Sunday, 6 October 2019

An economist speculates on politics

A Trudeau minority government may do some good things. But claims that such a minority would achieve all the goals of the smaller parties to whom it would be beholden are unfounded. I repeat the brief case I made in a twitter stream on October 6, 2019.

Tweet thread of October 6, 2019

I frequently hear claims that NDP and Green MPs will force a post-election minority Trudeau government to cancel TransMountain Pipeline Expansion, implement proportional representation, and rapidly intensify national climate policies. I am not a political scientist, but this thinking seems delusional to me.

Polls consistently show that either the Liberals or the Conservatives will lead the next government. Two out of three Canadians support one of these parties. And both parties support TMX and are unlikely to implement proportional representation without holding a referendum first.

If Canadians elect a minority government October 21, to survive it will most likely (1) negotiate on a bill-by-bill basis to prevent losing a confidence vote (like the Martin government of 2004-06 and the Harper government of 2006-11) or (2) negotiate a confidence agreement with a small party (like today’s governing agreement in BC between the NDP and Greens).

Federally, these types of agreements will not enable smaller parties representing just one third of voters (NDP, Greens, Bloc) to impose their will on the two parties who represent two thirds of voters. Why? Because the Liberals and Conservatives can join forces as necessary to prevent the smaller parties from getting their way on TMX, prop-rep and a radically more ambitious climate effort.

A Liberal minority, to maintain enough NDP and/or Green support to stay in power, might intensify its climate effort and agree to hold a referendum on proportional representation, just as in BC the NDP gave these concessions for Green support. But it is unlikely to halt TMX, just as the BC NDP didn’t halt the Site-C dam or LNG development in spite of Green opposition.

If the NDP and/or Greens make TMX their line in the sand for supporting a Trudeau minority, they risk triggering another election, which could produce a Conservative or Liberal majority. The Greens in BC understand this, which is why they sustain a gov that has done many things they support, in spite of its continuation with Site-C and LNG. 

Federal Greens and NDP might make strong, uncompromising statements now while campaigning in an election. But after an election their tone will change as they weigh the benefits of influencing policy under a minority Trudeau government versus the risk of forcing a second election that the Conservatives might win.

It is interesting to look at detailed opinion polls on these three key issues: TMX, proportional representation and climate policy effort. The percentage of Canadians intending to vote Liberal or Conservative is similar to the percentage who support TMX, who don’t support proportional representation, and who don’t seem to want to pay extra for more ambitious climate efforts (as indicated by current support levels for Conservatives and Liberals).

Sorry folks, but if Trudeau forms a minority government thanks to support of NDP and/or Greens, you still won’t get him to reverse the big decisions that so angered you – at least not until more Canadians adopt your views. That’s democracy.

Thursday, 1 August 2019

If Canadians elect a climate-insincere government in 2019, climate-concerned voters may need to look in the mirror when allocating blame

Two decades ago, I was not alone in predicting that humanity’s chances of rapid decarbonization were low. The reasons were obvious back then, and with hindsight are even more so now.

Climate success requires a coordinated global effort to switch away from burning fossil fuels, yet we lack a global government to impose hard targets and ensure universal compliance. In this context, climate-sincere politicians are constrained from making quick progress because unilateral GHG reductions in their jurisdiction will cause industries (and voters’ jobs!) to flee to laggard jurisdictions, without appreciably lowering global emissions.

And even if the challenge were national rather than global – meaning that one country’s decarbonization would spare it alone from climate change – progress would be extremely difficult. First, as a high-quality energy source, fossil fuels still offer the cheapest path to economic development for the planet’s poorest people. And since fossil fuel endowed regions benefit economically from their continued exploitation, self-interest motivates corporations and individuals to delude themselves and others that each new fossil fuel investment is somehow locally and globally beneficial.

Second, as a multi-decadal project, energy system transformation is out of sync with the 4-year electoral timeframes of democracies. This disconnect enables climate-insincere politicians to mislead voters by promising to achieve distant GHG targets without increasing energy costs. Of course, this is a lie. GHG emissions will not fall without cost-increasing regulations or carbon pricing. But it only takes a small percentage of voters to believe this for climate-insincere politicians to succeed electorally. Effective climate policy is always politically difficult.

