To whom is Jason Kenney selling a bill of goods on Energy East?

Jason Kenney is, ahem, bending the truth, for someone on Energy East. The questions we should be asking are whether he knows that he is and, if his Energy East fantasies were to come true, to whom would he have been selling a bill of goods.

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Senate Testimony on Bill c-48

Bill C-48, An Act respecting the regulation of vessels that transport crude oil or persistent oil to or from ports or marine installations located along British Columbia’s north coast, has passed third reading in the House of Commons and is now at the Senate committee stage.  I’ve been invited to appear before Senate Committee on Transport and Communications on Tuesday, April 30th.  I’ve slightly adapted my opening statement from an appearance before the House Transport committee last year. My opening statement to the committee is as follows:

Thank you for inviting me to appear today. In my remarks which follow, I will focus on those areas most relevant to my expertise – the impact of the proposed tanker ban on Canada’s ability to realize maximum value for its resources and for products derived from Canadian processing of those resources.

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My thoughts on the UCP Climate Change Plan

Jason Kenney formalized the United Conservative Party’s climate change and energy plans on the weekend. There’s more to Kenney’s platform than the headlines about scrapping the carbon tax – the platform is a systematic walk-back of some of the most important climate change initiatives in Alberta, an effort to perpetuate myths about other initiatives and, I believe, a gift to those opposed to Alberta’s energy sector.

In case you’re not aware, I have a personal tie to many of these policies: in 2015, I chaired Premier Notley’s Climate Leadership Panel that recommended many of them. I’ve also worked on policies federally under Prime Ministers Harper and Trudeau and provincially under Premiers Stelmach, Redford, Hancock, Prentice and Notley. I’ve written on these topics since before Alberta had its first carbon price introduced in 2007. So, if you want to take this as sour grapes about an opposition party proposing to unwind a policy I recommended, go ahead. But, before you do that, I hope you’ll take time to consider the arguments below.

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The price of gas and the taste of crow

Over the past few days, I’ve been involved in a lot of discussion on Twitter and in other fora about the distribution of transportation fuel expenditures across Canadian households.  The purpose of this post is two-fold: first, to eat a little crow for an error of my own, and then to provide some additional data with more explanation and reconciliation.

First, let’s get to the crow eating.  During my discussion with Dan McTeague (@gasbuddydan), I made a significant tabulation mistake.  The conversation related to expenditure on gasoline by Canadian households, and Dan had put forward a figure of 70 litres per week.  I challenged that, since 70 litres per week is well above any number I’ve seen for a Canadian household average, but in doing so I made an error of my own.  I sent a tweet as follows:

The tabulation I ran before sending this tweet was a quick StatsCan pull which turned out to be commodity expense alone, which ignored taxes including federal and provincial fuels taxes and carbon taxes which apply on fuel purchased.  That’s why, as Carnegie Mellon PhD student Arthur Yip pointed out, while Dan’s numbers were high, mine were low.  The Statistics Canada Survey of Household Spending actually puts the total expenditure at an average of $2142 per year for 2017.  We pay a lot in fuel taxes, so my omission was clearly material.  And, just as Dan should have realized that his number was high, I should have realized that my number was too low and gone back to check my data.  I didn’t – and so now I’m going to eat a bit of crow.

Since I’m eating crow, I might as well turn it into a valuable learning experience.  I went back to my SPSD model runs and corrected the error and added a few more details which address some of the questions that have come up in the ensuing conversation.  First, I’ve tabulated provincial fuel and fuel tax expenditure by income deciles (the income deciles are national, not provincial).  As you can see, there’s a consistent pattern across almost all the data, although there are some outliers: higher income households use, on average, more fuel. Note that because I’m using national income deciles, there will be some small-sample issues in some provinces where significantly more or less than 10% of the provincial population will be in certain income brackets.  Importantly, none of the estimates reported below include the new federal carbon charges, since the backstop regulation was not in place by the time this version was completed, and so a full analysis would add that to the values in Saskatchewan, Manitoba, Ontario, and New Brunswick.  This analysis is exactly what was prepared by Finance Canada for this report in the Fall 2018 fiscal update, and hopefully we’ll see that update soon in SPSDM.

