would affect GDP by somewhere around 1-2% c)the tax would be modestly regressive. Low-income earners would lose on average 3.4% (up to 7% in some sub-groups) of consumable income, while the highest-income earners would lose only 1.9-2.2%.

Link to the study

My comments: Not too much to say on the modelling, which was beyond me technically I have to admit. What I found most interesting was the authors preamble on carbon tax theory. They were very clear in saying that carbon taxes were the most efficient form of regulation available for reducing greenhouse gas emissions, and that political acceptance was the only real obstacle in implementing them. Aside from that, this article in my mind simply supports the ideas that a carbon tax would have minimal impact on economic growth, but that distributional effects would have to be compensated for.

Some limitations of carbon taxes

Gar Lipow, a writer with the online environmental magazine Grist, wrote a good critique of carbon taxes back in November 2006. He basically explains the price inelasticity of energy demand issue in more detail, and argues that carbon taxes aren't as efficient as standards, regulations and public works programs for achieving changes in energy use that require a lot of capital investment. His conclusion - carbon taxes are at best a supplementary measure rather than a climate change silver bullet, and they need to be applied judiciously.

Here is a more detailed summary of the points he makes about inelasticity (apologies for any economics mistakes):

Capital versus operating costs: Price signals such as a carbon tax will affect short term operating cost decisions more than capital investment decisions. The price inelasticity of energy capital cost decisions is very high (around 60%) according to Lipow. And the problem is, many of the big choices we need to make as a society to reduce greenhouse gas emissions are capital-intensive, and in fact replace operating costs with capital costs. For example, insulating an old house requires a big initial expense but pays for itself through operations savings.
Lipow argues that in many cases it would be cheaper for consumers and society to achieve these changes through public works programs and standards rather than raising energy prices to the point where the market finally makes the same changes.

Why are capital investments so insensitive to the price of energy? Lipow covers this in some detail. Here are his factors:

1. Split incentives. Landlords pay for insulation, but renters pay for heating, for example. Under the same category, limited access to capital. Homeowners may not want to take out a big loan for a capital investment because they need to keep their credit margin for other contingencies.
2. Corporate split incentives - Situations where the decision-maker in a position to invest in energy capital costs won't receive the benefits from reduced operating costs (they will go to another department, etc.)
3. Noise - the fact that for many purchasing decisions, energy use is only one of many factors, and not the deciding one. Home buyers, vehicle purchases, etc.
4. Chicken-egg situations
1. a technology (for example solar) could be made cheaper once production passes a certain threshold, but it can't because as existing scales, its too expensive to generate a market. The solution Lipow proposes - massive government funded large scale production, bringing down costs to the point where solar can get a larger market scale. At this point, in theory, other manufacturers come in and the market generates its own momentum. The initial government plant doesn't have to be that efficient - its more like a sacrificial lamb to break the deadlock.
   
2. a large-scale infrastructure-intensive technology that has been proven at the model level, but requires actual adoption by a large municipality/regional government to be actually proven. Lipow refers to a transit technology called Cybertran.
   

Link to the Grist article.

Illustrious carbon tax advocates

From the brief submitted by David Boyd to the Bill C30 review committee last week, here are some carbon tax supporters:

1. Al Gore, former Vice-president of the United States
2. Alan Greenspan, former Chairman of the U.S. Federal Reserve
3. Joseph Stiglitz, Nobel Prize winner, former Chief Economist at the World Bank
4. Nicholas Stern, author of the most comprehensive look at the economics of climate change, written on behalf of the UK government
5. James Rogers, Chairman and CEO, Duke Energy
6. Mark Jaccard, Simon Fraser University, author of The Cost of Climate Policy and Sustainable Fossil Fuels13
7. James Hansen, Director, NASA Goddard Institute for Space Studies
8. Gregory Mankiw, Chair of the President’s Council on Economic Advisers, 2003-2005, and Harvard professor
9. William Moomaw, Director of the Center for International Environment and Resource Policy, Tufts University
10. Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, former chief economist at the IMF.
11. Paul Krugman, economist, professor at Princeton, N.Y. Times columnist
12. Thomas Friedman, author of The Lexus and the Olive Tree
13. Richard Posner, economist, judge
14. William Nordhaus, economist, Yale University
15. Robert N. Stavins is the Albert Pratt Professor of Business and Government at the John F. Kennedy School of Government at Harvard University.
16. Edward Snyder, Dean of the University of Chicago’s Graduate School of Business
17. Theodore Roosevelt IV, Lehman Bros. executive
18. Jeffrey Sachs, economist, professor at Columbia, advisor to UN, IMF, World Bank
19. Lester Brown, Earth Policy Institute.
20. Jacques Chirac, President of France
21. The Economist, The Greening of America. Jan 25, 2007

