Earlier today, I had a quick Twitter exchange with Macleans’ Andrew Coyne (@acoyne) with respect to the NDP revenue projections from their cap-and-trade proposal. Coyne’s points, with which I don’t entirely disagree, were that the NDP platform costing document contains implausible claims that a) an auction would yield $3.6 billion revenue in the current (2011/2012) fiscal year, and b) that an auction of 100% of the permits would yield only $7.4-billion in year 4. I thought I would look at both in a few more than 140 characters.
Getting a cap-and-trade system up and running can be a long, arduous, and documentation-intensive process. In fact, it seems to be one of those “if you can’t do it, write another report,” type of things. If you want a peak into the world of mechanism design, look no further than the Western Climate Initiative Document Library, or at the EU Emissions Trading System website. There is no question that the process can take as long as you give it, but I am not convinced that makes for a better system – it might just give you more time to solve problems that your system doesn’t really have, and in so-doing create more problems that need to be solved with more reports.
What if they just did it? What if the NDP, or whoever forms our next government just said we’re doing this? An industrial cap-and-trade regime that covered all facilities with emissions over 50,000 tons of CO2 equivalent per year, the so-called big polluters, would only have to cover about 450 individual facilities, and fewer corporate entities since many corporations own and/or operate more than one of the listed facilities. These facilities are already required to report their annual GHG emissions, and you can see how they break down in this report. These 450 sites generate about 250 Mt/yr of GHG, or a little under 30% of Canada’s total. Suddenly the system gets a whole lot smaller when you think about a few hundred players.
If the NDP were to follow a smooth path to their target, they would have to quickly begin restricting the number of permits available. The fewer permits are made available, and the more limited the means of compliance would be for the firms, the higher would be the price. The NDP hasn’t given us much to work with in terms of emissions targets, but let’s work backwards from their emissions reductions. Suppose they keep their commitment to a 100% auction, and they restricted the quantity of emissions permits available to these covered facilities to 240Mt/yr for 2012, a small decrease. The price, at auction, for these permits would only have to be $15/t (a famous number in Canadian climate lore, I might add) to meet the 2012 revenue target. So, if you assume that you could get an industrial cap-and-trade program up and running by 2012, getting revenue of $3.6 billion from an auction of permits is not an outlandish number.
The next question is whether you could a cap-and-trade system going in that time frame. Likely the best example here is Alberta and the rush to get the Specified Gas Emitters Regulations in place. Faced with the possibility that the Harper government would enact the Regulatory Framework for Air Emissions after the filing of its Notice of Intent to Regulate GHG emissions in October of 2006, Alberta raced to craft (late 2006 and early 2007), pass (March 2007) and enact (July 2007) its own GHG emissions policy. It was seen as a matter of constitutional necessity in Alberta to get a system in place first and they certainly did. So, could a new government sworn-in this May get a cap-and-trade system sufficiently advanced so that an auction could be held before March of 2012? It seems possible, but would be difficult.
The NDP has some elements going for it which Alberta did not have in 2006-2007, in that many jurisdictions have created a lot of paper on these programs, including plenty in Canada. The Harper government, in its earlier flirtations with a modified cap-and-tax regime under the Regulatory Framework for Air Emissions, created things such as offset guidelines, the reporting framework, etc. They’d be wise to have some sort of price assurance for the first few years, which luckily has also been done before under what was then called a Technology Fund.
So, with respect to Coyne’s first point, the 3.6 billion (gross of any CIT interaction effects) revenue sometime in 2011-2012 is not unimaginable, but they would be up against a wall and I am not sure it’s a good idea to rush a policy of this magnitude to that degree.
With respect to Coyne’s second point, a $7.4 billion revenue from a full auction of permits in 2014 is harder to reconcile, at least if the NDP is serious about meeting its GHG targets domestically. Let’s suppose they are very aggressive on the targets, reducing GHG emissions among large emitters to 150Mt/yr by 2014. If this were the case, any price greater than $50/ton would result in auction revenue greater than $7.4 billion, and a permit market that restrictive would likely generate much higher permit prices. However, if we supposed that the permit system would allow international offsets, there is a good chance the permit prices could be kept below that $50 per ton figure, even if compliance objectives were kept tight. The only way I can see these numbers making sense is if you have an auction of somewhere in the neighbourhood of 150-180Mt of permits for large emitters currently covered under the reporting requirements, with a market price of $40-50/ton which is kept low by access to offsets.
Here, the net revenue problem would arise again, since firms spending money on offsets would be deducting those expenditures from corporate taxes and if the offsets are international there would be no corresponding tax revenue from the offset seller. Further, if the emissions reductions are taking place abroad, our domestic emissions won’t be decreasing as rapidly in reality as on paper. That may not be important, since our UN Copenhagen target will be judged net of internationally acceptable offsets.
