Monday, 30 April 2018

Canadian Carbon Pricing Confusions

The federal government (Environment and Climate Change Canada - ECCC) released on April 30, 2018 its estimate of the incremental effect of its carbon pricing initiative relative to other policies in achieving Canada’s GHG reductions – Estimated Results of the Federal Carbon Pollution Pricing System. They estimate annual reductions in 2022 of 80-90 mega-tonnes (MT) of CO2. Their numbers are dramatically higher than estimates by my research team. Why?

The approach we took to estimate the incremental effect of federal emissions pricing

At about the time the Trudeau government announced that emissions pricing would be “central” to achieving its GHG reduction targets, it also announced specific regulatory policies, including nation-wide adoption of Alberta’s coal plant phase-out and methane regulations, tightening of vehicle regulations, and (a bit later) a clean fuel standard, which is similar to BC’s low carbon fuel standard but applied to all sectors not just transport. To assess the incremental effect of the federal carbon pricing policy, we created a reference scenario which included everything that should happen absent the federal pricing initiative. 

Thus, our reference scenario included all carbon pricing and regulatory policies of the provinces and simulated their effect on emissions between 2018 and 2030. BC and Alberta had both committed to $30 /tCO2 for carbon pricing while Ontario and Quebec had committed to a price that climbs toward $20 and surpasses that threshold well before 2030. All four provinces had existing and announced regulations, such as Alberta’s announced cap on oil sands emissions, methane regulations, and coal-plant phase-out by 2030, and BC’s clean electricity standard and low carbon fuel standard. We included regulations by other provinces too, such as the electricity decarbonization policy in Nova Scotia. To these we added the existing and announced federal regulations. 

We sustained all of these provincial and federal policies through to 2030, which gave us a forecast of the evolution of Canadian emissions if Trudeau’s government had avoided carbon pricing as a policy and instead relied on existing provincial policies (pricing and regulation) and its own announced regulations. This reference scenario (without the federal pricing initiative) sees Canadian emissions fall approximately 6% from their 2005 level.

To this reference scenario, developed in early 2016, we later added the federal carbon pricing policy, which reaches $50 /tCO2 by 2022. We assumed, in the absence of a schedule beyond 2022, that the carbon price would remain constant after that. Not surprisingly, the incremental effect of the federal carbon pricing policy is very small by 2030 and even smaller by 2022. I’m getting my research associate to dig out the exact numbers for these two dates. (She now does modeling for the International Energy Agency in Paris and is awfully busy!). But my eyeball guess looking at our graphs is that the incremental effect of the federal carbon pricing policy is to reduce emissions 1-2% from their 2005 level, a reduction of 10-15 MT in 2030. That number should be smaller in 2022, far below the claim of 80-90 MT in the latest ECCC report.

The federal approach to estimate 80-90 MT of reductions from pricing by 2022.

In reading the report, I see two possible causes for the discrepancy between our estimate of a low incremental contribution from the federal carbon pricing initiative and the high estimate in this latest federal report. The first cause is that the federal government estimate takes credit for all pre-existing carbon pricing initiatives of the provinces. The second cause, more speculative on my part, is that they may not have done proper incremental policy modeling, meaning that the federal carbon pricing got recognition for emission reductions that should be attributed to non-pricing policies.

Page 3 of the report helps explain the first cause of the discrepancy. The estimated 80-90 MT attributed to federal carbon pricing is based on the assumption that there never have been provincial emissions pricing policies in Alberta, BC, Ontario and Quebec. The carbon pricing policy is “compared to a hypothetical scenario in which they [provincial governments] did not have pricing systems in place.” (p.3) In other words, the reference scenario for estimating the federal carbon pricing initiative is a hypothetical world in which there is no carbon pricing anywhere in Canada. Which of course is not true.

This is clearly not an accurate way to represent the incremental effect of the carbon pricing initiative of the federal government. While it makes a lot of sense to have better federal coordination and consistency of climate policies across the country, and the federal backstop carbon price does that, it is nonetheless grossly misleading to suggest that current provincial pricing can be attributable to federal policy any more than that the phase-out of coal plants in Ontario in 2004-2014, the policy-driven cancellation of coal plants in BC in 2007, and Alberta’s announced phase-out of coal plants in 2015, can be attributed to the federal coal plant policy announced in 2016.