Even

1. the American Enterprise Institute, a right wing think tank
2. the U.S. Congressional Budget Office
3. Ross McKitrick, University of Guelph, climate change skeptic

Greenspan tells Toronto business leaders cap and trade won't work

A brief article in the National Post today on a speech by Alan Greenspan to a group of Toronto business folks...Greenspan is quoted as saying that cap and trade is either ineffective because the target is too high (a la EU system) or if effective, causes costs to rise sharply, knocking out competitivity and creating job loss. Wonder if anyone asked him about carbon taxes?

Link to NP article
Link to Financial Post article from yesterday on the same speech

Clean Air Act Committee Meetings - Targets, Carbon Taxes and Emissions Trading

Just read over testimony from the February 6th meeting of the Clean Air Act Committee. The Committee heard from Bill Erasmus (Assembly of First Nations), Claude Villeneuve (Université du Québec À Chicoutimi prof), David R. Boyd (BC prof, author), and Mathieu Castonguay (Association québecoise de la lutte contre la pollution atmosphérique). There was a great deal of discussion on overall Canadian targets, the possibility of achieving our Kyoto targets, and the use of carbon taxes and emissions trading. In four sentences:

• Canada can't achieve our Kyoto targets even with international credits, nonetheless we can still work within the Kyoto protocol, and we need to set ourselves a binding target of 80% below 1990 levels by 2050.
  
• Carbon taxes are one of the most effective tools available, we need to use them, and they won't do us any harm; emissions trading can also be used but it is vulnerable to cheating by emitters.
• Emissions-intensity targets are a fraudulent approach, a trap to be avoided.
• The Clean Air Act is an unnecessary and risky piece of legislation.
  

Here is a more detailed summary. Remember that this is based on an unofficial transcript. If you would like a copy, email CC30 at parl.gc.ca

The Clean Air Act
The experts agreed, when asked, that the Clean Air Act achieved very little if anything from a climate change perspective and was unnecessary for addressing greenhouse gas emissions.

Achieving Kyoto Targets
Most of the discussion was from David Boyd. He pointed out that domestically, we would have to cut emissions by 7% a year for 5 years, which is too dramatic. He supports using verified international credits under the Clean Development Mechanism (CDM) but says that due to the long lead time on CDM there will never be enough projects available to cover our emissions. His diagnosis (supported by Villeneuve and others) - we will have to do our best and accept the penalties under Kyoto. Villeneuve proposed that an initial target of stabilizing emissions at 2003 levels for the 2008-2012 period would be feasible.

Emissions Intensity Targets

Both Boyd and Villeneuve criticized intensity targets extensively because they allow total emissions to increase. Boyd pointed out that, from an intensity perspective, Canada did quite well in the last 17 years: intensity was improved by 43% as measured by greenhouse gas emissions/GDP. Given our atrocious performance in terms of actual emissions, this underscores the weakness of using intensity targets.

Carbon Taxes
Again, a lot of discussion with Boyd and Villeneuve; carbon taxes were also supported by Castonguay. Boyd strongly advocated carbon taxes and pointed out that some of the most competitive countries in the world (the top four rated by the Davos World Economic Forum, for example) have carbon taxes. Advantages cited by Boyd and Villeneuve:

• comprehensive
• cover the entire economy
• widely regarded as the most efficient policy approach
• transparent
• administratively simple
• shows political will
• low government investment
• funds can be revenue neutral (tax shifting) and/or used for further reductions, R&D
• less likely to cause energy price volatility than a cap and trade
• proven track record in Europe

Why haven't carbon taxes been adopted? Pure political acceptability. Boyd recommends a revenue-neutral tax pushed by all parties together to mitigate this.

Emissions Trading

Again input from Boyd, Villeneuve. The main point was that despite some successes (US Acid Rain program), they are open to cheating. The recent European Union Emissions Trading System (EU ETS) price collapse demonstrates this. According to Boyd, emitters convinced governments that they needed more permits than they actually did. Since permits were given out freely, this led to many emitters making windfill profits as they sold extra permits, and then a price collapse.
According to Boyd, the Large Final Emitters emissions trading system the previous government was developing was on the brink of creating the same problem.

My comments:
Great to see this testimony. If only these experts and their arguments, particularly those on which they agreed, were listened to, we might be able to put something effective into place. Meanwhile, I'm (naively?) hopeful that the melee leading up to the 2007 election may lead one the opposition parties to start pushing a revenue-neutral carbon tax.