So, is the NDP out to lunch on their revenue? It’s hard but not impossible to see how their revenue numbers jive with their GHG targets. It would likely be impossible without both a heroic regulatory effort and significant access to international offsets for our big polluters.
Oh, and not to make their lives difficult, but they would still have to do something with the other 70% of the emissions in the economy…
Great post Andrew! I’ve been fielding some of the same questions from journalists (about whether the NDP proposal is realistic), and I had forgotten the precedent of Alberta’s timing.
Based on recent conversations with NDP staff, though, my understanding is that they don’t actually anticipate getting to 100% auctioning by 2015-16, and they do envision starting with a floor price for the auction of over $40 a tonne. I have the ramp-up of auction floor prices and percentage auctioned at the office, so I’ll post it for you Monday.
Thanks!
Clare
Thanks Clare. Will look forward to seeing those figures. Have they given you details on coverage? I assume from their discourse on “big polluters” that it’s somewhere in the 50k-100k tons/year range. 100kt/yr means you are only covering about 60 facilities across the country, and a smaller group of firms. Not sure you will have efficient trading, but it certainly makes an auction manageable.
Andrew
Excuse me, Mr. Leach? I have a question?
Thanks. Has anybody noticed that the worldwide economic recovery is treading on very thin ice, or that our major trading partner to the south is but one small holder of it’s government bonds shouting “Sell!” for a complete rout of the world’s reserve currency to begin? Like, I don’t want to change the subject, but don’t you think we should be praying that a socialist party hoping to fund an insane spending spree under the guise of cap and trade never gets a chance to push us all over the cliff? All we need is for a Jack Layton type in power to set his jaw and I guarantee you we won’t have a problem reducing industrial emissions in Canada.
Hi Rick. I think both the US and Canada found out over the last couple of years that economic recession is a really uncomfortable way to reduce GHGs. Anyway, to be clear I am not advocating for their platform, although I do think we risk a big cost of we don’t do something on GHGs and wait for someone else to do it for us. I am pretty well on-side with the Globe’s Editorial board on the notion that increasing taxes and fees on corporations by over $6 billion in a year with changes in corporate taxes and cap-and-trade auctions would have a profound impact. I think, unlike Ontario in the 90’s, the NDP surge happened early enough this time around for people to think about some of the proposals on the table. That said, I would also be a little careful about CPC promises, at least as they relate to the environment….see an old post here.
Thanks for reading and commenting!
andrew
Of course, Albert is not the best point of comparison as their system is an emission intensity based system built around establishing a baseline which becomes the target. The targets are not as tight as a cap and trade system,
The amount of lobbying, persuasion, policy design and potential compromise around a national cap and trade system requires more resources, effort and commitment and would be fiercer than Alberta had to face in their program. I think a more valid point of comparison would be the WCI timetable and if so, launching a cap and trade program by 2012 becomes much more difficult.
Chris, thanks for reading and commenting. I think you miss some important points. Most of all, the simple use of a “hard cap” versus an intensity-based target tells you nothing about the stringency of the system. If you want to meet the same target, a hard cap will be more cost-effective because you don’t have the implicit subsidy to output that comes with the intensity-based system, but otherwise you can get to the same place. CD Howe has a report showing four different permit allocation rules, including an output based allocation to reach the targets.
WCI, in some ways, provides a nice example of this. The 2012 targets for partners in the WCI are “the best estimate of what emissions would otherwise be”, in other words there is no stringency in the initial target. The “hard cap” for 2012 will be exactly what emissions would otherwise have been, absent any estimation error.
I agree that the WCI process has been a long haul, as I elude to in my article. But, you could make small changes to the model from Alberta to have a system with better incentives for emissions reduction (i.e. sector-level intensity benchmarks) and then you approach something like the Swedish NOx policy which has worked very well.
Andrew
[…] generating the revenues required to fund all of these commitments so quickly from an auction were raised by Andrew Leach and reported in the Canadian Press. The platform does not, however, specify how the […]
These are all interesting discussions, but the question that is never answered is “Will it make a difference?” If you believe (and for full disclosure, I do not) that CO2 is the sole cause of the warming that we have been seeing, then take the following calculations into consideration…
Let’s assume, for a moment,that the price of CO2 is $50/tonne. Canada emitted, in 2008, 734 million tonnes of CO2 (http://www.ec.gc.ca/indicateurs-indicators/default.asp?lang=en&n=FBF8455E-1). Using the $50/tonne costing, that puts the “price” of our CO2 emissions at $36.7 billion. So, what does that buy us? Well, follow the math here and you will see…
Worldwide emissions were 46,250. So, Canada’s contribution is 1.587%. Let’s assume, to make the numbers simple, that our emissions continue to increase and on average over the next 100 years, our contribution is 2%. The concentration of the atmosphere of CO2 is currently 391.76ppm (http://co2now.org/). It is increasing at a rate of approximately 2ppm/year. So, assuming that the increase is solely due to anthropogenic causes (this is the central assumption in AGW), then Canada’s contribution to that is 2% of 2ppm/year, or 0.04ppm/year.
