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.
Professor Leach, you claim that emissions intensity targets can achieve real reductions in emissions if they are set at a sufficient stringency. I don’t doubt that. I’m sure that’s possible in some sectors of the economy. I just don’t see how it’s possible with the oilsands, taking into account how much they are expected to grow and how much we should be reducing their emissions.
Let me explain, using the in-situ production example you used in your Journal op-ed.
Let’s say current in-situ production stands at 134,000 barrels per day (bbl/day). This amount, using the current CO2 emissions average of .1 ton per barrel, would generate 13,400 tons of CO2 per day. Your proposed 20 percent benchmark, if it were reached in the following year, would reduce this to 10,720 tons of carbon per day. However, if the “energy-superpower” dream captivates our province and in-situ production is allowed to increase 400 percent by 2020 to 536,000 bbl/per day, your performance benchmark would have to increase to 80 percent just to maintain the 2011 emissions levels.
But that’s not the worst of it.
The G8 countries have already agreed, albeit aspirationally, that they should collectively cut emissions 80 percent by 2050. (For this exercise, let’s assume 80 percent of 2010 levels.) So if, as an “energy superpower” we’re producing 536,000 bbl/day, to reach this target, Alberta would require a CO2 emission average of .005 ton/barrel by 2050.
Is this possible? Not if we quadruple our production. Not if we’re still fixed on fossil fuel consumption.
Eighty percent by 2050 and its companion 50 percent by 2020 are often cited as the targets the world needs to achieve if it’s to have any chance at holding global warming to a 2C temperature rise. And from what I’ve read I tend to agree. If in your estimation that makes me appear as a knight of yore chasing down some holy grail, then so be it. I’m in good company.
To achieve these targets, I favour a carbon tax, and the best one I’ve seen thus far is the one Dr. James Hansen proposes: applied at the source, significant from the start (equivalent to about a dollar per gallon) and increasing sharply by however much is required to reach the targets, with the revenue distributed back to taxpayers on a per-capita basis, so that those that use less energy make money and those that use more energy lose money.
In short, a carbon tax, if it’s tough enough and applied far and wide, would encourage us to make the kinds of decisions that reduce our fossil fuel consumption. A carbon tax can’t do it alone. Other measures will be required. But I can’t imagine an effective GHG reduction plan without a carbon tax.
Of course, the population at large would balk at such a tax—they already have—but if the severity of the problem were made clear to them, we might be able to muster the political will to implement such a tax.
Best regards,
Peter Adamski
Hi Peter, thanks for taking the time to expand on your arguments. I don’t disagree with some of your points, but do have issues with others.
My intent was not to suggest that emissions intensity targets would necessarily lead to emissions reductions in every sector – it was to suggest that an emissions-intensity-based system could lead to overall emissions reductions in the economy, as Rivers and Jaccard have shown. I have consistently argued on this blog and in other forums that the evidence stacks up that no matter what policy tool you use, oil sands tend to grow quickly, with the obvious exception of a sector-specific cap. This is not exclusive to me. In the Pembina-David Suzuki report, with a significant price on carbon and a CCS requirement on new upgraders, oil sands production still increases significantly relative to levels today simply because there is sufficient value in the resource to justify paying the carbon price and installing the CCS technology, at least in the medium term. I think we often confound economy-wide targets with sector level decreases.
I find Hansen interesting, because while advocating for a carbon tax, he is quick to propose complementary policies like “leaving the oil sands in the ground”. If you want to stop oil sands production, given today’s oil prices, you would likely need a carbon tax in the ballpark of $4-500/ton. Perhaps this is feasible, but I would argue that leaving the coal in the ground, along with a lot of other changes would be driven by the carbon tax long before we get to a level high enough that you would see a significant decrease in oil sands production. Among carbon emissions, liquid transportation fuels are still by far the highest value per ton of carbon emissions and those for which we have the least viable substitutes. Look at any of the work by the NRTEE, the Suzuki Foundation and others.
In principle, I don’t disagree with a revenue-generating carbon tax. Yes, we had one proposed by Dion, but it would have gotten us nowhere near the targets you discuss. As with emissions-intensity targets, the key question is the stringency of the carbon tax. The Pembina-Suzuki piece tells us that a carbon tax would have to be about $100/ton by 2020 to meet the near term gov’t of Canada target, and $200/ton by 2020 to reach something closer to the proportional reduction in the G8 target. Those are big numbers. As I see it, you then have three key battles to fight…first, industry is angry because you have effectively nationalized the right to emit which has been previously granted for free to them; second, while your preference for redistribution makes sense in terms of economic theory, it is not going to make everyone better off; finally, as we saw with Dion, these policies can exacerbate regional differences and raise constitutional issues. So, you have an industry vs. government fight, a constitutional fight about resource rights, and a fight about how to spend a new $80 billion per year pot of money. That’s a challenge that even someone much more skilled than Mr. Dion would have trouble with (and I was a Dion supporter on his plan despite being an Albertan). The point of my policy is to get at exactly the type of decisions you discuss, putting a price on emissions, while perhaps giving away a little bit of efficiency through the output distortion, and avoiding the constitutional and nationalization of emissions rights fights. It’s a compromise position, not one that I would advocate for as being perfect or ideal.