A side note: David Boyd was the expert cited by Minister Baird as comparing the emissions cuts needed to achieve Kyoto with the collapse of the Russian economy. Too bad Baird didn't go on to quote Boyd's bigger points that we need to continue to work within Kyoto, ditch intensity targets, and create a carbon tax...

B.C. Green Plan announcement includes regional emissions trading

From today's National Post, the BC Liberal's throne speech apparently focused on climate change initiatives, including a commitment to build "a sensible, efficient system for registering, trading and purchasing carbon offsets and carbon credits in co-operation with the federal government and the U.S. states of California, Oregon, Alaska and Washington." It isn't clear to me if they are just talking about voluntary carbon offsets - of which there are supposedly a glut of unregulated offerings on the market - or something regional.

Link to NP article
Link to BC Liberals press release on throne speech
Link to Wikipedia article on carbon offsets, including regulation issues
Link to New Internationalist article critiquing offset schemes

CIBC's report on the potential impacts of Canadian GHG emissions trading

As reported in the Globe and Mail today, CIBC World Markets' regular Monthly Indicators newsletter includes an article on Canadian emissions trading entitled "Evaluating Carbon Risk in the Canadian Economy". Briefly, they evaluate the vulnerability of Canadian industry sectors to the impacts of a cap and trade emissions trading system, concluding that coal-fired power plants, the oil and gas sector, and metal refining are the most vulnerable. The bottom line of the article is "investors beware: carbon emissions are very soon going to carry a price in the Canadian economy," and affecting 40% of the TSX.

Here is a more detailed summary and as always some pithy comments.

The article starts out with the assumption that Canada will soon have a cap and trade emissions trading system for greenhouse gasses. Their logic is that Canada generally follows American environmental initiatives. California and an alliance of northeastern states (the Regional Greenhouse Gas Initiative) have each recently enacted cap and trade systems, and McCain, Obama and Lieberman's bipartisan bill could potentially create one at the federal level.

Based on this assumption, CIBC has created a "Carbon Cap Vulnerability Index". This rates Canadian industrial sectors based on a weighted average of four factors, as follows:

1. 30%: emissions intensity - kilotonnes of CO2e/dollar of output
2. 15%: energy intensity - terajoules of energy/dollar of output
3. 30%: ability to pass increased costs onto customers: consultant assessment
4. 25%: ability to reduce GHG emissions: consultant assessment

(The consultants in question are Marc Jaccard and ICF Consulting. Marc Jaccard is the Simon Fraser prof who works extensively on climate change policy in Canada; ICF Consulting recently produced the scenarios for the NRTEE's Advice on a Long-Term Strategy on Energy and Climate Change.)

The results of their analysis are as follows:

1. Coal-fired power plants are the most vulnerable because of their high emissions and low-emission competition (hydro and nuclear)
2. Oil and Gas are vulnerable because emissions are projected to triple; on the other hand, they have a lot of potential for abatement (nuclear power for heating, carbon sequestration) and may end up the marginal supplier for world oil markets, therefore able to set prices.
3. Metal smelting and refining are vulnerable because of high emissions intensity and high energy intensity. To make matters worse, they can't pass prices on and their developing-country competitors won't have GHG costs.
4. The chemical sector's vulnerability comes from high energy intensity and little room for abatement.
5. Oil and gas pipelines will likely be a winner, selling surplus credits and/or passing costs onto consumers.
6. Gold mining won't be vulnerable because it can switch to electricity and reduce emissions, but gold refining faces the same problems as the rest of the metals sector.

My comments:
Just two things to say. First, great to see this message getting out to investors (i.e. "take GHG regulation seriously), and interesting to read about it from a market analyst perspective as opposed to an ENGO perspective. Secondly, interesting to see CIBC talking about a cap-and-trade approach, since so far the Liberal's almost-completed system and the Conservative's hinting about their soon to be announced approach are both based on emissions-intensity, not an absolute cap. Would this affect the CIBC analysis? Potentially. The Liberal's approach used sectoral targets (i.e. different targets for each sector), and specifically stated that competition issues would be taken into account. So any export-driven industries were likely to be given weak targets.
I am assuming that the Conservatives will end up using a lot of the Liberal's earlier work on emissions trading, since they don't have much time and they have so far not been shy in recycling existing programs. If this is the case, we may see weak targets for their political constituents (oil sands), political targets (Ontario and Quebec manufacturing) and anyone with an effective lobby.
On the other hand, you never know - maybe Jaccard, ICF and/or CIBC have been talking to Conservative insiders - maybe we will have an actual cap and trade system after all. Let's hope so.