With the strong likelihood of continued global failure, we climate-concerned citizens cannot afford to be self-indulgent. What I mean is that we cannot allow ourselves the luxury of righteously rejecting climate-sincere elected officials just because they are neither perfect nor always consistent in our eyes. To get elected, politicians must balance the diverse interests and frequently contradictory demands of voters – “reduce GHG emissions but don’t increase gas prices, transition to renewable energy, but let us do this fossil fuel project, invest in green infrastructure but don’t increase our taxes.” In this world, climate-sincere politicians will not always appear perfect, so climate-concerned citizens need to embrace the adage that we must not allow perfection to be the enemy of good. If we reject climate-sincere politicians because they are not perfect, we could help elect climate-insincere politicians instead. In Canada, sadly, we know this all too well from the experience of 2006 to 2015, when a climate-insincere government supported by less than 40% of voters was able to hold on to power while doing virtually nothing to reduce GHG emissions.

In spite of this recent, stark experience, I nonetheless detect a similar self-indulgence among many climate-sincere Canadians today, especially in my home province of British Columbia. Trying to govern all Canadians involves making compromises. On the climate file, I may disagree strongly with Prime Minister Trudeau’s efforts to expand the TransMountain pipeline (and I do, as I explained in a February 2018 Globe and Mail op-ed) but this is no excuse for overlooking the rapid development of effective federal climate policy in Trudeau’s first term. In contrast, all previous federal governments were climate-insincere. One should not measure sincerity by the willingness to make GHG commitments (Mulroney, Chretien, Harper), as these are meaningless without compulsory policies. Nor by the willingness to spend money (Martin), as government spending can have only a tiny effect when it is private investments in houses, vehicles and industrial plant and equipment that determine emissions. As I explained in the book Hot Air (with co-authors Jeffrey Simpson and Nic Rivers) climate-concerned citizens can detect climate-sincere politicians because these will be rapidly implementing carbon pricing and/or regulations that independent experts agree will reduce emissions significantly. Climate-sincere politicians will also be working to parlay our domestic GHG reduction efforts into an effective global effort.

In an April 15 Globe and Mail op-ed I briefly summarize the climate-energy policy efforts of the Trudeau government. (The text of that op-ed is appended below.) I explain why the Trudeau government’s policies are impressive and why Trudeau’s TransMountain pipeline issue is of less importance when assessing his government’s climate-sincerity. For success, humanity needs governments in wealthier countries that move quickly to decarbonize their electricity and transportation sectors, while seeking ways to transfer this effort to the developing world. The Trudeau government has been making a significant effort in this direction.

Climate-concerned Canadians need to vote strategically this fall to make sure they don’t elect a climate-insincere government. At the time of writing this blog, the most likely outcome is that the 65% of Canadians who tell pollsters they want a climate-sincere government will split their vote among three parties and enable the election of a climate-insincere government, just as in 2006-2015. When blaming our country for climate inaction, and the continued failure of an effective global effort, it’s time for us self-indulgent perfectionists to look in the mirror.

For more details, stay tuned for my forthcoming book with Cambridge University Press – The Citizen’s Guide to Climate Success: Overcoming Myths that Hinder Progress.


Finally, Canada is a Global Example on Climate Action

Mark Jaccard, Globe and Mail, April 15, 2019

 Since 1993, I have occasionally participated as a climate policy expert on the Intergovernmental Panel on Climate Change. At our Edinburgh meeting the first week of April, I was struck by the sharp contrast between the consensus of foreign experts that Canada has become a global climate policy leader and the frequent assumption among concerned Canadians that our government is failing on climate. Why this discrepancy?

The Trudeau government’s support of the TransMountain pipeline is one obvious reason. People ask, “How can a sincere government build an oil pipeline?” Another is the government’s admission that its climate plan won’t quite meet its 2030 target. “Isn’t this a repeat of previously ineffective Conservative and Liberal administrations?”

Increasingly, however, I detect a third, less obvious reason: Few climate-concerned Canadians know much about the slate of new federal climate polices, except for the contentious carbon tax. And while global experts agree that the national carbon tax is impressive, they are equally impressed with several other climate policies.

The government’s phased closure of coal plants is crucial to climate-policy experts who know that humanity must eliminate coal-fired power, first in rich countries and soon after in developing countries. To advance this global objective, the Canadian government has leveraged its policy leadership by co-founding with Britain the Powering Past Coal Alliance, a growing force of jurisdictions committed to phasing out coal. My counterparts in China and India already notice the influence on their own countries’ policies.