Now, according to the estimates from the IPCC of the climatic “sensitivity”, a doubling of CO2 will result in an increase in a global average temperature increase of 2°C to 4.5°C, with the best estimate being 3°C. For this discussion, let’s use 3°C. So, with the current concentration being 391.76ppm, it would take another 391.76ppm to increase the temperature by 3°C. So, the sensitivity is 7.65775e-3°C/ppm. At Canada’s CO2 concentration increase rate of 0.04ppm/year, and looking at a 100 year horizon, Canada can expect to contribute 4ppm of CO2 concentration over 100 years. Multiple that by the sensitivity, and you get 0.03063°C. IN 100 YEARS!!!
All of this effort, all of this money, for what: 0.0306°C, in 100 years. Forget how we would accomplish any reductions, our total contribution is 0.0306°C in 100 years. If we completely cut off all CO2 emissions, would anyone notice? NO. If we doubled, would anyone notice? NO.
Forget all about the taxes, the offsets, cap-n-trade, all of it. Will it make a difference? The answer is a resounding NO. So, why are we bothering to expend any effort? Wouldn’t we be better off discussing real, important issues?
Hi Trevor,
Your question is a fair one to ask, whether or not you believe in anthropogenic climate change. You are absolutely correct that we are talking about cuts of less than 0.5% in global emissions when we discuss these policies. I have discussed some of these points here.
Why I think you should worry about these issues is the ability of people to leverage against our lack of action for their own benefit, again regardless of whether you believe in climate change. Canada has gone into international negotiations with an attitude that it’s simply a matter of setting a target on a quantity basis that compares to other countries, and not one which reflects our economic realities, by contrast with say Australia. That has left Canada more open than ever to the exact “socialist conspiracies” that people are worried about with Kyoto. You could see this brewing in the US around the opposition to the Keystone XL pipeline where our lack of GHG policy was used by people who arguably don’t believe in climate change themselves to keep our oil out of their backyards. Read this piece from David Frum, and you will see some of the potential ways in which Canada could suffer from climate policy,whether or not climate change is real.
While you’re at it, you should also read this: http://www.frumforum.com/confessions-of-a-climate-change-convert
Andrew, you may apply whatever leverage you want, and it still doesn’t change the fundamentals of the equations. $36.7 BILLION dollars per year, which will have an impact of 0.000306°C/year. That values the global temperature at $122.876 TRILLION per degrees Celsius. Keep in mind that the planet has only warmed ~0.7°C from the end of the Little Ice Age. You think that raising $122.876 TRILLION will stop the planet from warming by 1°C?
All of the talk about emission reductions imply a certain level of price elasticity of demand – as prices go up, consumption goes down. So, what is the price elasticity of demand that is factored into all of these assumptions? Do you have a rational basis for such a number? How did worldwide energy consumption change as the prices changed over the past 30 years? Is there even a direct correlation? So, what is that elasticity number? Is $50/tonne CO2 enough to reduce demand by 80%? How about $100/tonne? At what point does industry and productive people leave to jurisdictions without such a levy, at which point local emissions do plummet because of a significant drop in GDP?
(All of these discussions are beside the point of whether or not the attribution of CO2 as the sole global thermostat is correct; whether you are a believer in AGW or not.)
Thanks Trevor,
Most of my numbers are based on either CIMS or Energy 2020 modeling, not my own work. Some of the readers of this blog are better-placed to tell you about specifics, but you are correct that energy consumption is very inelastic, but carbon emissions are not quite as much so, though still quite inelastic, in particular in Canada. This is exactly why, if you read any of my previous posts, you will see that I advocate for a price-based policy, not a quantity-based one in Canada. The EU has $20/ton on their industry, so let’s put the same on ours, commit to raising it as they do, and leave it at that.
Here’s a turn around for you though – why is it that you believe that taxing carbon would be worse for the economy than what we do now, which is to effectively tax economc growth and productivity via income and payroll taxes. If you fixed government spending, and shifted the tax treatment onto carbon, it would create far better growth incentives and would not damage the economy one bit. If you don’t believe me, read the last paragraph of this and then google Ross McKitrick.
The problem that I have with taxing carbon DIOXIDE is that it is a direct proxy for energy consumption, which is directly related to economic growth. I agree that taxing income and payroll taxes economic growth. If we can agree that such a thing is counter-productive, then taxing energy consumption, which is also directly linked to economic growth is also counter-productive.
So, if energy consumption is inelastic, what will a price-based policy obtain for you, other than an additional revenue stream? Or are you advocating completely (or partially) replacing the existing revenue streams with a carbon dioxide-based tax stream?