Link to Globe coverage
Link to CIBC news release (click on corporate releases - more info)
Link to CIBC report

Clean Air Act Committee - Liberals citing the Climate Action Network

Just going over the unofficial/unedited transcripts from the C-30 Committee from last week a bit more. Nothing particularly exciting in their first meeting (December 14, 2006) - just a lot of discussion about committee format, etc., with plenty of partisan jockeying for position. In the second meeting (Jan 29), they spent more time trying to set out a schedule for the committee meetings, which quickly became a larger discussion on the overall purpose of the committee. The Liberals, in particular, were pressing the Conservatives for more details on how C-30 is meant to fit into an overall climate change plan. Lots of political back-and-forth again, of course.
The most interesting event from my point of view to come out of these discussions/descents into posturing was the Liberals' use of a critique of Bill C-30 put out by the Climate Action Network the week before (January 22nd). To quote John Godfrey (NOTE - again, these are unofficial transcripts and therefore may contain errors):

There are a number of issues which have been identified by the non-governmental organizations very effectively in a submission to us and it would seem to me that the template that the NGOs have laid out have identified correctly the major concerns which we all felt in the month of October, when we had a problem collectively, that is to say the three opposition parties and the NGO community speaking unanimously....I'm not saying that we will endorse every single thing that the NGOs have said in terms of targets or anything else. What I will say is I think they have correctly identified the challenges we had with the original draft of the bill, way back when, which all of us agreed with.

Link to the CANet backgrounder
For a copy of the transcripts, write to CC30@parl.gc.ca

My comments:
For me this underscores the effectiveness of (a) the use of a broad coalition such as CANet by the environmental NGOs and (b) the type of detailed legislative critique that CANet and its members have been putting out. For example, the CANet backgrounder specifically calls for the inclusion of long term GHG reductions targets in C-30, based on a target of 80% below 1990 levels by 2050. This is the kind of serious target that neither the Conservatives nor the Liberals have been willing to commit to yet (I don't see Harper's 50% of 2006 levels in 2050 as a serious target) . To have the Liberals setting out CANet's position as a standard in this committee is very satisfying to see.

Mark Jaccard and Jack Mintz on carbon taxes and emissions trading

A week ago I reviewed an op-ed by the CEO of the C.D. Howe Institute, Jack Mintz, arguing against carbon taxes. Today I came across a longer article in Alternatives magazine where Marc Jaccard of Simon Fraser debated the issue with Mintz. I recommend reading the article because its a brief (2 page) summary of the principle arguments and counter-arguments around a carbon tax, by two particularly respected experts (note that Mintz is a tax expert, not an environmental economist). Its particularly interesting because by the end of the debate Mintz seems to have changed his position to support carbon taxes.

Here's a brief summary:

Mintz against carbon taxes

1. Carbon taxes don't reduce GHG emissions effectively because demand for energy isn't very price sensitive.
2. Carbon tax revenues are unlikely to be used to reduce other taxes (income, etc.) because governments love to appropriate new revenue streams.
3. Carbon taxes impose a disproportionate burden on low-income earners because energy costs are generally higher as a percentage of their income than higher-income earners. Compensation for low earners would significantly reduce the effectiveness of the tax.
   

Jaccard's rebuttal

1. Carbon taxes have been shown to affect energy use and emissions - demand doesn't go down necessarily, but consumers switch to lower-emissions energy sources.
2. This point isn't an argument against carbon taxes, simply a critique of government in general.
3. Compensation to low-income earners will reduce the effectiveness of a tax very little.
4. No applied economists looking at carbon taxes as a policy tool agree with Mintz's arguments.

Mintz's reponse

1. Regulation with emissions trading is more effective than a carbon tax because it sets a specific target for emissions reductions, whereas its very difficult to predict the reductions that a tax would achieve.
2. Governments will be reluctant to reduce a carbon tax even once emissions reductions are achieved, because of the revenue generated. Alcohol and cigarette taxes demonstrate this dynamic.
3. Yes, carbon taxes and other ecofiscal approaches (taxing "bads" rather than "goods") can be useful tools but can't achieve all reductions on their own.

Jaccard's summary/rebuttal

1. Both positions are actually fairly similar.
1. Carbon taxes on their own may not achieve all of our reductions targets.
1. However, carbon taxes and emissions trading can be used simultaneously and very effectively.
2. Leading climate change policy economists agree that carbon taxes are one of the most, if not the most, effective tools.
3. Carbon taxes should be seriously considered as a policy tool for Canada.
   

