Are the NDP’s cap-and-trade numbers believable?

Earlier today, I had a quick Twitter exchange with Macleans’ Andrew Coyne (@acoyne) with respect to the NDP revenue projections from their cap-and-trade proposal.  Coyne’s points, with which I don’t entirely disagree, were that the NDP platform costing document contains implausible claims that  a) an auction would yield $3.6 billion revenue in the current (2011/2012) fiscal year, and b) that an auction of 100% of the permits would yield only $7.4-billion in year 4.  I thought I would look at both in a few more than 140 characters.

Getting a cap-and-trade system up and running can be a long, arduous, and documentation-intensive process. In fact, it seems to be one of those “if you can’t do it, write another report,” type of things. If you want a peak into the world of mechanism design, look no further than the Western Climate Initiative Document Library, or at the EU Emissions Trading System website. There is no question that the process can take as long as you give it, but I am not convinced that makes for a better system – it might just give you more time to solve problems that your system doesn’t really have, and in so-doing create more problems that need to be solved with more reports.

What if they just did it? What if the NDP, or whoever forms our next government just said we’re doing this? An industrial cap-and-trade regime that covered all facilities with emissions over 50,000 tons of CO2 equivalent per year, the so-called big polluters, would only have to cover about 450 individual facilities, and fewer corporate entities since many corporations own and/or operate more than one of the listed facilities.  These facilities are already required to report their annual GHG emissions, and you can see how they break down in this report. These 450 sites generate about 250 Mt/yr of GHG, or a little under 30% of Canada’s total. Suddenly the system gets a whole lot smaller when you think about a few hundred players.

If the NDP were to follow a smooth path to their target, they would have to quickly begin restricting the number of permits available.  The fewer permits are made available, and the more limited the means of compliance would be for the firms, the higher would be the price.  The NDP hasn’t given us much to work with in terms of emissions targets, but let’s work backwards from their emissions reductions.  Suppose they keep their commitment to a 100% auction, and they restricted the quantity of emissions permits available to these covered facilities to 240Mt/yr for 2012, a small decrease.   The price, at auction, for these permits would only have to be $15/t (a famous number in Canadian climate lore, I might add) to meet the 2012 revenue target. So, if you assume that you could get an industrial cap-and-trade program up and running by 2012, getting revenue of $3.6 billion from an auction of permits is not an outlandish number.

The next question is whether you could a cap-and-trade system going in that time frame.  Likely the best example here is Alberta and the rush to get the Specified Gas Emitters Regulations in place. Faced with the possibility that the Harper government would enact the Regulatory Framework for Air Emissions after the filing of its Notice of Intent to Regulate GHG emissions in October of 2006, Alberta raced to craft (late 2006 and early 2007), pass (March 2007) and enact (July 2007) its own GHG emissions policy.  It was seen as a matter of constitutional necessity in Alberta to get a system in place first and they certainly did.  So, could a new government sworn-in this May get a cap-and-trade system sufficiently advanced so that an auction could be held before March of 2012? It seems possible, but would be difficult.

The NDP has some elements going for it which Alberta did not have in 2006-2007, in that many jurisdictions have created a lot of paper on these programs, including plenty in Canada.  The Harper government, in its earlier flirtations with a modified cap-and-tax regime under the Regulatory Framework for Air Emissions, created things such as offset guidelines, the reporting framework, etc.  They’d be wise to have some sort of price assurance for the first few years, which luckily has also been done before under what was then called a Technology Fund.

So, with respect to Coyne’s first point, the 3.6 billion (gross of any CIT interaction effects) revenue sometime in 2011-2012 is not unimaginable, but they would be up against a wall and I am not sure it’s a good idea to rush a policy of this magnitude to that degree.

With respect to Coyne’s second point, a $7.4 billion revenue from a full auction of permits in 2014 is harder to reconcile, at least if the NDP is serious about meeting its GHG targets domestically.  Let’s suppose they are very aggressive on the targets, reducing GHG emissions among large emitters to 150Mt/yr by 2014.  If this were the case, any price greater than $50/ton would result in auction revenue greater than $7.4 billion, and a permit market that restrictive would likely generate much higher permit prices.  However, if we supposed that the permit system would allow international offsets, there is a good chance the permit prices could be kept below that $50 per ton figure, even if compliance objectives were kept tight. The only way I can see these numbers making sense is if you have an auction of somewhere in the neighbourhood of 150-180Mt of permits for large emitters currently covered under the reporting requirements, with a market price of $40-50/ton which is kept low by access to offsets.