But, isn’t the goal of such schemes to reduce CO2 emissions? That’s what believers of AGW tell us, that CO2 emissions have to decrease. If there is price inelasticity in carbon dioxide emissions, will increasing the price decrease emissions “enough”? What’s the ultimate goal here – is it a complete revamp of taxation policy, or a reduction in CO2 emissions? Because if it’s the latter, with the price inelasticity, additional taxation will not achieve such an end.
And, one last question. Because the science behind the attribution of CO2 to global temperature increase is NOT settled, despite IPCC protestations to the contrary, what if we find out somewhere down the road that CO2 isn’t the evil little molecule that it’s made out to be? If we put all our eggs into the CO2 basket, only to find that the basket was made of mere gossamer, where does that leave us? Taxing a trace constituent of the air we breathe out…
Oh, and I follow Prof McKitrick’s work. That paper you quote is almost 15 years old. Here’s his more recent thoughts [link http://rossmckitrick.weebly.com/uploads/4/8/0/8/4808045/earthhour.pdf%5D here [/link] and [link http://rossmckitrick.weebly.com/uploads/4/8/0/8/4808045/t3tax.ee.online.pdf%5Dhere%5B/link%5D.
I was a student of Ross’s so I know his work very well. I think the story is very simple. We know that income is good, so if at the end of the day we find out that we were taxing carbon instead of income for no good reason, then we are likely still ahead. In terms of emissions reductions, again, the impact is nowhere near what you suggest it would be. Yes, energy is linked to consumption, and we consume fossil fuel energy in vast quantities because it is cheaper than other sources. That does not mean that moving to other sources of energy, in some uses, is drastically more expensive than using fossil sources…it just means it’s at least a little more expensive.
If you read through my work, you will see that what I advocate for is a global carbon pricing regime, where the marginal tradeoff from one additional ton of carbon is the same across the world. It’s a much more practical system than the UN’s pie-dividing quantity-based system. It won’t be perfect, but that’s not the point. Each jurisdiction can then do as they wish to enforce it, or be subject to trade adjustments if they don’t. Canada would face the same treatment. In that case, you need a signal on each ton rising to about $100 by 2030, or somewhere in the ballpark of 25c/l of gas 20 years from now. Sorry, but that’s not catastrophic as some people would suggest it is. And yes, we might find out that it was all for nothing. We might also find out it was a great deal. Right now, the preponderance of evidence suggests that not putting a global price on carbon is the equivalent of hitting on 19 in blackjack. If you look at Alberta’s oil sands growth potential, betting that we can do it with this approach to global GHG polcy is likely like hitting on 20. That said, some people do that and win big.
So, you’re suggesting that we tax energy consumption. Period. If that’s the case,I can get behind that. So long as it is not biased towards any one form of energy.
Playing with your blackjack analogy, you think that the science is 85% (hitting on 19) solid, and that the risk as applied to Alberta’s oilsands is 92% certain, insofar as CO2 being the sole attribution to the recent change in global temperature anomaly? Are you aware that the attribution is premised on computational simulations that make assumptions about just about everything, including solar spectral irradiance, cloud effects, and relative humidity, and ignore effects such as El Nino, La Nina (and other related Pacific Decadal Oscilliations), the Atlantic Multidecadal Oscillation, the Arctic Oscilliation, Milankovic cycles, etc? I do computer simulations for a living, have checked out what’s been made publicly available (which is not much), and can vouch for the above list. What climate scientists don’t know could fill an IPCC volume 100 times over. I’d put the risk of not doing anything more like hitting on 12.
I’m not opposed to having a discussion about taxation policy – goodness know it sure needs some discussion. But tying it to some fairytale attribution to CO2 is not a place to start.
Never said anything about “sole”. That would be foolish. It would also be foolish of me to argue the science…there are plenty of people who can do so much better than me. I also do computer simulations for a living, and so I am very well-aware of the assumptions and uncertainties involved. I am also an economist, so I know very well the importance of out-of-sample predictability, while many climate models have tried to justify their fit based mostly on in-sample probabilities. No question, there is a lot we do not know. There will also be a lot we don’t know for 10s of 1000s of years.
Anyway, can’t spend all day arguing climate science. I guess you need to ask yourself whether Alberta and Canada should bet the oilsands hitting on 12, or spent less than $1/barrel insuring the viability of the industry. Red-black risk on access to markets for a trillion dollar resource is a big bet.
Cheers,
Andrew
Hey Andrew, thanks for taking the time to explain a little bit more in detail about how it is supposed to work.
I believe it can be done if they are able to get enough power or help from other parties to support them doing this.