Link to Alternatives article

My comments
Glad to see this article come out, since Mintz's initial article in the Financial Post essentially claimed that carbon taxes are a terrible option that should not be considered. By the end of this debate, Mintz has essentially changed tack and said that in fact ecofiscal taxes and carbon taxes *are* a useful tool, but one that needs to be complemented with other policies. Wish that had been included in the FP article.

More details re Conservative position on emissions trading

I've been looking over the unofficial transcripts of Environment Minister John Baird's presentation to the committee on the Clean Air Act (available by request from the Committee secretary - write to CC30@parl.gc.ca). There were a bit more information on the Conservative's plans for GHG emissions trading than was reported in the natonal media. Here's a summary - note that the transcript is unofficial, so the quotes are conceivably inaccurate.

emissions-intensity versus an absolute cap

on the one hand, Minister Baird says: "With respect to hard emission caps and with respect to pollution we've indicated in the notice of intent our desire to have hard emissions caps to deal with pollution"
but on the other hand, he goes on to say (in yet another partisan exchange between him and a Liberal committee member) "I can quote Mr. Godfrey again, if you like, talking about how intensity-based are good, because I agree with him"

Using the clean development mechanism
John Godfrey pressed Minister Baird in some detail on whether or not he would use the CDM. Basically, he appears to reject it: "My problem with the clean development mechanisms, for taxpayers' dollars I would rather take the money, spend it in Canada, and also make our air cleaner. I use the example of the coal-fired generating station. We could take money and spend it abroad and then we'd get no benefit for clean air. But if we make the investment here in Canada, we get the twin benefit of clean air."

Domestic Emissions Trading
Bernard Bigras of the Parti Quebecois, among others, asked Baird about emissions trading - would it happen. He wouldn't make any commitment on it but spoke very positively about the idea of creating a domestic emissions trading market.

My comments
I got a bit excited to see him talking a hard cap on emissions for industry - basically, my biggest hope is that the Liberals and Conseravatives one-up each other right into some kind of significant cap and trade system - but it looks like intensity-targets are here to stay. I was also disappointed by his comments on CDM - hopefully he is just ill-informed. If not, in my opinion Canada will be missing a fantastic opportunity to meet Kyoto cheaply while boosting our international development funding and supporting Canadian technology exports.

Baird delays on industrial emissions, refuses carbon tax and international trading

Environment Minister Baird gave out more details on the Harper government's plans for industrial GHG emissions today, at a presentation to the House Committee studying the Clean Air Act. Highlights gleaned from the big media outlets:

Emissions trading
The big news - no emissions reductions targets for industry before 2010, but (as suspected), it will involve a carbon permit market. As CANet's John Bennett is quoted as saying, the delay is unnecessary since industry has been preparing to meet targets negotiated for the Large Final Emitters emissions trading system, which was set to take effect this January.

Carbon tax
Baird also reiterated the Conservatives' refusal to consider a carbon tax.

International Carbon Trading
The other interesting news from Baird today is that Canada will not take part in an international carbon trading market. Does this mean they are closing the door on Joint Implementation and Clean Developoment Mechanism projects as well?

Justifying the Conservative rejection of Kyoto
Meanwhile, Harper et al are defending their overall stalling on Kyoto with what I have to admit is a clever image"To achieve (the Kyoto target) would require a rate of emissions decline unmatched by any modern nation in the history of the world...except those who have suffered economic collapse, such as Russia".
Look for many, many comparisons between a Kyoto-compliant Canada and a collapsing Soviet Union from the Conservatives.

A quick look at the countries that have had success gives us Britain, who is on track to hit a 23.5% reduction in GHG emissions from 1990 levels by 2010. Admittedly this hasn't been accomplished in a five year period, but it is an example of dramatic domestic reductions.

Link to Globe article
Link to National Post article
Link to CBC coverage
Link re British emissions levels

