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.

European fuel regulations and Canadian hypocrisy: My trip to Europe with Jim Hansen

Prime Minister Harper promised in 2006 to reduce Canadian emissions 20% by 2020 (in 2009 he changed it slightly to 17%). Only two policy approaches can achieve this: emissions pricing or regulations (or a combination). But he rejected emissions pricing, whether carbon tax or cap-and-trade. So this leaves regulations on technologies and fuels, which he promised. However, he has not implemented regulations to achieve his 2020 target, and, according to Canada’s Auditor General, even an immediate aggressive effort is unlikely to succeed – he only has 7 years left after doing virtually nothing since making the promise 7 years ago. In any case, he is instead promoting rapid expansion of the Alberta oil sands, which, according to Environment Canada, will leave Canadian emissions in 2020 at least 7% above rather than 17% below their 2006 level.

Alberta’s (Non)-Carbon Tax and Our Threatened Climate

Why is Alberta’s policy a regulation and not a tax?

Alberta’s government officially says it doesn’t have a carbon tax, and I agree. But if I had a dollar for every time I’ve heard someone claim it does, I could buy a lot of anti-oil sands ads, and maybe a politician along the way.

I hear about Alberta’s so-called carbon tax from business people, politicians, journalists, environmentalists, sometimes even economists (who should know better). But the policy in question is, in fact, a “performance regulation,” that sets a maximum “emissions-intensity” for industries, and fines them $15 for each tonne of CO₂ emissions in excess of that maximum.

Minimizing the inevitable rate hike: What is best for BC Hydro - to be run by its review panel or independent regulation of the past three decades?

By Mark Jaccard
Originally published in the Vancouver Sun August 23, 2011

The recent report by the panel reviewing BC Hydro's electricity rates triggered a predictable flurry of conflicting comments from entrenched ideologues. One side blamed private power producers for rising rates while the other blamed the utility's mismanagement and government environmental policy. With the rampant distortions, it gets confusing. Here are a few things to keep in mind.

First, throughout the world, new supplies of electricity cost more. In British Columbia, some increase in electricity rates is inevitable as we blend new higher-cost supplies with the low-cost power from our hydropower legacy. This is true whether that new supply is provided by private companies or a Crown corporation like BC Hydro.

Second, evidence from around the world shows that for small projects private power tends to be cheaper than public power, but for large projects there is little difference. With small projects, there are substantial costs associated with preliminary assessments of potential sites and, since only a tiny fraction of these are finally developed, many private investors incur losses.

If only BC Hydro was allowed to develop small projects in B.C., ratepayers would pay for these losses, just as ratepayers paid for BC Hydro's write-offs of more than $100 million on Site C two decades ago and over $100 million on a failed Vancouver Island natural gas plant a decade ago. In spite of these past costly mistakes by Hydro, the global evidence generally indicates that well-managed crown corporations can develop large projects just as cost-effectively as private companies.

Third, environmental policy is a factor in rising electricity rates everywhere. B.C.'s zero-emission electricity policy reflects our willingness to join many jurisdictions around the world (the US, Europe, China) in incurring higher electricity rates to reduce greenhouse gas emissions. If we cared only about having more money in our pockets today, and not for the future of the planet, we should build nothing but coal and natural gas plants. Only a few extremists, who arrogantly deny what scientists are frantically saying, still make this argument.

Fourth, electricity self-sufficiency also increases rates in the shortrun, but this extra cost may be justified as an insurance premium to reduce the risk of higher prices during regional shortages in future, and also the amount of power B.C. must purchase from polluting coal plants in Alberta. To ensure self-sufficiency when our hydropower production is low (because of low water flows), Hydro can build extra capacity or sign additional long-term contracts with independent producers. In both cases, Hydro
will have to sell surplus power at (usually) lower spot prices in years of medium and high water flow. We can have lower rates for awhile by not being self-sufficient. But like any decision not to insure, it may backfire and result in much higher rates and more pollution if we guess wrong. People who pretend away this trade-off are being disingenuous.

Fifth, regulated monopolies manage their costs better than unregulated monopolies. BC Hydro has long been regulated by the BC Utilities Commission, but the Clean Energy Act last year removed much of its expenditures from that independent control. As I argued on these pages at the time, this alone can increase upward pressure on rates. (When I chaired the commission in the '90s, our executive director, Bill Grant, liked to say: "The only thing better in life than being a regulated monopoly, is being an unregulated monopoly.")

The BC Hydro review panel has essentially taken over the commission's function. But one has to ask why this ad hoc, politically driven oversight is preferable to the systematic, independent regulation of Hydro of the past three decades. The review panel's suggestion that Hydro's rate application be cut in half - from annual increases of 10 per cent down to five per cent - is probably what the commission would have ordered anyway. It reminds me of the mid-'90s, when the panel I chaired rejected a Hydro rate application, even though Hydro's witnesses testified the increase was crucial for sustaining reliable service. A few years later, Hydro's CEO testified that our disciplining of the company had been the correct decision, forcing it to find efficiencies without compromising reliability.

What conclusions do I draw? The public versus private power debate is mostly a red herring. Acquiring new power, protecting the environment, and energy self-reliance all increase rates. But these rate increases can be minimized if we re-establish independent regulation of BC Hydro by the commission. 

Finally, above all, ignore the ideologues.