The biggest issue is that they are treating this as a revenue source and not an environmental issue. Once the prices go up, it will be more economical for companies to find new technologies to cut back their emissions, and there will be less bidding for the credits. While that will accomplish the goal of making cleaner emissions, which is what the goal should be, the profits promised will start to shrink. Most of the numbers from what I can see are based on the fact that companies will not be able to reduce the emissions on their own, and be forced to buy the credits. Under the pressure of spending hundreds of millions of dollars there will be new ways discovered to be cleaner!
It is a similar problem many cities are finding with red light cameras. They were always designed for money, but claimed to be put in effect for safety purposes. They made huge money at first, going right with their projections. But then people started to smarten their driving up, and the amount of tickets issued started to decline. While that became a real benefit safety wise, the cities started losing that funding they were counting on and used to. Some have even gone as far to shorten yellow light times and change right hand turn laws to generate more money.
I foresee this cap and trade system, if implemented going the same route. At first the money pours in and emissions start being cut. But then they start being cut too much without anybody needing to buy credits and then the money is no longer coming in as planned. Then everybody will be up in arms trying to ditch the system, saying its not making money as touted.
The real thing they should focus on is the environmental benefits, because that is what we should care about, and if we make a few billion in the process of cleaning up the industries, that should be considered bonus.
Hi Josh,
Good points. I think you can treat it as both a revenue source and an environmental policy, as long as you recognize that meeting the goal of the policy will erode the revenue base over time. Good economic models take this into account. The red light camera example is a good one. I often use that as my example of taxes which I can avoid, but have not often used it as a direct link to ghg policy.
Thanks!
Josh, or Andrew, perhaps you could enlighten me on exactly what the environmental benefits of such a plan would be. As I showed in my April 26, 2011 at 2:11 pm posting, if one assumes that the IPCC claims of sensitivity are correct, the benefit of eliminating ALL CO2 emissions in Canada would be to stop the global temperature from increasing by 0.000306°C/year.
What I am asking for is a cost/benefit analysis of the situation.
Andrew, in your April 26, 2011 at 4:21 pm post, you say that we need to charge a levy on our oil production so that we can sell it into a market that will demand such levies. You seem to say that the risk of not doing so would be catastrophic. Please explain how such a catastrophe would play out for a world-market commodity such as oil? Do you seriously think that the US would/could not accept our oil because we haven’t taxed it “properly”?
Hi Trevor,
I appreciate your engagement in this, but I think you can also read through my thoughts pretty clearly on this in the posts. Yes, I do think our stance on GHG policy will affect our access to markets. No, I don’t think the costs of imposing credible GHG policy, and I have clearly defined what I think that means, would be exorbitant. Yes, I think it would be worth it. Yes, I believe that climate change is a problem and that Canada should be part of a global solution to it. No, I don’t think we should do more than our share, but I also don’t think we should do less. I certainly don’t think we should promise to do something about it and then re-neg.
Andrew
Thanks Andrew. My engagement in this issue at the local level (here in Alberta) is just starting, so I appreciate your patience.
The one area that I think that we can agree on is that we shouldn’t promise to do anything, and then reneg on it.
So, to summarize what I understand your thoughts to be:
– global warming is real
– global warming is solely caused by human emissions of CO2 (which makes it therefore the only “thing” worth dealing with in an economic sense).
– global warming is a problem
– the solution to the problem is valued at $122.876 TRILLION per degrees Celsius
– preventing the problem will cost less than adaptation, and therefore the focus of economic policy should be on prevention
– taxation of CO2 emissions will reduce emissions, even though demand for fuels whose combustion produces CO2 is relatively price inelastic
– taxation of CO2 emissions is a better way to generate income for governments than taxing income
– not taxing CO2 emissions will prevent our access to global markets for our fossil fuel commodities
– the costs of a taxation would be minimized (not exorbitant) by offsetting income taxes
Is that correct?
You are taking nuanced statements and translating them to absolutes, unfortunately you do not a very good job of capturing my positions in those statements. So, no, that is not correct. Sorry, but work calls me away.
I understand about work calling you.
This is, however, how I have interpreted what you have said on this page and other pages in your blog. There is, however, very little that can be nuanced about my above list. Either global warming is real or it isn’t, there’s no “kinda real”. Either global warming is solely caused by human generated CO2 or it isn’t (but if not CO2, then why the focus on it?). You’ve stated categorically that you believe that global warming is a problem. There was no nuance to your statement. Regarding the valuation of the problem, if you find a flaw in my calculations, please point it out. Regarding prevention vs adaptation, is the cost of adaptation were less, then that would be an economist’s focus. Focusing on the “more expensive” solution seems rather pointless. You have clearly spelled out how you theorize that the taxation of CO2 will reduce emissions, although with no back-up, and an admission that he demand is relatively price inelastic. You’ve clearly stated that taxation of CO2 is a better way to generate income for the government than taxing income – we both agreed that taxing economic growth had some absurdities. In your last post, you clearly stated that not taxing CO2 emissions risked preventing access to markets. And you have said in various places in this blog that a proper implementation of a CO2 taxation system would not be exorbitant.
