Peter Adamski wrote in to the Edmonton Journal in reply to my op-ed piece this morning, and I thought I would post a quick reply here. Of course, by posting here, I get the advantage of having no word limit, so should Mr Adamski read this, I would welcome a longer post of his critiques.
Mr Adamski says that my plan will resonate no more than the government’s plan because it uses an emissions intensity targets and claims that, “as a way of reducing overall GHG emissions, intensity targets are a sham.” Mr Adamski then suggests that, “if we really want to signal that we’re doing something serious about climate change, then we should abandon intensity targets in favour of actual GHG emission reduction targets.” Respectfully, I think that Mr. Adamski is confounding two concepts: the stringency of the climate policy and the means of application.
Mr. Adamski is absolutely correct to suggest that, in a growing economy, a given percentage reduction in emissions intensity will not result in an equivalent reduction in emissions, but rather in much lower reductions or even net increases in aggregate emissions. This does not, however, imply that emissions intensity targets can not achieve real reductions in emissions if they are set with sufficient stringency. Consider the example of vehicle emissions standards. A law requiring that all vehicles on the road achieve a fuel-efficiency rating of less than 5l/100km would be an effective emissions intensity standard on driving. This would be a very stringent requirement, and would almost certainly reduce emissions from transportation. Importantly, it would not reduce emissions in direct proportion with the overall improvement in the efficiency of the transportation fleet.
Mr Adamski appeals to the absolute cap on GHG emissions, the holy grail of climate policy. Again, there is an implicit commitment to a stringent cap in his statement. I could propose, for Alberta, a hard cap on emissions of 300 Mt/year, never to be exceeded under any conditions. This cap would likely never bind in the province, and would certainly not reduce emissions by any meaningful amount, yet it would be an “actual GHG emissions target,” just not a very stringent one.
Now, Mr. Adamski is correct that my policy proposal is not without flaws, and that one of the key flaws is the implicit output-based allocation of emissions permits. This creates a distortionary effect which effectively subsidizes output and prices emissions-efficiency improvements as opposed to directly pricing emissions reductions. However, what is most important is the trade-off created for firms. In the case of a hard cap policy, the stringency of the overall cap is only felt by individual firms through the price of emissions permits. The price of emissions permits determines the trade-off which the firm makes when deciding to emit GHGs, regardless of their initial allocation. In the case of my policy, the same is true with the caveat of the output distortion. Work by Jaccard and Rivers in the most recent edition of Canadian Public Policy shows that this distortion is important, but not catastrophic. They show that you could meet Canada’s emissions targets through a system of output-based allocations (which would present similar trade-offs for firms as the fee-bate regime I propose), but that the carbon price would be higher than in a pure cap-and-trade or revenue generating carbon tax.
So, in conclusion, I do think the idea of emissions-intensity targets has been mis-used by our government, and that was a key part of the talk I gave last Thursday night. The intention of my policy is not to try to fool anyone by equating emissions intensity reductions with emissions reductions. Rather, the intent of my policy is to ensure that firms operating here and in leading climate change jurisdictions face similar costs and benefits of emissions reductions in their operations. Let’s not confound the means of application of a price on carbon with the stringency of that price though, please.