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.