Here, the net revenue problem would arise again, since firms spending money on offsets would be deducting those expenditures from corporate taxes and if the offsets are international there would be no corresponding tax revenue from the offset seller. Further, if the emissions reductions are taking place abroad, our domestic emissions won’t be decreasing as rapidly in reality as on paper.  That may not be important, since our UN Copenhagen target will be judged net of internationally acceptable offsets.

So, is the NDP out to lunch on their revenue? It’s hard but not impossible to see how their revenue numbers jive with their GHG targets.  It would likely be impossible without both a heroic regulatory effort and significant access to international offsets for our big polluters.

Oh, and not to make their lives difficult, but they would still have to do something with the other 70% of the emissions in the economy…

37 responses to “Are the NDP’s cap-and-trade numbers believable?”

  1. Clare Demerse

    Great post Andrew! I’ve been fielding some of the same questions from journalists (about whether the NDP proposal is realistic), and I had forgotten the precedent of Alberta’s timing.
    Based on recent conversations with NDP staff, though, my understanding is that they don’t actually anticipate getting to 100% auctioning by 2015-16, and they do envision starting with a floor price for the auction of over $40 a tonne. I have the ramp-up of auction floor prices and percentage auctioned at the office, so I’ll post it for you Monday.
    Thanks!
    Clare

  2. Rick Hoff

    Excuse me, Mr. Leach? I have a question?

    Thanks. Has anybody noticed that the worldwide economic recovery is treading on very thin ice, or that our major trading partner to the south is but one small holder of it’s government bonds shouting “Sell!” for a complete rout of the world’s reserve currency to begin? Like, I don’t want to change the subject, but don’t you think we should be praying that a socialist party hoping to fund an insane spending spree under the guise of cap and trade never gets a chance to push us all over the cliff? All we need is for a Jack Layton type in power to set his jaw and I guarantee you we won’t have a problem reducing industrial emissions in Canada.

  3. Chris

    Of course, Albert is not the best point of comparison as their system is an emission intensity based system built around establishing a baseline which becomes the target. The targets are not as tight as a cap and trade system,

    The amount of lobbying, persuasion, policy design and potential compromise around a national cap and trade system requires more resources, effort and commitment and would be fiercer than Alberta had to face in their program. I think a more valid point of comparison would be the WCI timetable and if so, launching a cap and trade program by 2012 becomes much more difficult.

  4. The Missing Issue: Climate Policy Positions in the 2011 Canadian Federal Election | GreenPolicyProf

    [...] generating the revenues required to fund all of these commitments so quickly from an auction were raised by Andrew Leach and reported in the Canadian Press. The platform does not, however, specify how the [...]

  5. Trevor

    These are all interesting discussions, but the question that is never answered is “Will it make a difference?” If you believe (and for full disclosure, I do not) that CO2 is the sole cause of the warming that we have been seeing, then take the following calculations into consideration…

    Let’s assume, for a moment,that the price of CO2 is $50/tonne. Canada emitted, in 2008, 734 million tonnes of CO2 (http://www.ec.gc.ca/indicateurs-indicators/default.asp?lang=en&n=FBF8455E-1). Using the $50/tonne costing, that puts the “price” of our CO2 emissions at $36.7 billion. So, what does that buy us? Well, follow the math here and you will see…

    Worldwide emissions were 46,250. So, Canada’s contribution is 1.587%. Let’s assume, to make the numbers simple, that our emissions continue to increase and on average over the next 100 years, our contribution is 2%. The concentration of the atmosphere of CO2 is currently 391.76ppm (http://co2now.org/). It is increasing at a rate of approximately 2ppm/year. So, assuming that the increase is solely due to anthropogenic causes (this is the central assumption in AGW), then Canada’s contribution to that is 2% of 2ppm/year, or 0.04ppm/year.

