Canadian climate change regulations: how *not* to do the simple, sensible thing

For the same current total cost, we could be cutting 38 per cent more GHGs

by Stephen Gordon

(Peter Andrews/Reuters)

I described here one of the reasons why economists prefer market-based approaches such as carbon taxes or cap-and-trade: markets take some of the deadweight loss of regulations and—as Eric Crampton puts it—turn it into “crunchy tasty tax revenue.” The other reason is that regulations are generally inefficient: they don’t always concentrate efforts on the cheapest way of achieving the stated policy goal.

The National Round Table on the Environment and the Economy (NRTEE) has released a report (176-page PDF file) that includes a section on the cost-effectiveness of the various measures that have been implemented and proposed in Canada. These include policies set by both the provincial and federal governments, so the inefficiencies it identifies can’t all be blamed on Ottawa.

Each measure to reduce greenhouse gas emissions has its own cost, and to make things simple, the NRTEE places them in three categories: low cost (less than $50/tonne), medium-cost (between $50/tonne and $100/tonne) and high-cost (more than $100/tonne). Here’s what low-, medium and high-cost measures mean:

Market-based policies such as British Columbia’s carbon tax, Alberta’s specific gas emitter program and the Western Climate Initiative all generate low-cost-abatement. Policies based on market incentives are designed to simulate lowest-cost emission reductions. Similarly, electricity policies that are timed with the natural turnover of capital stock — such as the federal government’s electricity performance standards and some portion of Ontario’s coal phase-out — tend to generate low-cost abatement as well because they don’t require capital investments to shut down before the end of their useful life. Policies in the waste sector (mainly provincial landfill gas regulations) and agriculture sector (included as offsets in Alberta’s Specified Gas Emitter policy) also tend to access low-cost abatement opportunities.

Most medium-cost emission reductions come from the electricity sector and are weighted toward Ontario. The Ontario coal-fired electricity phase-out is therefore likely a significant driver of these reductions, as it accelerates the retirement of some plants ahead of their normal project life.

Emission reductions from vehicles — such as those induced by the federal vehicle standard — tend to have high marginal abatement costs overall, because individuals require strong incentives to switch to smaller, more fuel-efficient vehicles or vehicles that use alternative technologies like hybrid or electric engines. Emission reductions in commercial and residential buildings also tend to be largely high cost on a dollar per tonne basis, partly because buildings and appliances tend to become more efficient over time even in the absence of policies, thus reducing the incremental effect of policies implemented across all provinces to increase efficiency. Replacing more carbon-intensive electricity generation with low-carbon sources can have high costs as well, though as discussed below, electricity reductions are spread across all three cost levels. Finally, [carbon capture and storage] projects in Alberta and Saskatchewan are estimated to drive both medium- and high-cost reductions, depending on the specific project. 

If the only climate change policy in place was a carbon tax of, say, $50/tonne, all of the low-cost measures would be implemented by the private sector. If the tax rose to $100/tonne, all of the measures in the low- and medium-cost categories would be implemented.

If we’re willing to pay a certain economic cost to reduce greenhouse gas emissions, then we’d also want to translate that sacrifice into the biggest possible reduction. A sensibly-designed climate change policy would go after the low-hanging fruit first: implement the low-cost reductions first, and then move on to the higher-cost measures.

But that’s not what we do here in Canada. Here is Figure 20 from the NRTEE report:

 

The purple areas represent measures that have been implemented and proposed, and the blue areas represent what is required to meet the targets for 2020. The first thing to note is that 28 Mt of the 79 Mt in the low-cost category are not being addressed by existing measures. On the other hand, a remarkable amount of policy attention—amounting to 37% of targeted emissions—has been paid to the most expensive ways of reducing greenhouse gas emissions.

To get an idea of the size of the gains that are available, let’s assume for a minute that all projects cost $25 in the low-cost category, $75 in the middle group and, say, $150 for high-cost measures. This would mean that the costs released by relaxing 25 Mt of high-cost measures could be re-allocated to implement all the low- and medium-cost measures identified by the NRTEE. In other words, for the same total cost, emission reductions could by increased by 38% simply by concentrating on the least-costly measures.

This is a general problem with regulatory approaches: cost-benefit analyses are either not done, or ignored in the name of political expediency. If there were a price on carbon, the private sector would make it its business to implement all the low-cost emission reductions first, before moving higher up the tree. Indeed, much of the existing low-cost emission reductions are due to the market-based measures already in place, such as those listed by the NRTEE in B.C., Alberta and Ontario.

A sensible climate change policy doesn’t just reduce emissions, it also seeks to minimise the economic costs of doing so. As the NRTEE puts it,

Despite the concentration of low-cost reductions, the pursuit of some high-cost emission reductions suggests that governments have been willing — knowingly or not — in some cases to implement policies that tackle more than just the “low-hanging fruit”.

 




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Canadian climate change regulations: how *not* to do the simple, sensible thing

  1. Good post Mr G. But it always amuses me to see economists list the “costs” without ever seriously acknowledging the 5000lbs gorilla in the corner…the cost of doing little or nothing; the truly scary costs over and beyond just economics if we don’t get a handle on this looming CC monster.
    I have little faith govts here or around the world are really serious about dealing with this. They’ll do the least they can,protect their interests and continue to kick the issue down the road; preferring to believe that mitigation issues can just be dealt with as they arise.
    We are a myopic self absorbed species. We continue to worry about the “costs” while Rome smoulders.All we can do it seems is ride the tiger and keep on fiddling like mad.