While this is likely to be the dominant cause of the discrepancy in our estimates, I also could not find an explanation in the report of the method the federal policy modelers used to estimate the incremental effect of the federal carbon pricing initiative and federal regulations. As I noted above, this entails first simulating all of the provincial and federal non-carbon pricing policies and the provincial pricing policies to 2022 and 2030. And then to run a second simulation with only the addition of the federal carbon pricing initiative. The change in emissions between these two simulations indicates the incremental contribution of that policy. This contribution of the federal carbon pricing policy will be very small, as we found with our modeling research. But you actually don’t need a model to see what is obvious by surveying the portfolio of provincial and federal regulatory policies, past and present.

Take-Away

In 2016 I and two research associates produced a report entitled Is Win-Win Possible? Can Canada’s Government Achieve Its Paris Commitment . . . and Get Re-Elected? In which we explained that a rapidly rising carbon emissions price was needed to achieve the Paris commitment. We noted that while all climate policies are politically difficult, there is considerable evidence from real-world GHG policy experience and political science surveys to suggest that carbon pricing is far more politically challenging than some regulatory policies. We also noted that flexible regulations can be designed to approach carbon pricing in economic efficiency, if designed with that purpose in mind.

Some economists, including some at Canada’s carbon pricing advocacy entity, the Ecofiscal Commission, dismissed our assessment. They presented studies constructed to show a deliberately big economic efficiency gap between regulations and carbon pricing, instead of testing the likely long-run cost of using flexible regulations like the low carbon fuel standard over several decades to decarbonize transport. And they dismissed as naïve any research showing the visceral antagonism to pricing policies by significant segments of the population – and therefore the risks to politicians of relying on such policies. 

None seemed willing to even discuss the importance of comparing GHG policies using a criterion such as political cost per tonne reduced in order to compare this to economic cost per tonne reduced. This is unfortunate, because research by ourselves and others shows that carbon pricing has an enormous political cost per tonne in comparison to flexible regulations. This helps explain why many of these flexible regulations have played a much bigger role in GHG emission reductions thus far in Canada, California and Europe, including Scandinavia where there has been some form of carbon pricing for years.

A decade ago, Canada had a federal election dominated by the issue of carbon pricing. Voter rejection of carbon pricing enabled Stephen Harper to defeat Stephan Dion and win power for a decade, a decade in which he deliberately stalled on implementing effective GHG reducing policies. That was not an economically efficient outcome.

Because carbon pricing advocates have convinced the Trudeau government to take a large political risk for only a small incremental GHG reduction, history may soon repeat. Studies that are distorted to show an artificially large reduction from the federal pricing initiative are not going to save the day. Trudeau may win re-election and sustain the federal carbon pricing. But if so, this will occur in spite of carbon pricing, not because of it. One must ask if the risk is worth it, especially when the impacts of coal-plant phase out, methane regulations, and a clean fuel standard (that fairly efficiently decarbonizes transport) dominate our GHG reductions and yet are much less difficult politically – as polling continuously shows.

Ironically, our incremental modeling of various GHG reduction policies in Alberta shows a similar outcome. We estimate the incremental effect of Alberta’s carbon pricing policy (at its stringency level of $30 and different application in various economic sectors) is less than 5% of the GHG reductions caused by the other regulatory policies (excluding subsidy policies) in its Climate Leadership Plan. The vast majority of reductions are caused, again, by the coal plant phase-out, the methane regulation, the oil sands emissions cap (which varies depending on forecasts of future oil sands output), and various efficiency regulations. Yet some polls suggest that while the Notley government’s popularity is little affected by its introduction of regulations (most Albertans support coal plant phase-out), it has been greatly affected by the strong and ongoing opposition to her carbon tax.