Where’s the nuance? Where am I wrong?
Trevor,
– global warming is real – yes, but I would choose the term climate change.
– global warming is solely caused by human emissions of CO2 (which makes it therefore the only “thing” worth dealing with in an economic sense). – no, I would never argue that all climate changes are human-induced, nor that the only anthropogenic forcing agent on climate is CO2. CO2 equivalents is a type of exchange rate that lets you put all ghgs on a common benchmark.
– global warming is a problem – yes, although again I would use the broad term climate change, but that’s semantics.
– the solution to the problem is valued at $122.876 TRILLION per degrees Celsius – I think here you are confounding wealth transfers and abatement costs, and you are extrapolating on the basis of numbers for the Canadian economy, in which emissions reductions would be significantly more expensive at the margin than those which would be required globally. As such, as far as I can tell, your extrapolations are not reflections of the costs. Your number here seems to me to be the equivalent of saying that oil costs the world about $80 billion per day. That might be true, but those funds aren’t simply vaporized…the go somewhere else in the economy – many of them to Alberta. You should be able to see that there are two sides to an abatement cost transaction. You are also not looking at abatement costs, but prices on remaining emissions as far as I can tell. This is not how I would calculate this number. If you want to look at global mitigation costs, look perhaps at work by Bill Nordhaus – the numbers I have seen are on the order of 2-3% of global GDP, which is still big. There are some hidden costs in that, since you also have some GDP which is from funds re-tasked to ghg abatement from other expenditures.
– preventing the problem will cost less than adaptation, and therefore the focus of economic policy should be on prevention – I would never say this. I would say we should balance the costs of an approach based on adaptation and prevention. You and I might differ in our evaluation of the benefits of mitigation, and that’s fine.
– taxation of CO2 emissions will reduce emissions, even though demand for fuels whose combustion produces CO2 is relatively price inelastic – key word is relatively. Oil price increases, all else equal, reduce consumption. Economic growth, all else equal, reduces it. What CO2 taxation will do is put a price on CO2 emissions. Whether emissions are reduced depends entirely on the tax rate and point of application.
– taxation of CO2 emissions is a better way to generate income for governments than taxing income
If you are going to generate a given sum of revenue, the marginal cost of public funds is higher with income taxes than with carbon taxes, even if you value the pollution mitigation (GHGs and other local air pollutants at zero, which I don’t).
– not taxing CO2 emissions will prevent our access to global markets for our fossil fuel commodities
Didn’t say prevent, and didn’t say tax. I said that not having a GHG policy play into the hands of those who wish to reduce our access to markets. For another related example, the price we have paid for billboards in Time Square and marketing in the US would have paid for the adequate monitoring of oil sands water impacts. Which do you think would have been a better use of our money in terms of ensuring the continued health of the industry?
– the costs of a taxation would be minimized (not exorbitant) by offsetting income taxes
If you chose that route, yes. Again, I would never argue that there exists a prototype that all tax regimes follow. Carbon policy will shift wealth, but the aggregate costs to the economy will be lowest when the tax revenue is redistributed to individuals and firms via reduced income taxes.
I feel like your arguments really come down to you not feeling like the science of climate change is valid. I expect that your views on this are colored by those who use climate change as a crutch to justify wealth transfers out of Alberta, and so I understand your suspicion. I simply don’t believe in broad global scientific conspiracies, but if you read my work, you will see that I believe very strongly in defending Alberta’s interests and in the viability of the oil sands industry under carbon pricing.
I am happy to engage with you, but don’t try to paint my views into a corner as I have been careful not to do with yours.
Andrew
Andrew – thanks again for taking the time in this engagement. It is much appreciated.
It is not my intent to paint your views into a corner, so much as it is to elucidate exactly what they are. I appreciate your clarifications.
I can certainly empathize with your perspective, for they are essentially the perspectives that I held about two years ago. However, at that time, I thought that I should do some independent investigation into the science behind global warming, so as to not just take the word of an intergovernmental panel for it (that being premised on a general distrust for governments in general). It basically started with a “Hmmm, that’s interesting. I wonder what’s behind that”. I was actively looking for demonstrable scientific proof that 1) the globe was warming 2) human-generated CO2 was the culprit, and 3) the changes were far outside the realm of “normal” for the planet, and therefore cause for alarm. In a nut-shell, here’s what I found:
1) The temperature record is woefully inadequate to determine the magnitude of warming. Temperature-recording sites around the world for the most part (>80%) have contamination issues. Furthermore, the magnitude of the temperatures that we are talking about are so small in comparison to the daily and seasonal changes that the accuracy of the measurement is suspect. The locations of these sites are also not uniformly distributed and are only on land, meaning that the records that we do have are only applicable to 30% of the total surface area. Only the satellite data from the last 30 years or so could be considered to be reasonably accurate. That data certainly shows a trend, but we know that multi-decadal trends exist, and this could certainly be one.
