While there are many environmental concerns with the oil sands, the issue of greenhouse gas emissions (GHG) has the most potential to prevent Albertans from realizing the true value of the resource. The term dirty oil has clearly resonated with environmental groups both in the US and in Europe and will continue to be used by those who seek to limit our access to important markets. Our governments, both federal and provincial, seem to think that we face a dichotomy – either we can have an oil sands industry or we can have a globally credible GHG policy. Industry, with a few notable exceptions, has done little to alter this perception. I disagree entirely. I believe that a globally credible GHG policy is the only way to ensure the continued success of the oil sands industry, but I believe that we must build the policy on our own terms, not using reference points which were chosen for the benefit of other regions. An Albertan or Canadian policy, based on 5 modifications of the current Alberta GHG regulations, would send a signal to the rest of the world that Alberta and Canada are prepared to be part of a global effort but that we are not prepared to be taken for a ride.
The David Suzuki Foundation and the Pembina Institute describe the emissions reduction goals put forward by the Canadian government as modest in their Climate Leadership, Economic Prosperity report, and the David Suzuki Foundation has called Alberta’s Climate Change Strategy weak (see p. 18-19). Modeling work done for the report by Mark Jaccard and Associates showed that Canada would need a carbon price of at least $100/ton by 2020 to meet our modest targets. Similar work suggests that meeting Alberta’s weak targets would require measures equivalent to a provincial carbon price of $150/ton by 2020. In contrast, the EU’s carbon targets, which Dr. Suzuki’s autobiography describes as aggressive, are likely to produce carbon prices of less than $40/ton by 2020. If we implemented policies to meet our goals, a refinery in Canada would face a tradeoff between GHG emissions and a $100/ton carbon price while the climate leaders in the EU would demand a payment of less than $40 from the same facility. Nature, Dr. Suzuki tells us, always bats last. Dr. Suzuki should also tell us that nature does not discriminate on the basis of where GHGs come from, but that his standards for measuring effort to reduce GHGs clearly do.
Our goals appear modest when measured in terms of reductions relative to 1990 emissions levels, the favorite standard of the EU and Canadian NGOs. From an environmental perspective, the 1990 standard is the anti-thesis of the polluter pays principle as it capitalizes historic pollution into a valuable emissions right. This measure of effort also skews the playing field in favour of any region which includes post-communist economies which collapsed after 1990, regions with low population growth rates, and/or regions with stagnant economies. The EU is proud to trumpet their goal of a 20% reduction below 1990 levels by 2020, which NGOs compare to Canada’s paltry 3% relative to the same baseline year. Relative to 2005 emissions levels, Canada’s goal is a 17% reduction, while the EU goal amounts to an aggressive 13%. If you account for population growth, our modest goals see a reduction in per-capita emissions of over 30% from 2005 levels while the EU goals seek an aggressive 17% reduction. Canada’s governments have been willing to play the climate change policy game on the edges of the un-level playing field created by the 1990 standard for far too long. We need to change the game or we risk implementing very aggressive climate policies to accomplish what the world sees as modest goals. Our oil sands industry is likely to bear the brunt of the world’s efforts to close this perceived gap in our contribution.
Alberta’s way out of this mess is through carbon pricing, which would clearly benchmark the tradeoffs our firms, including those in the oil sands, are being asked to make against those made by firms in other jurisdictions. I propose that a price on carbon be applied through a fee-bate regime which would benefit top-performing firms at the expense of those who under-perform. Implementing this proposal would require 5 changes to Alberta’s existing Specified Gas Emitters Regulation. The first change would see the government commit to an increasing emissions price over time. I would suggest beginning at $20/ton and increasing at 4.5% per year, reaching $30/ton by 2020, based on the prices predicted to prevail in the EU’s emissions trading system. Second, performance benchmarks should be set at the sector level. For example, the performance benchmark for in situ bitumen production could be set at 20% below the current CO2 emissions average of 0.1t/barrel. Third, the government would require firms whose emissions intensity exceeds the benchmark to pay into a fund, while firms who outperform the benchmark would be able to extract from the fund at the current price per ton of emissions. Any net revenue in the Fund would be allocated to research and development. Firms in Alberta would therefore know with certainty the value of reducing emissions, and that value would apply for any emissions reductions achieved, all the way to zero. Fourth, the government should increase coverage to facilities with greater than 50,000 tons of annual GHG emissions so that 80% of all emissions in the province would be covered by the policy. Finally, the government should commit to adjust the price schedule if the prices faced by Alberta firms are lower than those faced by firms in both the US and the EU.
This policy represents a clear way for Alberta (or Canada) to throw the climate change gauntlet back to the European Union. The EU has positioned itself as a global leader on climate change but has thus far been unwilling to impose significant costs of carbon on its firms. Meanwhile, NGOs use EU targets to demand stronger action here in Alberta and to vilify the oil sands for preventing Canada from doing its fair share. The policy approach proposed above would make clear that we are willing to impose a globally credible carbon price so that firms in Alberta see gains from the elimination of any low-value uses of carbon in our economy and can effectively capitalize on low-carbon innovation. It would also send a strong signal to firms operating in all of our industrial sectors including the oil sands that those firms which generate the highest value per unit of carbon will win, and thus create an energy industry in Alberta which is prepared to withstand the carbon constrained world in which we are likely to find ourselves for the foreseeable future. Most importantly, it would change the tone of the dirty oil debate. The costs of all of this would likely amount to, at most, 50 cents per barrel.
