The Tories bring their free market approach to climate policy

Canada’s Environment Minister Peter Kent announced today that the Federal Government will continue to pursue a sector-by-sector, regulatory approach to meeting it’s climate change goals. This is baffling. I thought that conservatives (and even Conservatives) were supposed to believe in smaller government and the power of the market to drive innovation. If the Liberals were proposing such an approach, the Conservative economic brain-trust would be screaming that there was no need for the government to be getting involved in decisions about which type of insulation should be installed in a new gas processing facility in Peace River.

So, what are the Conservatives proposing?  It sounds like they are proposing a system similar to the EPA’s New Source Performance Standards and parallel existing source standards (Section 111 of the Clean Air Act for the wonks out there) which are being deployed in the US.  We saw a hint of this with the announcement of the regulations for coal-fired power. This is big government by design.  It’s hard to give a quick overview of how the US system works, but here’s a shot. For each source category (think power plants or refineries) or sub-category (think boilers, cokers, etc.), the EPA defines a performance standard (emissions intensity target, if you like) much like a minimum fuel economy standard for new cars.  This standard applies to all new facilities, and to facilities which undergo significant modifications.  If you want to get a flavor of what this looks like, look here for the EPA’s White Paper on Refinery Technology.  The EPA will then decide, on a facility-by-facility basis, what performance standard makes sense for a new refinery or power plant, and that performance metric will become a condition of their approval to build the plant. No offsets, no trading, no (or few) questions asked.  You don’t have to build it using any particular technology, but your permit to operate is conditional on your emissions intensity.

So, can’t we just do the same thing in Canada? Well, yes and no and, more importantly, I hope not.  First, we do not have a similar body to the EPA in Canada.  The EPA is much closer in structure to a utility tribunal (National Energy Board) than to Environment Canada.  As such, when the EPA makes decisions, they are process- and precedent-based.  In the case of GHG’s, the process forces them to determine the best available technology which is technically and economically achievable. Environment Canada, as Minister Kent has clearly shown to date, has a much more political role.  As such, the first question I would ask is how these performance standards would be determined and how much room there will be for political influence.  Second, I would want to know if there was a carbon price basis in the system. If the performance standards are all based on emissions reductions achievable at or below an average cost of $X/ton, then this system might not be so bad.  If, as with the US, the decision is based on what modifications are possible while not infringing on your ability to do business, then we are likely to have significant issues.

Economists tend to dislike command-and-control approaches because they lead to more expensive emissions reductions (as they violate the equi-marginal principle).  Carbon capture and storage provides a nice example of this.  Suppose that the government decided to impose a CCS-based performance standard “where economically and technically feasible”.  The first thing they would do is look at how much it would cost to capture and store carbon from a particular industrial facility – I would look to ICO2N for the data– and they would find that the costs ranges from $70 ish/ton up to $250+ dollars per ton.  The next step would be to ask whether or not it is economically feasible for each type of facility to install this type of control.  Here’s the kicker…the facilities which generate the most value per ton of carbon emissions, those which we should seek to reward, are those which get hit with the tighter performance standard.  Conversely, the regulation would likely not apply to those where either it is a poor technical fit (oil sands mining) or where it is simply too expensive given the low value generation in the industry.  You could easily have one facility (say an upgrader) capturing and storing carbon at a cost of $150+/ton while another facility down the road is forced to adopt only energy efficiency improvements which save them money.

All hope is not lost though, as there is still time for Minister Kent to steer the ship back to the economic right and to combine performance benchmarks with an emissions pricing regime.  This type of program has worked very well in Sweden for NOx emissions, and would not be a significant departure from what this government originally proposed in its Turning the Corner plan (today really is a policy flashback!).  Of course, you would need a much stronger price signal to meet our 2020 targets, but at least the small-c economic brain-trust could rest easy knowing the free market was hard at work trying to find cheaper ways to reduce emissions, and there were fewer bureaucrats in Ottawa shopping for insulation.