2) The attribution of the warming to CO2 is premised on laboratory work done over 100 years ago, and computer simulations. CO2 is indeed a greenhouse gas inasmuch as it is transparent to visible light, but opaque to narrow bands of infrared light. It’s cumulative effect is not linear, but logarithmic, though – resulting in declining returns are the infrared spectrum becomes saturated. The total “sensitivity” attributable directly to CO2 is extremely small – on the order of 0.2-0.3°C per doubling of CO2. What the climate scientists have done is hypothesized additional “feedbacks” that amplify this effect. I say hypothesize, because it has never been actually tested in any scientific manner – such that it would be elevated to the status of theory. Using these hypothesized feedbacks, they generated computational models of the earth’s atmosphere, and prognosticated that the actual sensitivity was at least an order of magnitude greater than what has been scientifically demonstrated. Since my engineering career is based on computational models of complicated systems, I started digging into these models. Turns out that the scientists running these models have not made them public, and have not subjected them to independent review. I don’t generally fall for conspiracy theories, but hiding something this important usually means that you have something to hide. Furthermore, these models do not include many phenomena that we are only starting to understand, such as the ENSO (El Nino Southern Oscillation), PDO (Pacific Decadal Oscillation), AMO (Atlantic Multidecadal Oscillation), and many others. Furthermore, these models are best judged by their ability to forecast, and the comparisons are atrocious (the correlations are often less than 0.1).
3) We need to understand where we’ve been to know where we’re going. Globally, the temperature has varied as shown in this plot fro the past 800,000 years (http://en.wikipedia.org/wiki/Temperature_record#The_long_term_ice_core_record:_the_last_800.2C000_years). It’s been as much as 8°C warmer and 12°C colder. The warmer didn’t result in catastrophe – we’re living proof of that, but the colder was much, much worse. During the last ice age, Edmonton was under over a kilometer of ice. Compared to the prognostications about the consequences of warming, 1km of ice over your head would be much worse. Furthermore, CO2 and temperature are only weakly correlated (remember that correlation does not equal causation), but slightly out of phase, with the CO2 generally lagging.
So, to summarize: after 2 years of researching this myself, no, I do not believe the science.
One other thing – regarding terminology: I do not think that calling this “climate change” versus “global warming” is mere semantics. For that, I will quote Dr. Richard Lindzen, who wrote in the inaugural issue of Nature Climate Change, “Climate change is the norm. If you want something to worry about, it would be if the climate were static. It would be like a person being dead.” As you can observe for yourself in the temperature history, the default for the climate is to change. What this entire discussion is about is CO2 causing global warming, and that CO2 being human generated, and that warming being catastrophic – hence the acronym CAGW. “Climate change” is a meaningless term that obscures the true intent. I object to it’s use.
All that said, I feel strongly that we need to reduce real pollution, dangerous fugitive emissions, improve water quality, and ensure responsible use of finite resources.
Thanks for clarifying. As I have said many times, if you want to argue the science of climate change or global warming, there are better people to do it with than me. If you want to talk about policy design, or if you want to talk about the political economy of the international climate agreement process and how it affects Canada and Alberta, that’s fine by me. My interest is much more in Canadian policy and strategy when it comes to climate change, which will have almost no affect on global climate change whatever the true climate sensitivity turns out to be. Fortunately, those discussions are all valid whether you are correct or not. That said, I will continue to take my climate science from NASA, the National Academy of Sciences, etc.
Cheers,
Andrew
“My interest is much more in Canadian policy and strategy when it comes to climate change, which will have almost no affect on global climate change whatever the true climate sensitivity turns out to be.”
Fascinating. Your interest is in a topic in which we will do “something” (or _need_ to do “something”), which will have no impact, except for the transfer of wealth out of our jurisdiction.
Reminds me of the Seinfeld series – a whole show about nothing. Except that emptying my wallet isn’t funny.
Getting tired of this discussion. If you read more carefully, you will see that most if not all of my work is on exactly the opposite of that…making sure we don’t let climate policy transfer wealth out of our jurisdiction, or be used as an excuse to empty your wallet…but again, you are more than free to assume that won’t happen. Remember, if you will, that the last time federal energy wealth transfers were put into place, no one could say they were doing it in the name of a global crisis, just that they wanted some of Alberta’s resource revenue for re-distribution.
Feel free to keep reading, but I think I’m done with this for now.
Andrew
Agreed. I will keep reading. Thanks for the discussion.
Trevor: “The total ‘sensitivity’ attributable directly to CO2 is extremely small – on the order of 0.2-0.3°C per doubling of CO2.”
Wait, what? You’ve been researching this issue for the last two years? Your numbers are wrong. There’s a ton of misinformation out there (not surprising, given the economic stakes involved)–be very wary.