The SPSD model national average expenditure predicted for 2019 is $2308, a little higher than the 2017 figures quoted above from the survey data. The highest average fuel expenditure is in Saskatchewan, predicted at more than $500/year above the national average household expenditure level.  The lowest, by far, is in Quebec, with $1924 per household in predicted annual expenses. Note that because Quebec’s cap-and-trade is paid for by distributors, it does not appear directly as a carbon tax in these data. Both Newfoundland and New Brunswick have higher average fuel expenditures than Alberta, owing to higher fuel taxes and commodity costs, although I would have expected the income effect to dominate here and I would have thought Alberta average expenditures on fuel consumption would have been higher.  Again, remember that the backstop provinces of New Brunswick, Ontario, Manitoba and Saskatchewan will have higher expenses once the federal carbon charges are implemented.

A common thread when discussing fuel (or carbon) taxes is the urban/rural split.  I re-ran the data, at the national level, to test how total fuel expenditures change over income levels in communities of different sizes and in rural areas.  On average, rural households do spend a bit more ($2400 per year combined, vs $2308 for all households), but are only slightly behind the medium-sized urban areas.  The small cities and towns have the lowest average expenditure although that is not consistent across all income brackets.

Another issue which has been raised by many is the question of household size. We know that data for the average household isn’t going to be representative for households of different sizes, and so I’ve re-cut the data to look at that facet too.  Here you go:

The intuitive feeling that expenditures scale with both income and household size certainly comes out in the data.  The larger households are those with the highest annual expenses, in particular at higher income brackets.

So, with that, I hope you’ve learned something about how transportation fuel expenses vary across the population. I’ve certainly learned to be more careful with quick data posts to Twitter.

 

 

 

What can we learn from the church carbon tax fiasco?

Yesterday morning, United Conservative Party candidate for Brooks-Medicine Hat and well-known conservative activist Michaela Glasgo tweeted a claim, since debunked, that her church, Hillcrest Evangelical Missionary Church in Medicine Hat, would be facing a $50,000 bill from Alberta’s carbon tax next year.  The claim, and the subsequent challenges to it, were picked up by the Edmonton Journal, the Toronto Star, and other media outlets.  Through the day today, Glasgo first doubled-down on the claim and then, after her church clarified that the true impact of the carbon tax on their annual operating costs was $5400, not $50,000, backed away and recanted.  Glasgo is now being piled-on from anyone and everyone on the left. Rather than pile-on, I think there’s a lesson here that we all should learn.

One of the challenges of carbon pricing has always been that the units are abstract: tonnes of a gas? What?  I’ve had the opportunity to talk to people across Canada about carbon pricing and one thing which is near-constant is that people have little-to-no idea how their own lives translate into tonnes of emissions and then, once a carbon price is applied, how those decisions will translate into an increase in costs.  Without looking at your monthly bill, how many gigajoules of gas does your household consume each month? How many kWh of electricity? What about your employer? Your favorite store? You’d likely be lucky to guess it within an order of magnitude in some cases.  I’ve sat at boardroom tables with executives and directors of large emitters and asked them to tell me the emissions-intensity of their firm’s production.  The ranges in replies I get are often an order of magnitude wide.  You’re not alone.

How many tonnes of emissions does a church emit? It turns out that the answer in Hillcrest’s case seems to be about 180 tonnes per year.  But, was that number obvious to you or was it the size of the $50,000 number that threw you for a loop because it just seemed too high to be plausible?  For me, it was the latter. Once I’d decided that I wanted to know more, I followed the same path that others did: I boiled it down to units of average households. Given Alberta’s $1.517 per GJ carbon tax on natural gas, a $50,000 tax bill would translate to 32,960 GJ/year.  The average Alberta house uses 120 GJ/year so I figured that it was implausible that a church building would have the energy consumption of hundreds of homes.  Others went a bit further – one twitter user worked out that the average single detached home in Alberta uses 0.045GJ per square foot per year which, if you assume comparable heat loads, would imply a church about 1/8 the size of the West Edmonton mall.  Not likely.

