Carbon pricing is not a panacea

Pretty well every economist you talk to will agree; if you want to reduce pollution, carbon or otherwise, the most cost-effective way to do so is with a price on the emissions of that which you seek to reduce. They’ll also tell you that, under some basic assumptions, the cost-effectiveness result holds whether you impose that price through a tax or by fixing allowable quantities of emissions, distributing the rights to emit, and making them tradeable – so-called cap-and-trade regimes.  This is taught in most first year economics classes, and you will test it under every conceivable permutation and combination of assumptions if you take an environmental economics class. It truly is economics 101.

Carbon pricing mechanisms generate cost-effective reductions because they make emissions (or emissions reductions) valuable. If you are facing a carbon tax, you can reduce your tax bill by reducing emissions either through changes in actions or changes in technology. The same is true for a cap-and-trade program, although in that case you might be earning revenue from the sale of unused permits or avoiding the need to purchase them.  Regardless, the price on emissions creates a decentralized economic incentive to reduce pollution. We’ve known this since Pigou in 1924 – Pigou suggested that the government could impose “extraordinary restraints – most obviously taxes,” to reduce pollution.

The reason why carbon pricing is not a panacea also goes all the way back to Pigou, if not earlier: stringency matters.  Carbon pricing is cost-effective because it provides people and firms who are affected by the price an incentive to change behaviour or implement new technology if those changes reduce emissions at a cost less than the carbon price.  That’s great, but no one is going to spend $50 to save $25.   In other words, carbon pricing is cost-effective, but not necessarily effective. Effectiveness is a matter of the level of the price and how broadly it’s applied, not the fact that there is one.

If you’re worried about climate change, your first concern should be effective policy (by how much will this reduce emissions?) and not cost-effectiveness (could the same emissions reductions have been generated at lower total cost to society?).  If you believe the International Energy Agency (IEA)’s 2012 World Energy Outlook, to stabilize global GHG concentrations at or about 450ppm, we’re going to need effective policies, and quickly.  By 2035, the IEA models suggest that we’ll need the equivalent of a global carbon price of $120/tonne, along with some complementary regulations. With the exception of implicit prices on carbon on some emissions in Sweden, Japan, and Germany (see yesterday’s OECD report for details), no carbon pricing policy in place today comes close to that type of stringency.  Put another way, despite all the good things about BC’s carbon tax (and it got some laudatory words in the OECD report yesterday), it’s barely stringent enough to fit into the IEA’s 450ppm path and it’s not likely to be stringent enough to see BC’s emissions decrease between now and 2020 (see Table 17).

Your second order concern should likely be political feasibility, and in particular you should ask whether more stringent regulations are more feasible than a stringent price-based policy.  If that’s true, then your regulation will lead to more expensive emissions reductions, but the total benefits to society of a stringent regulation could easily outweigh a weak carbon price.   It’s possible, but by no means guaranteed, that more cost-effective policies will be more politically feasible. If your condition for GHG policy is that you must impose the same price on all sectors of the economy because you want to be cost-effective, that rules out higher prices on some sectors where deep emissions reductions are possible, or lower prices in more politically sensitive areas to ensure you get a policy in place at all. Policies are also most cost-effective when the costs are transparent, but when you see the NRDC campaigning against Keystone XL by telling Americans that their gas prices might go up, you know just how politically palatable a transparent price at the pump will be.  If you want a policy that will actually reduce emissions, it has to be implemented and kept in place by people who face elections every 4 years or less. You might not like it, but that’s a reality.

So, can we all talk a little more about stringency and political feasibility and a little less about prices vs. regulations?


Transparency and Credibility

Tonight, I was a little surprised to read the following tweets from Marc Lee, Senior Economist with the Canadian Centre for Policy Alternatives (CCPA), and Co-Director of the Climate Justice Project:

I’m appalled by your acceptance of Enbridge professorship. You’ve lost credibility.


If I recall correctly you also own Enbridge stock. So a double conflict on interest on energy issues?

As I wrote here, I expect and welcome the conversation with respect to the impact of accepting this position on my objectivity and ability to comment on energy policy without bias related to the professorship. I do, as Mr. Lee noted, also own Enbridge shares – you can see that and all of my other stock holdings here.

I welcome the conversation, but conversations must be a dialogue not a monologue. I had a brief exchange with Mr. Lee following his initial comments, but feel the need to add a little more here. I am pleased that Mr. Lee is one of a few publicly-engaged economists who has provided on online conflict of interest disclosure of his own. However, this disclosure does not extend to his employer, the CCPA.  When asked whether the CCPA published their financial supporters, Mr. Lee replied that the CCPA publishes financials by donor category, but that donors are not individually listed, to respect their privacy.