The Swedish Carbon Tax Experience

So, Sweden's had a carbon tax in place since 1991, at a rate of about $150 US/tonne of CO2. Interestingly, they share some similarities with Canada: large forestry industry, large hydroelectricity capacity, export-driven economy, northern climate with significant heating costs, relatively significant transportation distances for the north. They do have much lower GHG emissions per capita (around 8 tonnes compared to 24 or so for Canada)
Apparently the tax has had little or no negative impact on their economy and significantly reduced GHG emissions - 25% from BAU levels in 2000 according to a 2000 Swedish Environmental Protection Agency (SEPA) report, 20% below BAU levels projected in 2010 according to their 2005 report on Kyoto protocol progress (along with other economic instruments).
Given that the big barrier to carbon taxes is apparently political resistance, particularly from vested interests in industry, how did they do it? Two factors are mentioned by SEPA in an OECD report from 2000. A) Energy taxes, already quite high (got to love those European taxation levels) were simultaneously reduced, so that the overall cost of some fossil fuels actually went down initially. B) Exporting and/or energy-intensive industries like pulp and paper, as well as electricity generation, were either exempted or taxed at 50% of the level of the rest of society.
Of course, both of these factors must have reduced the effectiveness of the tax as well in changing behaviour. What have been the biggest effects of the tax? Again according to SEPA , fairly modest changes, but a big increase in the use of forestry products for heat generation, and a major expansion of the industry for biomass heat generation technology.

Link to SEPA 2000 case study for the OECD
Link to Sweden's 2005 report on its climate change policy

My comments
Two points. Firstly, this supports an argument put forward by the Director of GEMCO on CBC's Cross-Country Checkup (February 4th 2007), that carbon taxes have generally failed to perform strongly because politicians inevitably weaken the taxes on interest groups. At the same time, let your imagination run wild - what could be done with a 150$/tonne carbon tax in Canada, with tax shifting for export-driven industries and low-income families? As pointed out this week here, even an 85$/tonne carbon tax would produce about 65 billion dollars/year. Assume the rest of our 150$ carbon tax goes to the aforementioned tax shifting, that's a whole lot of money for renewables production subsidies, climate change adaptation, R&D programs, etc....

CD Howe Institute 2004 proposal for emissions trading

Just read over a great commentary from the CD Howe Institute, published in 2004: The Morning After: Optimal Greenhouse Gas Policies for Canada's Kyoto Obligations and Beyond. . Its a commentary, so isn't necessarily the opinion of the Institute itself. Basically its a set of alternative policy proposals for achieving GHG reductions by 2010, supported by modelling. Two of the three authors are researchers from Simon Fraser, one of whom at least (Mark Jaccard) has worked extensively on climate change policy modelling for the feds since Kyoto was signed; the third is Matt Horne from the Pembina Institute.
Their set of policies focuses on what they call market-oriented regulations, basically tools like emissions trading ("emissions cap and tradeable permits" or ECTP as they call it), renewable portfolio standards, and vehicle emissions standards. They also add in some traditional command and control in the form of a carbon sequestration requirement for oil and gas and increased energy efficiency standards.
I'll focus here on what they have to say about emissions trading and carbon taxes.

First, carbon taxes. They reject carbon taxes as a tool because of political unfeasibility, although they point out that revenue neutral tax shifting could be used to make it more attractive.

Secondly, emissions trading. They propose two options, less aggressive and more aggressive. Both options:

• use an absolute cap on emissions (no intensity targets here)
• seem to auction off most permits (not explicitly stated, but implied)
• grandfather (i.e give away) some permits for old coal electricity generation in high emissions provinces, for political acceptability
• provide a price ceiling on emissions permits, beyond which the government will sell unlimited numbers of permits at the ceiling price, using the revenue to buy international permits of some form.

The difference between the options is in the price ceiling for permits - 10$ per tonne in the less aggressive, 50$ per tonne in the more aggressive.

The results of their modelling (based on 2004 implementation): 57.5 Mt of reductions from BAU under the less aggressive model, 86.4 Mt with the more aggressive model. In both cases, industry makes significant use of permits at the price ceiling.

Link to the CD Howe commentary

My comments: I found this a great article for a lot of reasons. It sets up clear policy evaluation criteria, gives an overview of all of the options that could be used, and then explains why certain policy tools were chosen. It clearly explains and summarizes the reductions associated with each policy tool (not always the case in other documents I've seen), and it references every argument on the effectiveness of the tools to academic research.
Re their emissions trading proposal, it seems sound to me. Absolute targets instead of intensity targets, and mostly auctioned permits instead of the permit giveaway planned under the LFE system developed by the feds. I found the grandfathered permits easier to swallow because they were limited to the amount of grandfathering necessary to keep reductions cost burdens relatively equal between provinces, which is a relatively fair political consideration. Their modelling of the results of the different permit ceiling prices was interesting, since it puts the 15$ per tonne guarantee the federal government promised under the LFE scheme into perspective.