Global success depends, however, on co-ordinating electricity decarbonization with increasing its use in vehicles, buildings and industry. Our government understands this. In addition to its carbon tax, its clean fuel standard will accelerate the switch in transportation from gasoline and diesel to electricity and sustainably-produced biofuels. Experts around the world are studying this policy, which comes fully into force in two years – if the government is re-elected. It offers a viable alternative for the many jurisdictions unable to implement significant carbon pricing for political reasons. Several U.S. states are considering a version of this policy that California and British Columbia originated a decade ago, called the low carbon fuel standard.

Our hopes for global success increase as political leaders in developing countries realize that the rapid adoption of electric vehicles will abate the smog choking their cities – and their families. Policies such as the clean fuel standard can accelerate this transition and, if co-ordinated with coal phase-out, ensure that falling emissions from gasoline and diesel will not be offset by rising emissions from electricity generation.

The government’s pending regulation on methane emissions is another example of a policy of global significance that is unknown in Canada. Flexibility provisions in the policy will ensure that emitters such as the oil and gas industry can choose the least-cost options to reduce these emissions. Again, other countries are studying this policy.

Yet another key policy recognizes that forcing costly reductions by Canada’s emissions-intensive industries is ineffective if it simply causes an increase in production elsewhere. By adopting Alberta’s regulatory ingenuity, the federal government’s new output-based pricing system for large industries incentivizes their emission reductions without significantly increasing their production costs. Rather than avoiding industrial regulation altogether, like some jurisdictions, Canada is innovating a model of growing interest to policy-makers in developed and developing countries. 

In just four years, these and other policies have transformed Canada from a global pariah under the Harper government to a model for climate action under Trudeau. Perhaps the government will build a new oil pipeline and will also miss its 2030 target. But these don’t matter much for the global climate challenge. What matters enormously is the continued implementation of Canada’s emerging, effective climate policies, especially those with global influence. And if the resulting intensified global effort more quickly reduces the world-wide demand for gasoline and diesel, which the planet so desperately needs, then the TransMountain pipeline can shift to transporting different Albertan products, perhaps hydrogen produced from the oil sands or sustainably-produced biofuels on the prairies.

In climate policy, experts agree that Canada is finally a global leader. I wonder if enough climate-concerned Canadians will recognize this, before it’s too late.

Monday, 17 December 2018

A chat about carbon pricing

Below is a link to a fun podcast chat I had with the very sharp interviewer Jayme Poisson on the un-necessity of carbon pricing. My 15 minute discussion starts at minute 5:45.

Please share widely.

Saturday, 15 December 2018

Carbon Pricing: Wasting Time We Cannot Spare on the Optimal Steering Mechanism for the Titanic

I am a climate-energy economist open to incorporating in my analysis and policy prescriptions lessons from other disciplines, in this case political science and social psychology. This is why almost 20 years ago I started studying and writing about 'market-oriented regulations’, which I now refer to as 'flex-regs.' It is also why, 14 years ago, I proposed a ‘carbon management standard’ in my book, Sustainable Fossil Fuels. And it is why I have explained for over a decade to sincere politicians and their advisors how to integrate political acceptability as a policy evaluation criterion alongside cost-effectiveness. Sadly, whenever sincere politicians get interested in climate policy, voices like mine can get drowned out by suggestions from people who have never been interested in the empirical research, especially on the challenges of carbon pricing in first-past-the-post electoral systems where victory often depends on a tiny percentage of voters in a few swing suburban ridings. Also, these people seem to naively assume that this small percentage of voters are willing to invest the necessary time and smarts to carefully assess the verity of misinformation campaigns claiming that carbon pricing is highly punitive and economically disastrous.

Is it any surprise that many in the fossil fuel industry are keen to propose carbon pricing for all emissions of domestic consumers, but only a tiny percentage of their emissions?

Much more to come in a book I have written but not yet published.

Here is a link to my article in the December 15 Globe and Mail and the text is below:

Divisive carbon pricing. Much ado about nothing.

I am a climate-energy economist. Most of us tell politicians: “You must price carbon to succeed against climate change.” Later, after an election, we say, “You opposed carbon pricing and won. That’s bad policy.” Or, we say, “You promised carbon pricing and were defeated. You would have won had I designed and explained it. My students say I’d have been a great politician.”

Fiction? Think again. This has been the economists’ narrative for decades as politicians wrestle with the unforgiving task of decarbonization.

