Liberals grab FoE's proposal and run with it

Repeat after me - I love minority government. Sure, elections every year or two mean little gets actually done on climate change, but meanwhile the Liberals and Conservatives are one-upping each other to the point where radical environmental proposals transmogrify into mainstream policy!
In January, Friends of the Earth and Corporate Knights publicized a proposal to create an emissions tax at 30$/tonne CO2e for large emitters, with the catch that the tax revenues would actually be kept in special accounts for each emitter, who would have the option of getting the money back to spend on emissions reductions. Many, many orders of magnitude beyond any existing Canadian policy to date. I loved the idea but assumed it would be ignored within federal politics. (See my post for more details)
Last month, FoE and Corporate Knights released a more global proposal, with additional carbon taxes all over the place, tax shifting, the whole caboodle. Again, I thought, this is great, but we'll be lucky to get even absolute emissions limits for industry, let alone making them pay for every tonne emitted! (See my post for more details). Meanwhile, the Climate Action Network set out clear proposals for amending the Clean Air Act, including setting absolute targets for large emitters at our Kyoto target level ((1990 minus 6%). (Here's the post on that one)
NOW, the Liberals release their environmental plan, which first of all sets absolute targets for large emitters; even better, it sets them at our Kyoto target level. This is a much, much better idea than the intensity-based system that the Liberals built and the Conservatives are now recycling. (See this post for why). And on top of this, it brings in the FoE/CK idea of tax +emitter account, with a 20$/tonne tax with emitter accounts allowing emitters to reuse the money, with the tax rising to 30$/tonne in 2011. The key, unfortunate difference is that industry only pays for emissions beyond their targets, not for all emissions as per the FoE/CK plan. This is still an improvement over the old Liberal LFE system, which had a $15/tonne charge (much too low according to both environmentalists and economists). The Conservatives are rumoured to be sticking with the $15/tonne charge.

We'll have to see what the Conservatives come up with, but so far it looks like easy intensity-based targets starting in three years. If that's the case, the Liberal plan is much more effective, and fair (industry shoulders its share of the reductions burden). It'll be interesting to see how things go...

Meet Kyoto or Pay Up, Dion Tells Industry (Globe)
Liberal press release
Dymaxion World post on Liberal plan

Let's set up some markets - TD bank report

Toronto Dominion Bank released a report on March 7 calling for market based solutions for climate change. You tell 'em, my financially-inclined brethren! The 21-page report, "Market-Based Solutions to Protect the Environment" is 80% introduction to climate change policy options and 20% suggestions for Canada, with a focus on carbon taxes and emissions trading systems (ETS). It doesn't take a strong position on Canada's policy, but it does recommend:

• a mix of all policy tools, but a focus on price signals (most effective, least overall cost)
• following the polluter-pays principal (maximize efficiency and fairness)
  
• providing long term continuity so that emitters know what to expect
• setting up a domestic emissions trading system ASAP, with the idea of eventually linking to international carbon markets like the European Union ETS
  

The paper covers the classic tools and their advantages and disadvantages, going over

• command and control (can be effective but expensive if too interventionist)
• moral suasion (politically easy but ineffective)
• carbon taxes (the stuff of environmental economists' dreams and politicians' nightmares, but tax shifting will solve the problem if only the political will can be found)
• subsidies (politically popular, sometimes effective but huge free rider problems)
• cap and trade/ETS (an international inevitability; effective but easily diluted by politics (free allocation of permits, overly generous targets)

TD press release
TD report
Toronto Star coverage: "Carbon Taxes Are Coming"

My comments:
carbon taxes: I keep thinking that the idea of carbon taxes are forever marginalized in Canada, but then these reports pop up. Nice to see TD come out with this, even if it is, naturally enough, understated. It looks like the idea is dead at the federal level for now, but maybe if enough mainstream institutions start recommending revenue-neutral emissions taxation we will see provincial initiatives or a return to the idea in future federal debates. Or maybe the policy fairy will simply sprinkle all of our heads with externality-powder and we will wake up and smelllll the coffee...
emissions trading: I'm happy with their general recommendations (starting soon, auctioning permits, starting with a domestic system until international kinks worked out), but I'd like to see an opinion on intensity targets versus absolute targets.

More Alberta "Carbon Tax" madness

Yesterday's Calgary herald also calls the SGER penalty for emissions beyond regulated targets a carbon tax (see last two posts for more on this), and talks briefly about the politics behind it all, federally and provincially:

The goal is to paint Harper and Alberta green so the federal Conservatives can go to the polls this spring without having to attack the prime minister's own province.

There could still be fireworks if Harper's own green plan, coming soon, imposes rules tougher than Alberta's.