Pembina Institute Op-Ed on Harper's response to Kyoto

Matthew Bramley of the Pembina Institute wrote an op-ed in La Presse Sunday entitled Les changements climatiques: rien a faire? ("Climate change: can nothing be done?"). It critiques the Harper government's assertion that its a "fantasy" to think that Kyoto targets can be achieved without spending billions on Russian hot-air credits. His main points:

a) reducing GHGs won't cause economic pain. The NRTEE's 2006 advice on a long-term strategy on energy and climate change demonstrates that long term reductions are achievable using today's technology with minimal economic disruption and significant economic benefits.
b) the 'hot air' argument is a red herring. Kyoto can be achieved by buying verified, real reductions credits from developing countries.
c) the government can act immediately. Regulating GHGs can be done without waiting for the Clean Air Act, because the government has already given itself the power it needs under CEPA (Canadian Environmental Protection Act).
d) the Conservatives are stalling. Bramley references John Ibbitson of the Globe and Mail in suggesting that the Conservatives want the public to believe that nothing can be done about climate change.

Link to the op-ed piece

My comments: I have to agree with everything Bramley says. The most interesting thing for me in reading this, however, is that its the first time I've seen one of the big ENGOs specifically say that Canada can't respect Kyoto targets using only domestic action.

C.D. Howe Institute op-ed piece on carbon taxes

Good summary of the anti-carbon tax position given in an op-ed piece in the National Post back in June. Boils down to:

1. carbon taxes don't change consumer behaviour that much because energy "essentials" aren't very price sensitive
2. although in theory carbon tax revenues could be used to reduce more distortionary taxes, in practice the revenues will end up dedicated to federal climate change programs. Bureaucrats will then be reluctant to ever give up the tax revenue in the future, even if emissions control is no longer necessary.
3. carbon taxes put a disproportionate burden on the poor and low income, but compensating for this with income-linked rebates a la GST will negate the behaviour-changing goal of the tax.

Link to archived article text.

My comments
re Item 1: My understanding is that a sufficiently high carbon tax would change consumer behaviour over the long term. Sure, heating oil and gas aren't very price sensitive compared to non essentials, but people and companies are going to invest more in energy efficiency and substitute technologies when prices double or triple over time.
Item 2: This is not an inevitable feature of carbon taxes. A revenue-neutral tax would completely avoid this problem, and go far to overcome resistance to the idea.
Item 3: Not a strong argument. If lower-income families get a bigger piece of income tax reductions to compensate for the higher impact of a carbon tax, this doesn't negate the point of the tax at all. Those families will still have a strong incentive over time to switch to other technologies or less energy intensive behaviour. And the tax will still create the exact same incentives for richer Canadians and industry.

Green Party position on carbon taxes and emissions trading

Just spent some time reviewing the Green Party website. The most relevant public documents are their fall 2006 Green Plan and 2006 policy platform. The two documents make some commitments re emissions trading:

1. increasing emissions targets for large industrial emitters to achieve at least 55 Mt CO2e of reductions above and beyond any other measures.
2. setting absolute targets ("cap and trade") instead of using emissions intensity targets
3. "expanding the proposed...system so that it will ensure real emissions reductions across sectors"
4. using revenue from permit sales to offset tax breaks that would be provided for energy efficiency and other reductions initiatives.

The Green Plan also commits the party to implementing a revenue-neutral carbon tax, but doesn't talk about the size of the tax or the emissions reductions targets they hope to achieve with it. They do say that by using an emission cap and trade permit system, they will "avoid having to set the carbon tax so high as to be economically dislocating" (from the Green Plan).

Link to Greens' 2006 policy platform
Link to Greens' September 2006 Green Plan
Link to Green Party news release advocating a revenue-neutral carbon tax

My comments:

As mentioned before, I am definitely happy to see anyone advocate absolute limits over emissions intensity targets. Their 55 Mt CO2e target doesn't seem particularly demanding, since that is actually what the Liberal's Large Final Emitters program was aiming for already. Re a revenue-neutral carbon tax, it makes sense as an idea to me, especially with the necessary compensation for lower income families, but I'd like to see a more detailed proposal. I'm also going to look into more economic research on carbon taxes - my understanding is still that environmental economists are for the idea, but I've heard reference to some convincing evidence from existing schemes elsewhere that carbon taxes inevitably get diluted by politicians' fear of unpopular taxation.

Suzuki Foundation take on Quebec's carbon tax

The Suzuki foundation released a review of provincial climate change action plans back in October 2006. Here's what they had to say about Quebec's carbon tax:

• Suzuki foundation calculations show that the tax will end up being approximately 3$ per tonne of CO2e
• The Canadian Association of Petroleum Producers claim they will have to pass the cost onto consumers (likely, despite Quebec government assertions), and that this will add roughly 1.5 cents/liter to the price of gasoline.
• According to Suzuki, this is unlikely to modify consumer actions but is a good first step and appropriate funding mechanism.