I then went in another direction – I used some new Statistics Canada data to look up total religious sector emissions in Alberta.  It turns out that annual emissions from the sector in Alberta is about 160,000 tonnes per year, assuming little has changed since 2016.  I graphed religious sector emissions by province for your enjoyment below.  For Glasgo’s church to have a $50,000 tax bill, her church would have made up about 1% of the total emissions from that sector in Alberta in a year.  Again, that seemed implausible.  But, here’s the thing – the reason her soundbite was challenged, or at least the reason I dug into it was that it conflicted with my priors. It didn’t seem right. It made me wonder how many similar estimates I’d let slide by because they didn’t conflict.

Psychology and, more recently, behavioural economics, has taught us the power of confirmation bias. If you’re a conservative today, you’re ready and willing to believe that all the ills in the world are caused by policies implemented by Justin Trudeau or Rachel Notley. Perhaps you’re even working hard to build on some of those biases in your voters. Sometimes you’re going to get caught up in your own narrative.  When Jason Kenney tweeted, in response to Glasgo’s claim, that, “we hear stories like this all the time, sadly,” he was (perhaps unintentionally) very perceptive. Yes, every day, politicians are likely to hear anecdotes which either misattribute causality or exaggerate impacts.  As we move into campaign mode federally and provincially, candidates and supporters will have a choice whether to amplify these anecdotes. Perhaps Glasgo’s tale will give everyone pause to ask, “does this really make sense, or am I only willing to believe it because it confirms my biases?”  If this causes a moment of pause before amplifying potentially false messages, then we’ll all have benefited from this episode and we’ll have better, more informed debate. Plus, more of you likely know how much energy your house uses.

Of course, maybe the idea that people are, fundamentally, looking for truth rather than partisan advantage is just me trying to confirm my academic biases.

House Standing Committee on Environment

The following is a transcript of my remarks to the House of Commons Standing Committee on Environment and Sustainable Development from Monday, January 28. 2019. Please check against delivery.

Thank you for inviting me to appear before your Standing Committee to make the case in favour of carbon pricing.

I am an Associate Professor at the University of Alberta where I teach and conduct research in our energy and environment programs.  I’ve previously served as Visiting Scholar at Environment Canada from 2012 to 2013, and as Chair of Alberta’s Climate Leadership Panel in 2015. Since 2016, I’ve contributed to some aspects of design and implementation of the federal carbon pricing program we are here to discuss today.

The fact that we find ourselves here today discussing carbon pricing is telling – despite the fact that carbon prices of one sort or another have been implemented in Canada for more than a decade, opposition and misinformation about carbon pricing policies remains rampant.

There is near-unanimity amongst economists that imposing a price on carbon emissions will deliver emissions reductions at the lowest cost to the economy.  Why? Because leveraging the market through carbon pricing allows individuals and firms – those who know best their costs of reducing emissions or the value they derive from emissions – to decide when to emit and pay the carbon price and when to choose other actions.  To derive the maximum benefit from these policies, prices should apply to as broad a set of emissions as is feasible. In what follows, I hope to address a few common questions which come up with respect to carbon pricing.

Why tax consumer emissions at all? We often see Canada’s emissions painted as a large industry issue – we’ve all heard Premier Ford’s calls to penalize polluters not commuters. Here’s the problem: nationally, almost two thirds of emissions come from small emitters: factories, cars, trucks, buildings, not from large, industrial facilities. In some provinces, that share is higher than 90%. Emissions policies which exempt these emissions or address them only partially will make meeting any emissions reduction goals much more expensive and impose punitive costs on a select few industries.Figure 1 Provincial emissions from small (<50kt CO2e/yr) and large(>50kt CO2e/yr) sources

What about impacts on low income Canadians? Or rural residents? On their own, carbon taxes may be is regressive, and we often see concerns that costs imposed on lower-income households or on those in rural regions will be prohibitive.  Assessing distributional impacts is important, but these concerns have been largely offset through the use of carbon tax revenues to provide lump-sum transfers or other fiscal benefits to affected groups where carbon prices have been imposed. But, of course, we must be careful not to claim that these rebates or transfers are sufficient to make everyone better off. They’re not.  Importantly, these solutions also do not compromise the effectiveness of the carbon price.  The price remains on emissions and that’s what will influence behaviour. I can’t help but notice, though, that some of those with concerns about regressive impacts seem to become very concerned with any redistribution of revenues deployed to address those concerns.

