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 St├ęphane 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 St├ęphane 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.)