Tuesday, 11 October 2016

Climate policy advisers need to take into account the real world trade-off between economic efficiency and political acceptability

Here is my response to fellow economists who seem unwilling to take into account this trade-off when giving climate policy advice. It appeared in Policy Options on October 11, 2016. The text is also given below:

Last week, the House of Commons endorsed the Paris climate agreement, under which Canada commits to reduce greenhouse gases by 30 percent below 2005 levels by 2030. Simultaneously, Prime Minister Justin Trudeau abandoned hope that each province would voluntarily implement policies to achieve the national target. He said the federal government would, if necessary, impose a national charge of $10 per tonne of carbon dioxide in 2018, rising to $50 by 2022. After a year of niceties, realpolitikhas arrived.


It is encouraging that Canadian governments increasingly acknowledge that effective climate policy requires a carbon price or equivalent regulations to reduce our use of coal, oil and natural gas. But this does not make the task easier. In September, I and my co-researchers Tiffany Vass and Mikela Hein released a report in which we estimate that Canada’s carbon price must reach $200 by 2030, if it is to be the dominant policy for achieving the Paris target. (This week we analyzed Trudeau’s proposed carbon price. If the price remained at $50 from 2022 to 2030, emissions would fall 12 percent. If it rose to $100 by 2030, they would fall by 17 percent.)


Relying entirely on emissions-pricing to reach our targets is a tough sell, because a $200 carbon price would increase the price of gasoline 45 cents per litre in just over a decade. Many people won’t grasp that as they switch to already-available electric, plug-in hybrid and biofuel vehicles, they will not be paying the high carbon price. And while economic impacts can be minimized if the government returns carbon revenues through income tax cuts, many people won’t see the correlation. Hence the political challenge.


This explains why, in our September report, we suggested that economists could help real-world climate policy implementation if they analyzed the costs of other policies that have successfully reduced emissions, especially the flexible regulations that have been dominant in activist jurisdictions like California. But in a recent article, members of Canada’s Ecofiscal Commission Don Drummond, Nancy Olewiler and Chris Ragan rejected our proposal.


First, they claimed that I and my colleagues don’t see the higher costs associated with carbon emissions regulations “as much of a problem.” This misrepresents our challenge to economists to estimate how flexible regulations like clean electricity standards, low carbon fuel standards and vehicle emission standards — compared with carbon pricing — will hurt the economy. If the economic penalty is small, flexible regulations should be considered where they have a much higher chance of being politically acceptable. Former Liberal leader Stéphane Dion’s failed electoral bid, which was based on a carbon tax, ensured a decade of climate inaction by former prime minister Stephen Harper. If we agree that a continued failure to act on climate will have a large cost, then not incorporating political acceptability into the policy calculus is penny wise and pound foolish.


Second, they argued that carbon pricing is now politically acceptable. But academic surveys and real-world evidence show the opposite. Carbon prices are everywhere still at such low levels that their effect in places like California, British Columbia, Quebec, and Ontario is negligible relative to regulatory actions that have also been introduced in those jurisdictions. Flexible regulations are projected to account for 90 percent of California’s reductions between 2005 and 2025.


Third, they argued that everyone can see the benefits of using carbon revenues to lower income taxes. Stating unequivocally, and without evidence, that “nobody should believe the claims of political infeasibility,” they explain that whenever the public complains that carbon taxes are too high, an easy solution is to explain that income taxes will go down.


Maybe this works with the students in their economics classes, but it certainly didn’t work for Stéphane Dion, and nor did it work for former BC premier Gordon Campbell, whose supposedly revenue-neutral carbon tax is the poster child for emissions-pricing. Government, climate activists, business leaders, and academics like Nancy Olewiler and myself made this case for revenue neutrality via income tax cuts repeatedly in the 2008-09 BC climate debate, to no effect. During the opposition’s “axe the tax” campaign, Campbell’s government dropped 20 points in the polls and would have lost the 2009 election, but it was saved by the bell when the global recession and resulting collapse in oil prices shifted voter concerns from gasoline to jobs. In a recent survey on the public’s relative views on climate policies in BC, I and co-researchers Katya Rhodes and Jonn Axsen found that strong opposition to the carbon tax was 7 to 10 times greater than strong opposition to flexible regulations.