Mr Lee claims that  I have lost credibility and am biased both because I own stock in Enbridge (which I publicly disclose) and because I receive a salary premium from the University of Alberta which is financed by a donation from Enbridge (also acknowledged publicly). Are we to believe that Mr. Lee’s own organization, which relies on (unpublished) membership and donor financing is not skewed by conflicts of interests? We must take their word for it because they want to respect their donors’ privacy.  My employment contract and the University’s policy for donation acceptance (PDF) clearly protect the academic freedom which underpins my ability to speak on areas of my expertise without fear of reprisal. So far as I can tell, the CCPA publishes no such documents or makes no such guarantees.

Here are my questions to the CCPA:

1) Will you publish your donor list?

2) Will you state that your employees engaging in public commentary, including but not limited to Mr. Lee, are not bound in any way by the wishes of your donors in terms of that public commentary?

3) Will you state that your research agenda is not influenced by the wishes of your major donors or member organizations?

I have published my sources of financing, my faculty agreement clearly protects my academic freedom, and I can say confidently that my Enbridge Professorship does not influence my research agenda.  I hope you can say the same. If not, what should we conclude about your organization’s credibility and objectivity?

I hope either Mr. Lee or a representative from the CCPA will see fit to respond.

Common sense, sample selection, representative samples, and sample sizes

As Statistics Canada continues to roll-out the results from the National Household survey, I seem to become involved in arguments at least once a week as to the importance of sample selection in survey data.  This week, my argument was with IPSOS CEO Darrell Bricker – someone who should know a lot about statistics.  In particular, Mr. Bricker should know that you can’t solve a sample selection problem with an increased sample size, and I actually think he does. I think the issue is that he’s thinking about practical polling issues with respect to sampling, not about statistical issues with respect to selected samples.  Statistics Canada differentiates between sampling error and non-sampling errors, and I think that’s where our key difference lies. Let me see if I can explain this, and hopefully Mr. Bricker will respond and let me know if I am on the right track.

Continue reading “Common sense, sample selection, representative samples, and sample sizes”

The Decline of Canadian (Academic) Economics?

The IRPP released a report today on the decline of economics papers by Canadian academics looking at Canadian issues.  Today’s report, authored by the University of Calgary’s Herb Emery, the University of Manitoba’s Wayne Simpson, and the IRPP’s Stephen Tapp  draws on earlier work  by Simpson and Emery published in the journal Canadian Public Policy.  The gist of the article comes across in the graphic below – academic economists at Canadian universities (note, this is very different from saying Canadian academic economists) examine Canadian issues in a smaller share of their papers today than at any time since the 1960’s, and that share has been declining steadily over time.

Continue reading “The Decline of Canadian (Academic) Economics?”

Crude costs and Energy East

My latest at Macleans digs into TransCanada’s analysis on crude cost savings for eastern refiners from Energy East. Check it out here.

Marginal and average costs, and the price of bike commuting

One of the things which changed during my year in Ottawa is that I became a year-round bike commuter. I’ve decided to try to keep this up in Edmonton, despite some (potentially important) differences in climate and snow clearing between the two cities.


Climate normals, Ottawa MacDonald Cartier International Airport (1981-2010) and Edmonton City Center Airport (1996-2007)

One of the factors in my initial decision to ride to work was savings in terms of the cost of gas and parking, which made up for most of the additional cost equipment required to bike through the winter in just one year. At Environment Canada, the cost of a monthly parking pass was $170, compared to a daily rate of $9. It was easy to figure out that, as long as I could expect to ride to work more than a couple of days per month, I would be ahead on parking costs not to mention fitness. In January, I drove to work 5 times, which was the most all year, so my worst month saw me save $125 on parking, plus the savings in fuel.  So, each morning I had a no-bike tax of $9, but the average cost to me each month was actually negative.

This pricing relationship is very different at U of A as a monthly pass costs only $96, while daily parking is $14. I’ll have to ride to work at least 14 days out of 20 to make it pay to not get a parking pass. However, if I don’t buy the pass, my marginal incentive (my no-bike tax) will go up to $14/d making it much less tempting to drive to work on the really cold days. It’s possible that, in the cold months of the year, I’ll lose money by not buying a parking pass but I’ll bike more if I don’t have one.

I might be out a few dollars, but I’ll be in better shape in the Spring. Sometimes, economists do think about things other than money.

Canada: Petrostate or not?

Andrew Nikiforuk’s piece in the July/August issue of Foreign Policy claims that Canada has become a rogue petrostate. You can read my reply, and Mr. Nikiforuk’s response to it, here.

On my Enbridge Professorship

Update: As of March, 2015, I no longer hold the Enbridge Professorship.

There are 4 major milestones in a professor’s career – you get your first job as Assistant Professor, you get tenure, then (or possibly jointly) get promoted to Associate Professor, and finally to (full) Professor. Outside of that formal structure, there are separate rewards that you might earn – Professorships, Chairs–including those endowed by donors or funded through a government granting agency–fellowships, etc.  This year, I was awarded one of these – the Alberta School of Business Enbridge Professorship in Energy Policy.  I’m grateful for the recognition from the school and grateful for the support of Enbridge, as well as for that of our many other donors.  The University of Alberta’s Donation Acceptance Policy states that, “philanthropic support is an important element in advancing research and education,” and there are many donors who make it possible to do the work we do at the Alberta School of Business. I am aware that many of you will have questions about this professorship and how it influences my work and responsibilities. I hope that this post will answer them.