Andrew –
I’ve been following your blog for a few weeks and really enjoying the commentary. Haven’t had much of a reason to comment, because I agree with most of what you say. Here, though, I have a quibble. You imply in this post that the main reason that Canada’s GHG emissions have grown faster since 1990 (which I agree is an arbitrary baseline) than those of European countries is our faster population growth and faster economic growth. Partly, this is right. But another key factor is the fact that the EU countries have reduced GHG intensity much faster than Canada. We can determine the relative significance of these three trends by decomposing emissions growth as follows:
GHG = POP * GDP/POP * GHG/GDP
In Canada, population has grown by about 20% since 1990, similar to Australia and US, but substantially higher than the 5-10% aggregate growth rate in most of the EU countries. As you say, this puts upward pressure on emissions in Canada. Normalizing for population growth makes Canada’s growth in emissions look less severe compared to Europe. The second term – per capita economic growth – is a wash. Canada grew (on a per capita basis) at a similar rate as most EU countries. A bit faster than France, a bit slower than the UK, but similar. The last term, though, is missed from your commentary, and I think it’s important. Canada’s GHG intensity dropped by about 20% since 1990, or roughly 1%/year. This sounds like a lot, but it less than half the 35-50% drop in UK, Germany, Netherlands, Belgium, etc. And the drop in these countries isn’t a one-time blip due to busting coal unions and discovery of gas in the UK, or the reunification of East and West Germany (although there is a noticeable blip in the series around 1990-1992). In contrast, emissions intensity in European countries continues to improve at a faster rate than Canada ever since 1990. I think part of this is due to the “aggressive” policies, urban planning, etc. that David Suzuki loves about Europe. Although there are laudable initiatives like the Specified Gas Emitters Framework in Alberta, I think Canada does continue to lag behind.
Great post as usual, and keep up the good work,
Nic
Hi Nic,
Glad I could goad you into a comment. Thanks for reading and for contributing to the discussion.
Your point is absolutely valid, and while I did intend to highlight some of the reasons why our abatement costs to meet the same relative reduction would be higher, I did omit the valuable but emissions-intensive resources which have driven some of our growth. Canada’s emissions intensity has not decreased at anywhere near the rate of the EU, and only some of the EU’s decline can be attributed to the removal of communist subsidies for energy intensive sectors. The EU is clearly miles ahead in terms of fuel taxes and urban planning, some by accident and some by design. That said, I don’t think there is any question that the BAU emissions levels in Europe would be far closer to their goal of 20% below 1990 than would BAU emissions for Canada to 17% below 2005. I think your work has highlighted this many times over.
I’ll quibble with your choice of the word arbitrary though, for the 1990 standard. I think the choice of 1990 was clearly driven by those who would benefit from that choice. I am actually using a quote from you and your C.D. Howe co-authors in an argument to this effect in my talk on Tuesday night (although I do recognize that your quote was with respect to fed-prov equity discussions in Canada):
“…people tend to intertwine their self-interests with their definitions of equity, (so) it is no surprise that the most vigorous and convinced proponents of each definition of equity are often those who do best under that definition.”
Jotham Peters, Chris Bataille, Nic Rivers, Mark Jaccard in C.D. Howe Commentary #314, November 2010
Not sure if you have seen the paper by Lange et al in the EER in 2010 that tests for the use of equity in the Kyoto bargaining process, but they very clearly show that, “the economic costs implied by the respective equity rules explain their perceived support by the EU, Russia, and the USA,” at the Kyoto table. I think your book with Jeff Simpson and Mark makes some of the same points, no?
I hope that the overall message that I can bring is that Canada’s policies do lag behind, but that this may be exacerbated by the target trap in which they find themselves. We have made some ambitious commitments, both nationally and provincially, and that has not been recognized.
Thanks for reading and for bringing for perspective to the discussion.
Andrew
Andrew,
Great post as always. Is there research to suggest that policies similar to your fee-bate and R&D approach would be as efficient or more efficient than a carbon tax with the revenue reducing other distortionary taxes? Or is this more of a pragmatic policy suggestion since it is based on tweaking the current Alberta framework?
Joel
Thanks Joel. The key distortion in my feebate approach is the implicit output subsidy that comes with an intensity-based system. In this regard, the distortions would be similar to a cap-and-trade system with output-based allocations, assuming similar emissions prices. The most efficient carbon price is almost certainly a pure carbon emissions tax applied on all emissions in the economy, with revenue recycled through reductions in the most distortionary taxes in the economy – the so-called double dividend. I think though, from a practical perspective, the political football of creating and re-distributing a large transfer fund makes policies like that hard to implement. My push is certainly more practical in that it looks for a way to modify the existing policy to get a credible price on every or, to be fair, most tons of carbon emissions to get the incentives aligned for innovation and the elimination of low-value uses of carbon. Best work on output-based allocation distortion is likely Stavins, although Jotham Peters, Nic Rivers and others have done really good work on OBA implications for Canada (see their C.D. Howe piece on redistribution cited in my reply to Nic on this thread).
Andrew
Joel, a shameless plug:
This issue of Canadian Public Policy contains an article called “Intensity-based climate policy in Canada” that addresses the issue that you ask about:
http://economics.ca/cgi/jab?journal=cpp&article=v36n4p0409
Thanks Nic. I’ll give your article a read. I hadn’t looked at the February issue yet. It looks like there is also an article on wind power investment in Ontario. Interesting.
Joel
Thanks Nic. I had missed that paper.
I am surprised that the gap in emissions price is that high (i.e. effectively double) to reach the same goal. I would have thought that going to an intensity-based system would tend to remove mostly abatement options that are high-cost. When you run your numbers for the cap-and-trade policies, you don’t see output reduction as an abatement mechanism being that important, do you? Will have to read more closely and get a sense of the drivers.
I may try to integrate some of your numbers into my talk for tomorrow night.
Cheers,
Andrew
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