Thanks again for reading.
Andrew
Professor Leach,
I’m familiar with Jaccard and Rivers, but only through their work with Jeffrey Simpson on Hot Air: Meeting Canada’s Climate Change Challenge. I stand to be corrected, but I don’t recall them speaking so fondly about intensity targets in their book. Here’s some of what they had to say about intensity targets:
“[Large Final Emitters] never publicize the fact that if intensity falls more slowly than output rises, emissions would keep rising.”
“[Intensity targets] would be a good start if the intensity reductions exceeded the growth of the output . . . because then the plan would indeed lower absolute GHG emissions. “
“We know that extracting oil from the sands produces at least twice the GHG emissions per unit of energy as does the extraction of conventional oil. At that rate of expansion, any improvements in intensity will be overwhelmed by the sheer additional volume of emissions.”
“[Our simulations] show that energy efficiency, the Holy Grail of so many environmentalists, would not play the dominant role in GHG reduction that so many of them believe it will and must.”
As far as Simpson, Jaccard and Rivers are concerned, there are only five policy options available, but they dismiss two of them leaving only three: command and control, market oriented regulations (cap and trade, vehicle emission standards, etc.) and emission taxes, i.e., a carbon tax.
I don’t get the impression, certainly not from reading Hot Air, that they are in favour of an intensity-based system unless of course it meets the criteria noted above.
Regards,
Peter Adamski
Hi Peter,
Thanks for commenting again…I really do enjoy having people challenge my ideas as they will only improve with discussion. To clarify, I am not suggesting an emissions-intensity-based approach because I feel that it is superior to a cap-and-trade or to a pure carbon tax. Further, I am suggesting a price benchmark, not an emissions-intensity target, although I do use a performance-based threshold for the carbon price.
What I am suggesting, from an economic point of view, is roughly equivalent to a cap-and-trade program with so-called output-based allocations. The Jaccard and Rivers piece I mentioned shows that such an approach could be used to meet Canada’s targets, but certainly makes the point that it is not the most cost-effective means to get there. I agree, but I also don’t see either a hard cap, with or without trading, or a pure carbon tax as being politically feasible in the near term in Canada. The options seem to be regulation, in which firms are held to performance (i.e. intensity) standards or nothing. My approach, I hope, offers a way to improve on the pure regulatory approach by pushing it toward a unified price on emissions. As you correctly point out, the price on emissions would apply to all emissions except those initially associated with increases in output and/or new facilities. This would mean that, to reach the same emissions reduction target, you would need a higher price on carbon within the feebate regime.
Simpson, Jaccard, and Rivers are not fond of intensity targets because of how they have been used to obfuscate the issue by confounding reductions in emissions intensity with reductions in emissions (hence your first quote), which is not what I am doing or at least not what I am trying to do. I am trying to set a system by which the decisions of firms in our economy are affected by a price on carbon. Let me try to give you an example. Suppose you have an existing oil sands plant, with an emissions intensity of 0.1t/bbl producing 50,000bpd. That facility would produce 1.825Mt of emissions per year, assuming it operated at nameplate capacity. Under a carbon tax of $10/ton the tax bill would be $18 million/year. Of course, what we really want to do is drive emissions reductions in these facilities (the intensive margin), and each ton that facility reduces would be worth $10 of additional profit assuming that continue producing at nameplate capacity. Under my regime, the key difference would be in the average annual cost which, assuming a performance benchmark of .08t/bbl, would be $3.65 million/year. However, the gains to any emissions reductions, again assuming the facility keeps producing at nameplate capacity, would still be $10/ton reduced.
No question that the difference lies on the extensive margin of new sources and within the output decision of firms. For a new firm starting up, the average cost will matter, and so certain new projects may not be bankable under a tax on every ton as compared to under my system, and so in those cases, the tax would be more effective, no question. There is also a difference for some projects for which output reduction constitutes a low-cost means of emissions abatement. Since my policy takes both of those abatement decisions off the table, the price has to be higher on the remaining tons to get the same reductions.
The effect on decisions is actually quite similar to a cap-and-trade system with allocations as is used in the EU, since new and existing facilities currently receive some permits for free, thereby facing a lower average cost of the policy while still feeling the marginal price signal.
Andrew
PS As an aside, the vehicle emissions standards are very close to an emissions intensity measure (they are a fuel-intensity standard, and will be equivalent to an emissions-intensity approach if the emissions per unit of fuel burned are equivalent).