    Now, according to the estimates from the IPCC of the climatic “sensitivity”, a doubling of CO2 will result in an increase in a global average temperature increase of 2°C to 4.5°C, with the best estimate being 3°C. For this discussion, let’s use 3°C. So, with the current concentration being 391.76ppm, it would take another 391.76ppm to increase the temperature by 3°C. So, the sensitivity is 7.65775e-3°C/ppm. At Canada’s CO2 concentration increase rate of 0.04ppm/year, and looking at a 100 year horizon, Canada can expect to contribute 4ppm of CO2 concentration over 100 years. Multiple that by the sensitivity, and you get 0.03063°C. IN 100 YEARS!!!

    All of this effort, all of this money, for what: 0.0306°C, in 100 years. Forget how we would accomplish any reductions, our total contribution is 0.0306°C in 100 years. If we completely cut off all CO2 emissions, would anyone notice? NO. If we doubled, would anyone notice? NO.

    Forget all about the taxes, the offsets, cap-n-trade, all of it. Will it make a difference? The answer is a resounding NO. So, why are we bothering to expend any effort? Wouldn’t we be better off discussing real, important issues?

  6. Trevor

    Andrew, you may apply whatever leverage you want, and it still doesn’t change the fundamentals of the equations. $36.7 BILLION dollars per year, which will have an impact of 0.000306°C/year. That values the global temperature at $122.876 TRILLION per degrees Celsius. Keep in mind that the planet has only warmed ~0.7°C from the end of the Little Ice Age. You think that raising $122.876 TRILLION will stop the planet from warming by 1°C?

    All of the talk about emission reductions imply a certain level of price elasticity of demand – as prices go up, consumption goes down. So, what is the price elasticity of demand that is factored into all of these assumptions? Do you have a rational basis for such a number? How did worldwide energy consumption change as the prices changed over the past 30 years? Is there even a direct correlation? So, what is that elasticity number? Is $50/tonne CO2 enough to reduce demand by 80%? How about $100/tonne? At what point does industry and productive people leave to jurisdictions without such a levy, at which point local emissions do plummet because of a significant drop in GDP?

    (All of these discussions are beside the point of whether or not the attribution of CO2 as the sole global thermostat is correct; whether you are a believer in AGW or not.)

  7. Josh

    Hey Andrew, thanks for taking the time to explain a little bit more in detail about how it is supposed to work.

    I believe it can be done if they are able to get enough power or help from other parties to support them doing this.

    The biggest issue is that they are treating this as a revenue source and not an environmental issue. Once the prices go up, it will be more economical for companies to find new technologies to cut back their emissions, and there will be less bidding for the credits. While that will accomplish the goal of making cleaner emissions, which is what the goal should be, the profits promised will start to shrink. Most of the numbers from what I can see are based on the fact that companies will not be able to reduce the emissions on their own, and be forced to buy the credits. Under the pressure of spending hundreds of millions of dollars there will be new ways discovered to be cleaner!

    It is a similar problem many cities are finding with red light cameras. They were always designed for money, but claimed to be put in effect for safety purposes. They made huge money at first, going right with their projections. But then people started to smarten their driving up, and the amount of tickets issued started to decline. While that became a real benefit safety wise, the cities started losing that funding they were counting on and used to. Some have even gone as far to shorten yellow light times and change right hand turn laws to generate more money.

    I foresee this cap and trade system, if implemented going the same route. At first the money pours in and emissions start being cut. But then they start being cut too much without anybody needing to buy credits and then the money is no longer coming in as planned. Then everybody will be up in arms trying to ditch the system, saying its not making money as touted.

    The real thing they should focus on is the environmental benefits, because that is what we should care about, and if we make a few billion in the process of cleaning up the industries, that should be considered bonus.

    1. Trevor

      Josh, or Andrew, perhaps you could enlighten me on exactly what the environmental benefits of such a plan would be. As I showed in my April 26, 2011 at 2:11 pm posting, if one assumes that the IPCC claims of sensitivity are correct, the benefit of eliminating ALL CO2 emissions in Canada would be to stop the global temperature from increasing by 0.000306°C/year.

      What I am asking for is a cost/benefit analysis of the situation.

      Andrew, in your April 26, 2011 at 4:21 pm post, you say that we need to charge a levy on our oil production so that we can sell it into a market that will demand such levies. You seem to say that the risk of not doing so would be catastrophic. Please explain how such a catastrophe would play out for a world-market commodity such as oil? Do you seriously think that the US would/could not accept our oil because we haven’t taxed it “properly”?