Figure 2 Analysis of Alberta Carbon Pricing for 2019. Calculations by Andrew Leach using Statistics Canada SPSDM version 27.0

We also hear concerns about carbon pricing applied to large industries and, in particular, about the competitiveness impacts on trade-exposed sectors.  These concerns are, again, real, and particularly affect our resource-dependent provinces.  Here, economics research provides a clear solution: the allocations of emissions credits on the basis of output along with a carbon price means that the impact of carbon pricing on overall profitability is mitigated, while firms retain the incentive to reduce emissions and to innovate.  Not surprisingly, those with concerns about competitiveness also have concerns with these allocations, which the Leader of the Opposition has frequently characterized as exemptions for industry from the carbon price.  In my own research, I’ve shown that oil sands firms, for example, would capture the same value from an emissions reducing innovation under a carbon tax with or without the allocation of emissions credits, but would not capture that value if emissions were exempt from a carbon price (see below).

Figure 3 Oil sands simulations under different carbon price policies

In the New York Times in December, US Senate Environment Committee Chair argued that, “making energy as clean as we can, as fast as we can, without raising costs to consumers will be accomplished through investment, invention and innovation.” We see similar claims in Canada that rather than pricing carbon, we should rely on innovation to tackle climate change.  This is a false dichotomy.  Economists like David Popp consistently find that price-based policies provide far better incentives for innovation than regulations and without the direct expense required for subsidies.  A carbon price creates a market for low-carbon technologies and rewards those who can reduce emissions in their supply chains without relying on the government to pick specific winners and losers.

Does this mean that carbon pricing is a panacea or that it’s the only option available to us? No.  Regulations, subsidies, and other policies could have the same impacts on emissions but the evidence tells as that, insofar as we rely on those tools, we’ll reduce emissions at greater total costs to the economy. We might also suspect that some of those who are today opposed to carbon pricing might also find reasons to oppose other policies were they to be proposed and implemented.

Thank you for welcoming me here today and I look forward to your questions.

The federal output-based carbon pricing system works because it’s not an exemption

This week, the federal government announced more details of their Output Based Pricing System (OBPS) which targets greenhouse gas emissions from large, industrial facilities. These policies are complex (although perhaps not as complex as their acronyms make them sound) and build on a long line of similar policies proposed and/or implemented in Canada.  In this post, I take you through the history of these policies, discuss which facilities are covered, and explain why the system implemented in Alberta and now being implemented as part of the federal backstop is far better than other systems in preserving competitiveness and providing rewards for innovation.

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The evolution of Alberta gas prices

Today was mostly a course prep day for me and, as part of that, I was updating a graph package for my students.  I decided to pull down some longer history on Alberta natural gas prices and overlay them with settlement prices for futures contracts.  These are US-dollars-denominated contracts but for gas at the Nova Inventory Transfer (NIT, or the hub everyone still calls AECO in Alberta.

The next time someone complains about high gas prices, maybe show them this? How soon we forget the times when natural gas prices were in double-digits and expected to keep going up!

All credible agencies?

My fellow economist Jack Mintz has a piece out this morning in the Financial Post on Alberta Separatism.  By Jack’s standards, this piece leaves a lot to be desired – it makes a claim that an Alberta exit from Canada would be easier (implied) and more beneficial (explicit) to Alberta than Brexit has been for England.  Now, to be fair to Jack, given that we are mere months from an official Brexit and no one seems to have any idea how it’s going to work, it would be hard to come up with a major change in policy which would be less beneficial to the region involved than Brexit is likely to be for Britain, but let’s put that aside.  The piece struck me as being glaring in its many omissions. What of currencies? Trade deals? Border security? International relations? Family connections? Perhaps amid all of these, you’ll think that the omission which struck me the most is relatively minor, but I don’t believe it is.

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My FINA remarks

Good afternoon ladies and gentlemen. It’s a pleasure to speak to you today to express my overall support and to provide context for the Greenhouse Gas Pollution Pricing Act, Section 5 of Bill C-74.  This legislation is the backbone of the federal government’s approach to climate change and will complement the measures already taken by Canada’s provinces. It will also allow provinces without carbon pricing systems to benefit from the federal architecture to impose a carbon price and to receive the revenue collected from it.  This combination – a federal policy with provincial-level flexibility – recognizes the diversity of provincial economies yet still allows for federal leadership on climate change.