John Cook:
If we add positive and negative feedbacks, how much warming are we going to get? Cook notes that several independent estimates–not just based on climate models, but looking at paleontological reconstructions, or at the observed effect of volcanic eruptions–provide consistent answers: about 2-4.5°C.
If you’re looking for a simple argument that CO2 emissions are a problem, consider this: The last time atmospheric CO2 levels were as high as they are today was 15 million years ago. “… temperatures were 5 to 10 degrees Fahrenheit higher than they are today, the sea level was approximately 75 to 120 feet higher than today, there was no permanent sea ice cap in the Arctic and very little ice on Antarctica and Greenland.”
We’re in uncharted territory here. If we go to the scientists and ask what’s likely to happen as CO2 levels continue to rise, their answer is, “We can’t be totally sure yet, but it looks like we’re in deep trouble.”
Carbon rpicing and Cap&Tarde is a non-starter. All I know is I have been a Liberal supporter all my life until Stephan Dione moved the party so far left I was suddenly all alone. I now vote for whichever party will NOT introduce a price on carbon or Cap&trade. Simple as that. All parties are promising carbon controls except the Tories, I therefore will vote Tory on Monday. They still might introduce carbon controls but at least thay are not making that promise, I simply cannot vote for carbon conrols. The CPC have my vote until my Liberal party returns to sanity. Cheers.
I’m happy if people are asking questions about carbon policy. I think that your view of carbon policy as a blanket evil is wrong. To me, that’s like saying speed limits are bad, full stop. It’s too broad an argument in my view.
Andrew, thanks for publishing this blog. I have a question that you might consider for a future post:
Suppose political feasibility isn’t a concern, only economic efficiency. Is it correct to say that a revenue-neutral, gradually rising, broad-based carbon tax–similar to what BC implemented in 2006 and what the federal Liberals proposed in 2008–would be preferable to cap-and-trade and to command-and-control policies? What would be the economic impact of such a policy, assuming the carbon tax rises high enough to meet Canada’s 2050 goals? (2-3% of GDP? Higher?)
An obvious objection to such a policy is that it’d be a large transfer from Alberta to the rest of the country. So a better policy would be a carbon tax at the provincial level: for example, Alberta would use its carbon-tax revenues to cut income taxes (or put more money into the Heritage Fund), rather than sending the money to Ottawa. (Alberta already has a limited $15/tonne carbon tax, of course.)
A second objection is that even if there’s not much impact on the economy as a whole, it’d still have a major impact on Alberta’s oil and gas industry. Are there any studies which attempt to quantify this impact?
Russil, sorry this is quick but I am on the run. Check out a piece at the CD Howe (don’t have the link, but I have linked to it in previous posts) on regional equality concerns and carbon pricing. If you want to lower economic cost in aggregate terms, best way is a broad-based carbon price on every ton. No exceptions. So, BC’s combined tax and cap-and-trade would be the closest we have in Canada to that once cap-and-trade is implemented there.
You also have to keeep in mind that there are within-region equity concerns as well, since the policy (like BCs) is neutral in aggregate revenue, but as Mark Jaccard argues, makes 75% of people better off and about 25% neutral or worse off.
Andrew
Thanks, Andrew! Commentary 314: Taxing Emissions, Not Income: How to Moderate the Regional Impact of Federal Environment Policy, November 2010, by Peters, Bataille, Rivers, and Jaccard. I’ll take a look.
I like your suggestion of administering a carbon tax at the provincial level (rather than having Ottawa collect revenue and then send it back to the provinces, as discussed by Peters et al.).
[…] all assumes they could get a system off the ground in that time, which is unlikely at best. If the system seeks to cover all 320Mt from the industrial sectors, this will take some additional […]
Thanks, Andrew! For anyone else who’s interested, the link is Taxing Emissions, Not Income: How to Moderate the Regional Impact of Federal Environmental Policy, by Peters, Bataille, Rivers, and Jaccard (November 2010). I think the idea of each province administering its own carbon tax, as you’ve mentioned in a previous post, makes even more sense.
I found William Nordhaus’s argument about the advantages of a carbon tax over cap-and-trade to be convincing, especially when it comes to international coordination. Saying “all the major industrialized countries need to have a carbon tax of $100/tonne in 2020” is going to be a lot easier than saying “all the major industrialized countries have to limit their emissions to no more than x GtC, and here’s how they’re going to be initially allocated.” The latter is a recipe for endless wrangling and non-binding limits; the former is basically just a sales tax. It only took BC about six months to set up its carbon tax, once Campbell had made the decision.
Thanks Russil. I worked on Nordhaus models for my thesis and have published a few papers using them, so I know his work really does inform my arguments. Thanks for reminding me about this piece.
Couldn’t agree more with your point.
Andrew