  8. Trevor

    Thanks Andrew. My engagement in this issue at the local level (here in Alberta) is just starting, so I appreciate your patience.

    The one area that I think that we can agree on is that we shouldn’t promise to do anything, and then reneg on it.

    So, to summarize what I understand your thoughts to be:
    - global warming is real
    - global warming is solely caused by human emissions of CO2 (which makes it therefore the only “thing” worth dealing with in an economic sense).
    - global warming is a problem
    - the solution to the problem is valued at $122.876 TRILLION per degrees Celsius
    - preventing the problem will cost less than adaptation, and therefore the focus of economic policy should be on prevention
    - taxation of CO2 emissions will reduce emissions, even though demand for fuels whose combustion produces CO2 is relatively price inelastic
    - taxation of CO2 emissions is a better way to generate income for governments than taxing income
    - not taxing CO2 emissions will prevent our access to global markets for our fossil fuel commodities
    - the costs of a taxation would be minimized (not exorbitant) by offsetting income taxes

    Is that correct?

  9. Trevor

    “My interest is much more in Canadian policy and strategy when it comes to climate change, which will have almost no affect on global climate change whatever the true climate sensitivity turns out to be.”

    Fascinating. Your interest is in a topic in which we will do “something” (or _need_ to do “something”), which will have no impact, except for the transfer of wealth out of our jurisdiction.

    Reminds me of the Seinfeld series – a whole show about nothing. Except that emptying my wallet isn’t funny.

  10. klem

    Carbon rpicing and Cap&Tarde is a non-starter. All I know is I have been a Liberal supporter all my life until Stephan Dione moved the party so far left I was suddenly all alone. I now vote for whichever party will NOT introduce a price on carbon or Cap&trade. Simple as that. All parties are promising carbon controls except the Tories, I therefore will vote Tory on Monday. They still might introduce carbon controls but at least thay are not making that promise, I simply cannot vote for carbon conrols. The CPC have my vote until my Liberal party returns to sanity. Cheers.

  11. Russil Wvong

    Andrew, thanks for publishing this blog. I have a question that you might consider for a future post:

    Suppose political feasibility isn’t a concern, only economic efficiency. Is it correct to say that a revenue-neutral, gradually rising, broad-based carbon tax–similar to what BC implemented in 2006 and what the federal Liberals proposed in 2008–would be preferable to cap-and-trade and to command-and-control policies? What would be the economic impact of such a policy, assuming the carbon tax rises high enough to meet Canada’s 2050 goals? (2-3% of GDP? Higher?)

    An obvious objection to such a policy is that it’d be a large transfer from Alberta to the rest of the country. So a better policy would be a carbon tax at the provincial level: for example, Alberta would use its carbon-tax revenues to cut income taxes (or put more money into the Heritage Fund), rather than sending the money to Ottawa. (Alberta already has a limited $15/tonne carbon tax, of course.)

    A second objection is that even if there’s not much impact on the economy as a whole, it’d still have a major impact on Alberta’s oil and gas industry. Are there any studies which attempt to quantify this impact?

  12. On the NDP and budgets

    [...] all assumes they could get a system off the ground in that time, which is unlikely at best. If the system seeks to cover all 320Mt from the industrial sectors, this will take some additional [...]

  13. Russil Wvong

    Thanks, Andrew! For anyone else who’s interested, the link is Taxing Emissions, Not Income: How to Moderate the Regional Impact of Federal Environmental Policy, by Peters, Bataille, Rivers, and Jaccard (November 2010). I think the idea of each province administering its own carbon tax, as you’ve mentioned in a previous post, makes even more sense.

    I found William Nordhaus’s argument about the advantages of a carbon tax over cap-and-trade to be convincing, especially when it comes to international coordination. Saying “all the major industrialized countries need to have a carbon tax of $100/tonne in 2020″ is going to be a lot easier than saying “all the major industrialized countries have to limit their emissions to no more than x GtC, and here’s how they’re going to be initially allocated.” The latter is a recipe for endless wrangling and non-binding limits; the former is basically just a sales tax. It only took BC about six months to set up its carbon tax, once Campbell had made the decision.

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