I am committed to transparency and disclosure with respect to potential conflicts of interest. I have posted my own Conflict of Interest Disclosure on this blog and kept it regularly updated since early 2012.  I began this in response to the American Economics Association’s adoption of new guidelines for economists in terms of conflict of interest management, also in 2012. The link to my conflict of interest disclosure is on every page, at the top of every post. If you want to know anything about me, from who has paid me to speak to who has given me hockey tickets to what stocks I am holding today, you can find out with a click and a scroll. If there’s something you’d like to know that is not there and is germane to my public engagement or research work, let me know and I’ll add it to the list.  This post will have a permanent link from that page as well.

I have structured the remainder of this post as a Q&A.

What is the Enbridge Professorship? The Enbridge Professorship is an award supported by a donation from Enbridge to the Alberta School of Business. The award is given by the Alberta School of Business to a faculty member working in the field of energy policy. The award provides financial resources, which may be used to support research or taken as salary. The total value of the award is less than 10% of my annual salary.  The award does not change my conditions of employment at the university as stipulated by the Faculty Agreement (PDF), nor does it change my rank. I remain an Associate Professor with tenure.

Does this mean that Enbridge is paying part of your salary? Yes and no. The Professorship is an appointment provided by the Alberta School of Business funded through a donation from Enbridge. My salary is paid by the University of Alberta, but I can elect on an annual basis to receive some or all of the Professorship resources as a stipend, which would be funded by the Enbridge donation.  As specified above, the share of my annual earnings which would be funded by the Enbridge Professorship would be a maximum of less than 10%. Based on my elections for this academic year, the share will be less than 5%.

Can the position be revoked at Enbridge’s request? No. The professorship and accompanying resources are provided by the Alberta School of Business, and so such a decision would be at the School’s discretion, not Enbridge’s. The University of Alberta has specific guidelines that detail the relationship between a donor and the university, protecting scholarly freedom and integrity, which you can see here.

Are you required to be supportive of Enbridge projects, actions, statements? No.  The Faculty Agreement is very specific as to the protection of academic freedom. Article 2 of the agreement states that the principles of academic freedom include, “the right to examine, to question, to teach, to learn, to investigate, to speculate, to comment, to criticize without deference to prescribed doctrine.” This is not superseded by the awarding of a sponsored professorship. The University of Alberta’s Donation Acceptance Policy is very clear in this regard, and states that, “the University values and will protect its integrity, autonomy, and academic freedom, and does not accept donations when a condition of such acceptance would compromise these fundamental principles.”

I’ve been supportive of Enbridge positions in some cases in the past, and not so at other times. I expect that will continue. I have received wonderful support in my classes from Enbridge over the years, as well as from many of their competitors and opponents.  I expect that to continue as well.

Does the award specify subjects that you should or should not address in your research? No. The award is not a research grant and so is not tied to a specific project, nor are there expectations in terms of specific research questions to be addressed by the holder of the professorship.  I expect to continue as before – working on what interests me, and trying to publish articles in the top peer-reviewed journals in my field, as well as maintaining this blog and other public platforms. In accordance with the American Economics Association guidelines, I will disclose the general research support provided through the Enbridge Professorship on research papers submitted for publication, and on my conflict of interest disclosure, which is readily available on this blog. The award places no restrictions on research topics or any other academic activity, as explained above.

Do you expect me to believe you aren’t conflicted by this position? No. There is no question that the debate over energy is both very important and often heated in Canada. As a result, in accepting this position, I was and remain well aware that people will assume that I am conflicted by this position and will view my writing and commentary through that lens.  That’s fine – please read and judge for yourselves.

My promise to myself on accepting this position was that if I were to come to feel that my academic freedom had suffered as a result, I’d give up the professorship. Academic freedom is the first substantive clause in the Faculty Agreement for a reason: it’s crucial to have that freedom in order to contribute positively to the public understanding of important issues including energy. I am not prepared to give that up.

Did Enbridge approve this post? No. A copy was provided in advance to the appropriate contact within Enbridge as a courtesy.

I hope that this has addressed any concerns you may have and that you will continue reading my work here and elsewhere.

The National Energy Program – A missed boom for the oil sands?

After my post last night got me reading Budget 1980 and the National Energy Program, I stumbled upon something completely fascinating: the hated National Energy Program proposed an indexed price for synthetic crude from oil sands projects which, had it been followed until today, would have been above the Canadian dollar price of WTI in every year but 1980, 1981, and 2008.

Continue reading “The National Energy Program – A missed boom for the oil sands?”

Reading the National Energy Program

As a non-native-Albertan academic (in particular one from back east), I have learned that there are two golden rules to follow when in Alberta – don’t mention the National Energy Program, and don’t mention the National Energy Program.  This post, and my next one, are going to break both of those rules.

Continue reading “Reading the National Energy Program”