Link to Suzuki review
Link to Quebec climate change plan

Alberta also talking emissions-intensity

From today's National Post. The good news - Alberta says it will set mandatory greenhouse gas emissions targets. The bad news - they will be emissions intensity targets, not absolute targets. As I mentioned earlier today, emissions intensity targets don't guarantee absolute limits to our emissions, just less emissions per unit of GDP/barrel of oil/what have you. The second problem here is the issue of redundant targets. There is no need for Alberta to have its own targets, unless they want to be more or less stringent than the feds. Given the Alberta government track record, I'm guessing this move is meant to ensure lower targets for Alberta industry. That, or its just a chance to claim credit for something the feds are putting in place anyway.

Link to NP story

Baird's industry targets

Looks like the Conservatives are poised to resurrect the large final emitters emissions trading scheme. Yesterday, Environment Minister John Baird told reporters that he is preparing to impose emissions intensity targets on industry, apparently "among the most aggressive in the world." The LFE scheme was also based on emissions intensity targets, which, as CANet noted, have a big weakness - they don't provide an absolute limit on industry emissions. If industry grows faster than anticipated, then emissions can grow with the industry, wiping out any absolute reductions.

The one possibly positive thing in this announcement- talk of aggressive targets. Hopefully the Conservatives will want to announce that they've gone beyond the targets previously set under the Liberals...given their political base, though, I suspect that this won't happen. More likely is that they will delay mentioning sectoral targets and hope that the public can't be bothered to figure out the details.

Link to Globe article.

Liberal Party's Kyoto motion

The Globe and Mail covers the Liberal's motion yesterday calling on the government to "reconfirm Canada's commitment to honour the principles and targets of the Kyoto Protocol in their entirety". Followed of course by mutual name calling over Liberal inaction and Conservative insincerity. I just hope the public pressure keeps up long enough for the parties to throw up a few real policy initiatives in their quest to one-up each other. Witness the Liberal's call for the creation of a "cap and trade" emissions trading system in the same motion. Dion's previous discussion of emissions trading stuck to the old emissions-intensity system, which had no hard cap. Hopefully the cap and trade reference means that we might start discussing a more serious system.

Link to Globe article
Link to Liberal press release:
Link to previous post on Dion's emissions trading plan

NDP-Conservative alliance on Kyoto

Ahh, the good old National Post. Combining the bias of Fox News with the smarmy upper-class smugness of the likes of Conrad Black. Wednesday's coverage of Clean Air Act negotiations by John Ivison discusses a potential liaison between the NDP and the Conservatives to push an improved version of the Act through by March. The article itself covers signs of a rapprochement between the two parties, including the possibility that the NDP might even go along with the Conservative's abandonment of Kyoto targets. Ivison also asserts that the Liberals look to be stalling progress on the bill in hopes that it won't make it to an eventual election.

The bias I'm mentioning here - the NDP is "clinging to the comfort blanket of Kyoto, arguing with blind optimism that we can close the 'Kyoto gap' in the next five years." Meanwhile, "a five minute talk with anyone who really knows what it would take to meet Canada's Kyoto commitment...gives some sense of how deep in the hole we are. Three hundred of the largest polluters in Canada would have to reduce emissions by more than half, something that is not technically feasible without beggaring the economy."

I guess Mr. Ivison doesn't talk much with the staff of the Pembina Institute, the David Suzuki Foundation and the other climate change experts who have been modelling and planning for Kyoto from the beginning. Their most recent contribution to the debate, under the CANet umbrella, is a backgrounder on the Clean Air Act aimed at MPs. It asks for a commitment to Kyoto targets and to a long term target of 80% below 1990 levels to be set for 2050.

Link to CANet backgrounder
Personally, I wouldn't care about meeting Kyoto targets if I actually thought that we were setting ourselves the long term targets proposed by CANet, and acting immediately on them. I agree with Ivison that we are in a deep hole and that the Kyoto targets will be difficult to meet. The problem is, backing down on Kyoto in favour of long term targets only is an easy political cop-out and will lead to more 'study' and excuses about the need to wait until magical, painless technologies appear. The only way I could accept any kind of NDP-backed dropping of the Kyoto targets would be if they were replaced by a binding set of targets for reductions in 2010, 2012, and 2015 that led to below-Kyoto targets by 2015, targets low enough to compensate for any lost reductions now. Somehow, it doesn't seem likely the Conservatives will do this.