But guess what? Carbon pricing is not essential to stop burning coal and gasoline. We economists only say it is because we prefer it. If we were honest, we would explain that decarbonization can be achieved entirely with regulations. These will cost more, but not a great deal more if policy-makers use flexible regulations, or “flex-regs,” that allow companies and individuals to determine their cheapest way to decarbonize.

Thus, policy-makers can require the phase-out of coal plants while allowing competing electricity generators to determine the cheapest mix of low-emission wind, solar, hydro, geothermal, nuclear, wood, biomethane and natural gas. Likewise, policy-makers can require the phase-out of gasoline vehicles while allowing manufacturers and consumers to determine the contributions of electric, biofuel and hydrogen vehicles.

We economists should also explain that while carbon pricing gets all the media attention, flex-regs quietly do the heavy lifting. A decade ago, I helped design British Columbia’s mix of a carbon tax and flex-regs. One flex-reg caused BC Hydro to cancel intended coal and natural gas plants and instead develop low-carbon options from competitive bids. This flex-reg is three times more effective than B.C.’s carbon tax, and it faced no opposition. Last week, the B.C. government copied Quebec in implementing a zero-emission vehicle standard, a flex-reg to eliminate the purchase of gasoline vehicles by 2040.

The California Air Resources Board acknowledges that California’s carbon-pricing policy, which Quebec shares and Ontario did briefly, accounts for only 15 per cent of recent and projected emission reductions in California. Again, the key policies are flex-regs, namely electricity’s renewable portfolio standard and transportation’s low carbon-fuel standard and zero-emission vehicle standard.

Pollsters say Alberta Premier Rachel Notley’s carbon tax contributes significantly to her dim re-election prospects. Ironically, my research team finds the new tax will cause no more than 5 per cent of her climate plan’s projected reductions. The heavy lifting is from her coal-plant phase-out, methane regulations, a pre-existing flex-reg on large industries, and a cap on oil sands emissions. I’ll bet she wishes an economist had told her she didn’t need the tax, and that it does almost nothing anyway.

According to analysis by my research team, Prime Minister Justin Trudeau’s court-challenged carbon tax contributes 15 per cent of his climate plan’s reductions. He can easily replace it by tightening the stringency of his planned clean fuel standard, a flex-reg that applies to the same fuels as the carbon price. I’ll bet he wishes an economist had told him that, as I tried to in an article in Policy Options magazine shortly after his election.

But if carbon pricing is doing little to decarbonize the economy, why does it get all the attention? The reason is obvious to political scientists.

Surveys have long shown that taxes are a toxic issue for some voters. Unless it is an obvious tax cut, any other tax change for societal benefit can easily be framed by opponents as economically harmful. A politician proposing carbon pricing presents an irresistible target, especially if political opponents only need to swing 5 per cent of voters in key suburban ridings for electoral success.

Even if most voters support carbon pricing, this doesn’t matter in our first-past-the-post electoral system. What matters is small success with misinformation campaigns claiming that carbon taxes hurt middle-class suburbanites and rural residents. Some will believe it, and even if government returns carbon-tax revenue as tax cuts or dividend payments, some of these voters will still accept the untruths that carbon pricing is personally punitive.

Thus, a carbon tax puts a bulls-eye on a politician’s back, making it easier for opponents to promise to axe the tax and replace it with ineffective policies they untruthfully claim will cause decarbonization. They might even hint at regulations, without giving a timeline.

In 2008, then-Liberal leader Stéphane Dion asked to meet with me to discuss his plan to campaign on a carbon tax. I told him this was good policy, but bad politics, and that it would cost him the election. He did it anyway. Sure enough, Stephen Harper focused his campaign on “job-killing carbon taxes.” Mr. Harper’s victory ensured a lost decade of faking-it climate policies.

This time last year, I gave talks in France at the invitation of some academics trying to warn President Emmanuel Macron’s advisers that relying on carbon taxes would be a political disaster, stalling rather than advancing decarbonization. Unfortunately, their warning went unheeded, and now the violent gilets jaune protests in Paris have forced Mr. Macron to backpedal on the plan.

As long as we economists tell politicians they must price carbon, instead of admitting that flex-regs and other mechanisms can do it all, humanity will continue to flounder in the face of the decarbonization challenge. Sincere politicians cannot use carbon pricing as their lead policy. Even modest pricing efforts can help elect insincere politicians. But fortunately, we don’t need to price carbon. 

When allocating blame for humanity’s inaction on climate, it’s time for us economists to look in the mirror – instead of convincing our students what great politicians we would have been.

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.


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.