Alvarez says, "the biggest outstanding question right now is how the provincial and federal programs are going to interact."

Harper might push a bit harder than Alberta to show his own shade of green. But whatever he does, it's likely to be something Premier Ed Stelmach can accept after mild protest.

Go figure - a carbon tax crafted right here at home (Calgary Herald)

De facto Canadian carbon taxes

The Globe and Mail has a story today on Harper and Stelmach's recent announcements re carbon sequestration investments (the CO2 pipeline etc.), but what caught my eye was a reference to "Alberta's new carbon tax". They are referring to the $15.00/tonne charge on emissions beyond the targets included in the new proposed "Specific Gas Emitters Regulation" (SGER - say that ten times real fast). The article then goes on to say that the Harper Conservatives are also expected to adopt a $15/tonne tax on emissions beyond regulated limits.
I guess they are right to call it a tax (economists of the world, feel free to correct me on this), but it provides little of the benefits of a true carbon tax, since it will only apply on emissions beyond regulated targets - in Alberta's case, the first 88-98% of a facilities emissions will be
untaxed. I will remain indefatigably optimistic about this, since at least the words "Alberta's new carbon tax" are actually being bandied about matter of factly in a national newspaper - a vital psychological watershed in carbon tax acceptance. Next stop, 80-150$/tonne taxes on all fuels sold in Canada, followed smoothly by the abolishment of income taxes and free photovoltaic backpacks for the whole famdamily!

Ottawa advised to underwrite carbon technology (Globe article)
Get your (not so free) solar backpack today!

Update on FoE / Corporate Knights proposal

Corresponded via email today with Toby Heaps of Corporate Knights re his proposal for meeting Canada's Kyoto targets. Here is what he had to say on capital investment cycles and emissions trading:

Given that many of the LFEs need to take capital investment cycles into consideration, do you think that that some of them will not be able to efficiently use the tax taken from them within the 3-year window provided?

The scale of capital raised would provide sufficient incentive for any rational facility to, at a minimum, commence capital projects to reduce emissions. It is true that order times and installation hold-ups would not allow for everything to be deployed in the immediate term. In order to access the industrial fee, a company would have to show how the lifecycle emissions add up. Lifecycle emissions can run as long as 20-25 years and beyond. As an example, if I am Transalta, my Sundance Generating Plant with no modifcation is going to cost me $485 million per year on the carbon fee. In a four year time span, that will add up to just under $2 billion. I would prefer to not leave that $2 billion on the table for the government to scoop up. Instead I would take it and make investments in either lower carbon forms of electricity production or retrofitting my plant, both of which would produce lifecycle emissions reductions will into the future.

It looks like the Conservatives are going to come out with something fairly similar to the LFE emissions trading system that the Liberal government had under development.

1.Why do you advocate your carbon tax proposal over emissions trading?

Toby provided a detailed comparison chart for his proposal versus emissions trading - summarized at the end of this post.

2. If the government does go with emissions trading, what changes would you like to see happen?

I would like to see industrial facilities with a strong price signal to make domestic reductions so that clean air benefits are coupled with GHG emissions, providing more immediate term benefits to Canadians. In the event that we are falling short of Kyoto targets as a country, I would like to see the government finance international renewable energy projects, with the solar cooker (see notes about solar cooker below) being a major component.

The Solar Cooker Story:

-2 billion people rely on wood to cook their food
-Each solar cooker saves roughly 3.5 tonnes of CO2e per year compared to a wood burning stove.

-Solar cooker can last 20 years

-Alcan has innovated a special material that id ideally suited for solar cookers

-Deploying 10 million family sized solar cookers a year would require 30-40 kt of aluminum

-Manufacturing 10m family sized solar cookers per year in developing nations at a total cost of $100-$200 per unit would cost $1-2bn per year and be generating 140 million tonnes of CO2e by end of year four

(note:presently, the CDM has a hold-up on granting credits for small scale projects on this level and they are working on ironing out the methodology--one area of ambiguity to clarify is whether the forests harvested for the wood are renewable forests of not--in most cases they're not)

CDM methodology on Solar cooker: http://cdm.unfccc.int/Projects/DB/TUEV-SUED1135345789.43/view.html

Comparison of the FoE/Corporate Knights carbon tax with emissions trading:

CK/FoE Zero Leakage Carbon Innovation Fund (see page 2 for desc.)		Cap and Trade
Price certainty – best for business and can be coupled with emissions standards for environmental quantity goals. Redeploys sufficient capital within businesses to pave way for green industrial revolution	Pro	Quantity certainty – best for environment. Does not provide leapfrog opportunities for green industrial revolution	Pro/Con
No ceiling for emissions reductions	Pro	Provides a ceiling for emissions reductions	Con
Provides double dividend to facilities that reduce emissions w/in 3 yrs and powerful incentive to invest in immediate reductions	Pro	All money spent on immediate emission reductions	Pro
Fits with part of Kyoto architecture as it allows government to make up shortfall through financing international renewable energy projects	Pro/Con	Fits with Kyoto architecture and minimizes costs via international trading	Pro
Couples emissions reductions and cleaner air together by requiring domestic industry to make reductions in Canada	Pro	Decouples domestic clear air from GHG reductions by allowing industry to purchase international credits	Con
100 per cent of money stays at facility (or corporate level in certain case). Keeps money in facility's specific account in province	Pro	Money stays in the private sector. Politically difficult to transfer money out of high emissions provinces	Pro/Con
Fair and firm price with flexibility to recognize energy-intensive export value-added industry's ability to pay. Does not punish early movers. Every company in a sector pays the same $ per tonne of C02e	Pro/Con	Flexibility to differentiate burdens according to ability-to-pay, but can punish early movers	Pro/Con
Simple, easier to explain, less vulnerable to lobbying	Pro	Complex, therefore more difficult to explain and vulnerable to being undermined by lobbying	Con
Requires business to take responsibility for emissions and provides them clear price to optimize around	Pro	“Requires business to take responsibility for emissions”	Pro
Risk of a run on stock prices of emissions intensive industry is reduced because clear price on carbon provides a number that analysts can use for discounted cash flow analysis, allowing them to place a cost ceiling on the effect of the carbon price system. Risk of run is also reduced as money paid for carbon fee is recorded on company's balance sheet as an asset.	Pro	Could spark a run on stock prices of emissions intensive industry because of uncertainty on the price of emissions	Con

CK/FoE Consumer Carbon Tax
Consumers are less sensitive to price increases than economic theory suggests	Con
Taxes on carbon content of fuels reduce consumer demand for high carbon fuels and increase it for low carbon fuels	Pro
Higher electricity prices increases consumer demand for efficient appliances and retirement of inefficient appliances	Pro
Access to zero-interest financing for geothermal and retrofits spurs mass deployment of money saving and energy reducing installations	Pro
Carbon taxes do not go into general funds, but instead raise billions to finance rebates on efficient vehicles, home retrofits and other supportive policies	Pro
Raises revenue for providing tax cut/rebate to cushion blow of higher prices for low-income families	Pro

Carbon taxes back on the table, at least for 48 hours

Very pleased to hear some more serious discussion of carbon/GHG taxation in Canada today. CBC's the Current had two pieces on carbon taxes today (see link below to listen), one of which was more or less a debate between Terry Corcoran (Financial Post Editor) and Andrew Van Iterson (Green Budget Coalition). The piece was spurred by last week's news reports that the Liberals were supposedly considering a carbon tax. Alas, the Liberals are now saying it was all a misunderstanding - they are considering pricing emissions, but not creating a carbon tax.

Link to Cnews story on Liberal rejection of carbon tax
Link to Friday's Globe story on Liberal development of carbon tax
Link to today's CBC discussion of carbon taxation

My comments: Very disappointed to hear the Liberals reject carbon taxes again. Dion must know better - he is clearly well-informed on environmental policy in interviews - so I guess this is just politics. The Conservatives, of course, were excoriating the Liberals for the idea, although I'm sure the economically-educated among them would admit that a revenue-neutral carbon tax is actually one of the cheapest options we have. I think they have made a mistake in using the carbon tax idea as a club to beat the Liberals with - they have cut themselves off from what could have been a policy coup. If the Conservatives had come out with a sensible tax shifting proposal, they could have had support from environmental groups and big business simultaneously.
On the plus side, the brouhaha led to more coverage of the idea, and I thought some very effective advocacy from Van Iterson. Corcoran's arguments really seemed like a series of red herrings to me - calling taxes "arbitrary" (all taxes are arbitrary) and attempting to paint a carbon tax as ineffective and morally self-righteous. He seemed caught off guard by the idea of revenue-neutrality, and actually ended up admitting that a revenue-neutral tax shift would actually have some merit.

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.

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

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...

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.

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.

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

Stephen Harper's position on carbon taxes

From a Canadian Press article published back in June 2006: "Harper rules out federal carbon tax as a climate change strategy"

"The federal government absolutely disagrees with a carbon tax and will not impose it," he said outside a cabinet meeting.

"We believe if a carbon tax is effective at all, it will ultimately be effective only because it will raise gas prices on consumers.

That's not something we're going to do."

Link

My comments: Well, that takes care of that. Not a big surprise given his Alberta base and political instints.