We repeat our appeal that economists learn from other social sciences. Effective climate policies are politically difficult. Being unwilling to consider trade-offs that are at the margin between purist economic efficiency and political acceptability is to risk continuing along the path of climate inaction, which itself is economically inefficient.

Tuesday, 20 September 2016

Is Win-Win Possible? Can Canada’s Government Achieve Its Paris Commitment . . . and Get Re-elected?

For the past 6 months, I and co-researchers Mikela Hein and Tiffany Vass have been developing our national energy-economy model (CIMS) to simulate climate policy scenarios that explore the effect of current Canadian policies, and contrast this with (1) the must-price-emissions approach that some are advocating, and (2) an alternative approach that emphasizes a significant role for flexible regulations, similar to what California is doing with regulations on electricity, vehicles, fuels, etc. Available on this link, our report is called “Is Win-Win Possible? Can Canada’s Government Achieve Its Paris Commitment . . .  and Get Re-elected?"

If policy advisors and policy makers are to learn anything from the past 30 years of ineffective climate policies, they would hopefully see that climate policy is very difficult politically and emissions pricing is especially difficult. Canada intends to achieve its Paris commitment. To do so by emphasizing emissions pricing would require a price that climbs by about $15 per year to reach $200 per tonne of CO2 by 2030. It is highly unlikely that federal or provincial politicians will pursue this approach. Fortunately, they don’t have to. As noted, California is especially relying on flexible regulations. Such an approach is likely to be less economically efficient than emissions pricing. But researchers can help policy makers by estimating the magnitude of the economic efficiency trade-off for political acceptance. Our report attempts to start that process.

Monday, 22 August 2016

BC’s ‘New’ Climate Plan Scales Olympian Heights of Political Cynicism

This blog was first published as an Op-Ed piece in The Globe and Mail Aug. 21, 2016

In 30 years of evaluating government climate plans, I have learned to classify them into three categories: somewhat effective, naively ineffective and cynically ineffective. BC’s new climate plan fits perfectly into one of these categories. Can you guess which?

Let me help. The thing about ‘effective’ climate policy is that it is never a political winner. Effective policies would start immediately to reduce carbon dioxide emissions by either pricing these or regulating fuels and technologies. The price can be achieved by a carbon tax, as in BC and Alberta, or an emissions cap with tradable permits, as in Ontario and Quebec. Alternatively, regulations, which dominate in California, would require a growing market share for zero-emission vehicles, furnaces, electricity generation, and industrial equipment. In every case, the stringency of these effective policies must be increasing – a rising carbon tax, a falling emissions cap, tightening regulations. Everything else is bogus.

Politicians know that effective climate policy is not a political winner because these effective policies cause gasoline prices to rise immediately, while the benefits from slowing climate change and sea level rise occur after the politician’s career is over. Only a politician willing to show ethical leadership would take effective action on this difficult global challenge. Politicians who are not leaders but seem to care would gravitate to ineffective policies. Politicians who are cynical and don’t care would deliberately fake it, implementing a long list of ineffective policies, engaging in endless ‘public consultation’ and dismantling the effective policies implemented by previous climate leaders.

Which brings us to BC Premier Christy Clark and her new climate plan. From 2007 to 2011, her predecessor, Gordon Campbell, led the world in implementing effective climate policies, out-muscling even Arnold Schwarzenegger’s efforts in California. He banned the use of coal and natural gas to generate electricity. He implemented a rising carbon tax. He established the legislative framework for an emissions cap, and for tightening regulations on fuels, vehicles, buildings and equipment. He not only set a climate target for 2020, but also interim targets for 2012 and 2016 to enable real-time monitoring of the effectiveness of his efforts.

But when Clark replaced Campbell in 2011, one of her first acts was to freeze the tax at its 2012 level. Because of inflation, this means the tax has been declining in real value for the last four years. She also undermined his zero-emission electricity requirement and his emissions-cap legislation, and she has done nothing to tighten any of his other regulations. At the same time, she has vigorously promoted expansion of the natural gas industry which, if successful, would dramatically increase emissions. And last year, she launched yet another public consultation.