The Bill guarantees that carbon prices will apply on nearly all carbon emissions from energy use in Canada – from the cars on the 401 (and yes, the 417) to the largest industrial facilities.

The bill provides for the federal price to be applied in provinces without sufficiently-stringent carbon pricing policy.  Assuming no changes in provincial policies, implementation of this bill would likely exempt the provinces of BC, Alberta, Ontario and Quebec and likely Manitoba. These provinces, home to 90% of Canada’s population and responsible for 83% of Canada’s emissions, would potentially be subject to this legislation were their domestic climate change policies to be significantly weakened.

Why a carbon price? Simply put, a carbon price leverages the power of the market to enable emissions reductions at the lowest possible cost.  It does not rely on governments to determine who should emit how much or what their technology decisions should be – it relies on individuals to make decisions. The carbon pricing plan proposed in this Bill, like current policies in BC, Alberta, Ontario and Quebec, puts a price on carbon emissions from most sources, not just large, industrial facilities. The broader the of carbon pricing, the lower will the price have to be to meet a given target or the greater will be the emissions reductions at any given price. As you can see from the graphic below, emissions in Canada are not just a big industry issue.

Do carbon prices work? Absolutely.  We have plenty of evidence from BC’s carbon tax, which has been in place since 2008, to say that carbon prices reduce emissions below where they would otherwise be.  Work by Nic Rivers at the University of Ottawa among many others has shown this conclusively. This doesn’t mean they are magic – they will not always lead emissions to be lower than historic levels, especially when macroeconomic growth is rapid or technological change is slow, but I can assure you that demand curves slope downward, despite frequent claims to the contrary. When emissions have a price, we will use fewer of them.

If you think innovation and technological change are the answers to climate change, a carbon price is the best policy choice.  When asked how governments could spur innovation in green tech, University of Syracuse Professor David Popp provided five rules for governments. The first of these was: Carbon price, carbon price, carbon price. Why?  In Popp’s words, “supporting technology development means not only investing in new technologies but also creating demand for clean technologies throughout the economy,” which happens organically with a carbon price. A carbon price is also a useful alternative to governments picking winners with regulation and subsidies.

Why not have a one-size-fits-all federal policy? Our provincial economies have very different emissions profiles and means to reduce emissions. In some provinces, electricity is already carbon-free while, in others, long-lived, fossil-fueled assets provide electricity.  In provinces such as my home province of Alberta, about 1/4 of our GDP comes from what are known as emissions-intensive and trade-exposed sectors.  The national average is less than 4% and some provinces have half of that still.  A measure which is a good fit for Ontario and Quebec might cause chaos in Alberta and Saskatchewan, while an approach such as that previously implemented in Alberta would fail to cover almost all of the emissions in many provinces in the country.

The federal government has chosen wisely here, not only providing the provinces with the means to both select their own policies but also to determine the uses of the revenue from federally-imposed carbon prices. Here, provinces will certainly have different priorities. Some examples: University of Calgary’s Trevor Tombe showed that Ontario could implement a carbon tax and, without changing the distribution of income, boost its sales tax credit by 80% and eliminate health care premiums. Alberta and BC have chosen policies with progressive outcomes – in both provinces, the bottom 40-50% of income-earners were better off with the carbon tax than without. These choices are far-better made provincially than federally.

I do have some concerns with this legislation. I am concerned with the discretion provided to the Governor in Council to apply these measures to provinces. Section 189 (1) holds that (Cabinet) may, “take into account any factor (it) considers appropriate, including the stringency of provincial pricing mechanisms,” to determine whether a province should be covered by the federal price. Here, I’d like to see a clearer definition of stringency. Conveniently, the price on carbon allows just such a test and judging by this standard would prevent an outcome where Cabinet applies to one province a price on carbon far higher than that which it might allow to apply in others. I am also concerned that Section 188 does not stipulate that, in the event that a carbon tax is collected from a province, that total federal transfers to that province will increase…only that an amount equal to the carbon tax revenues will be spent in that province. While the government intends to address these issues through regulation, these clauses may leave an undue breadth of federal government power.

Thank you for your time and attention and I look forward to your questions.