In refusing to serve on her consultative panel, I pointed out that this was the last thing BC needed, and that anyone joining the panel was legitimizing a strategy of inaction. In BC, we already had effective policies, and Clark would know from her advisors that only by increasing their stringency would emissions fall. But endless public consultation is a convenient way of appearing to care without taking action. And the panel did not help by naively calling for an increase in the carbon tax. This played directly into Clark’s populist posture as defender of overtaxed car and truck drivers, and was unnecessary, as California’s smart regulations have proven.

Last week, Clark finally released her climate policy. Predictably, it perfectly fits the ‘cynically ineffective’ category. First, there is no immediate tightening of the stringency of any effective policies to achieve emissions targets in, say, 2020 and 2025. Second, consistent with the cynical category, the plan includes a list of innocuous policies that are known to be ineffective – subsidies to industry to electrify some processes, information programs for consumers, and statements about the government’s good intentions. And taking cynicism to a new level, the plan’s so-called emissions reductions are dominated by tree planting on lands that are already allocated to forestry, an action that does not decrease emissions in the long run.

If there were an Olympic event for political cynicism on the climate challenge, BC’s new climate plan would be a strong contender for the gold medal.


Monday, 14 March 2016

My interview in "Building a consensus on climate change? Not so easy, after all" in Macleans

Here is the link to an article by John Geddes "Building a consensus on climate change? Not so easy, after all", Ottawa bureau chief at Maclean’s, who does a good job of distilling my point that while carbon pricing is the most economically efficient GHG reduction policy, it is willful blindness to assume that economic efficiency is the only criterion when trying to implement climate policy. If regulations are more politically acceptable, especially for doing the heavy lifting, then put some intelligence (even economic intelligence) into designing market-oriented regulations that are relatively economically efficient.



One might notice by the way, that in the first two weeks of March Trudeau failed to get provinces to agree to even a small carbon price (that would have virtually no effect on emissions - such as $15 or $30 per tonne of CO2)) and then went to Washington and quickly signed an agreement with Obama to dramatically reduce methane emissions from the oil and gas industry. No mention of emissions pricing. It will be regulation." 

The Paris climate summit

This article appeared in Policy Options in November 2015.
The Paris climate summit
Canada has consistently failed to deliver, but it’s not too late for us to make a major contribution at the climate summit in Paris.
The other day I heard an environmental advocate argue that Prime Minister Justin Trudeau needed to make an ambitious commitment at the UN Paris climate summit (COP 21) to atone for all the “climate fossil” awards won by our previous prime minister. I’m not so sure.
Remember when newly elected President Barack Obama won the Nobel Peace Prize? He hadn’t yet done anything. Apparently the Nobel committee bestowed the award simply because he was not George W. Bush. In the same vein, Trudeau will be welcomed because he is not Stephen Harper.
I am not saying, of course, that Trudeau should just go to Paris and smile. But to make a real contribution, he will need to be brutally honest about why UN negotiations have failed for over two decades and equally honest about why Canada’s emission reduction efforts have also continuously failed.

Want an effective climate policy? Heed the evidence

This article appeared in Policy Options in February 2016.
Want an effective climate policy? Heed the evidence
Carbon taxes and caps may be most effective in economic theory, but smart regulation will produce better climate policy for our political reality.
Wisely, Prime Minister Justin Trudeau resisted the temptation at the Paris climate summit in December to double down on Stephen Harper’s 2030 target for Canadian carbon dioxide (CO2) emissions. While future emissions promises are easily made, effective climate policy is devilishly difficult. To have any chance, Trudeau needs to stay wise — which starts by avoiding advice from technology and policy advocates who themselves avoid inconvenient evidence from leading climate policy research and real-world experience. What does this evidence tell us?
For one thing, it’s a mistake to expect a big contribution from energy efficiency. For three decades, governments and utilities have made efficiency the focus of their emissions reduction efforts, with negligible results. Yes, energy efficiency is always improving, and we can slightly accelerate that trend. But humans require energy for basic needs and, more important, we keep inventing frivolous devices that use more. (Need evidence? Stroll through your local big-box store.)