    • I think there are enough people doing that already. If one of the reasons people resist that message is that they’re concerned about the economic costs, then the thing to do is try and figure out how big those costs are and how best to minimise them. It’s really not good enough to dismiss their concerns and embark on another extended rant about sea levels. Why would they listen to your concerns if you won’t listen to theirs?

      • Fair enough. No rants from me on rising sea levels.[ other than a little melodrama now and again]
        I do appreciate the work people like you are doing here – this post in particular – and repost it where i can and where i hope it may do the most good.[ i've just posted it on the liberal blog]
        As long as you are shining a light on the subject rather than attempting to minimize it in some way – then i’m onside. Carry on sir!

        • I’m not sure where people get the idea that Prof. Gordon has been minimizing the issue of AGW and the need for policy intervention. To me he has been very clear in arguing that in doing something about AGW, we not be too stupid about it. Why spend 3x achieving the policy goal of reducing emissions by y% when X will do?

          • I don’t think i said he was minimizing AGW; i certainly didn’t mean to imply it.

          • I didn’t read your comment that way…

            And I do somewhat agree with your original ‘complaint’ wrt no mention of the cost of not doing anything, although I can certainly understand that SG has to put a limit on the contents of any given column, and ‘ignoring’ those costs was a logical ‘omission’.

            In the bigger picture it seems likely to me that, by procrastinating as long as we have, we are going to get the opportunity to spend most of those adaptation funds.

          • We may look back on the cost of doing as little as possible as being a very steep one indeed. And not just in economic terms either.
            To the degree we eventually get it right – if we do – it will need all the help we can get from the SGs of this world.

          • May isn’t the best reason to do something today.

            What is your best/favourite source that indicates what those future costs are projected to be? I’m asking independent of the science of AGW.

          • Hmmmm, it’s not really my area. I’ve read some of the stuff the British expert wrote, for the world bank wasn’t it. And some of the guy i linked to above – Bjorn Lomburg.
            I guess it offends my basic grasp of logic to not try to minimize the worst effects of CC; especially when you consider it is the ultimate generational issue. My kid is just 11. Just what kind of a world am i going to leave her if i don’t speak my mind? This is the principle driving moral imperative behind all environmental issues that stir me. It’s why i oppose the gateway project, regardless of the economic upside for Canada.
            I also have real reservations about just how quickly and how much we should exploit the tar/oil sands. The economic upside is a given i think
            As to your question, again big holes in my grasp of the subject, but Jeff Rubin seems to make some sense..

          • Yeah, without looking (which I will do later) I only recall the fellow that got some play within the last year or two was indeed formerly of the World Bank, Lord Something or Other (not Lord of Cross Harbour). For folks trying to make the case that it is cheaper to do something today it would be helpful to have at least a few other studies or whatnot to back up the idea. AFAIK, the IPCC stuff doesn’t get into the economics of either approach. But I certainly stand to be corrected.

            I like Lomborg, except for the title he gave his book – it makes sense to focus scarce resources where they will provide the biggest benefit, and perhaps attacking AIDS or malaria is more cost effective.

          • It’s an interesting point, one that SG makes too. Up to now there’s been too much daylight between his profession and say members of the IPCC.Unfortunately it’s allowed far too much nonesense to be peddled as untested truth on both sides. My natural sympathies lie with the scientists. But i can see SG’s point about needing to convince moderates on each side of the issue – maybe even those with less moderate views?

          • As it turns out, the fellow we are speaking about is a Sir, not a Lord: Sir Nicholas Stern.

            Here is a link to the Executive Summary of his report.

      • Well, considering that a rise in sea level of, say, 50 cm would render many of the world’s largest cities uninhabitable barring massive investment in sea walls and so on, the economic cost of doing nothing is simply staggering.

        • Is it just that one report from that British fellow that actually tries to document those costs, or would you be kind enough to post links to a few other estimates?

      • But they aren’t doing that from an economic standpoint. We need to know how much it will cost us to do something, and ALSO how much it will cost us to not do something, in order to make a sensible decision. For example, if my roof needs new shingles, it behooves me to consider not just the cost of new shingles, but also the cost to my investment if I don’t get the new shingles. Penny wise and pound foolish, or some such saying.

  2. If anyone knows how to avoid regulations, or how pointless rules are, it’s the present government

  3. Emission reductions from vehicles — such as those induced by the federal vehicle standard — tend to have high marginal abatement costs overall, because individuals require strong incentives to switch to smaller, more fuel-efficient vehicles or vehicles that use alternative technologies like hybrid or electric engines.

    I don’t follow this. Perhaps someone more familiar with CAFE standards can explain this to me.

    As I understand it: The gov’t assigns a targeted fuel efficiency standard (MPG or l/100 km) by manufacturer for the weighted average of their total sales. Above the target, the manufacturer pays a penalty to the gov’t.

    So, to achieve the target mix, the manufacturer designs/sells vehicles with better fuel efficiency and markets (pushes) sales of these vehicles. So, less Hummers, SUVs more smaller/fuel efficient vehicles.

    So, where does the higher cost come in? The cost to design/develop the vehicles? (notwithstanding that Canada is to some extent getting a free ride by harmonizing with the US moves in this area.)

    I could see NRTEE ‘s argument if the govt had to cough up say a $3,000 per vehicle subsidy to promote Prius or Volt sales (which was a program at one time I believe).

    Can anyone explain this further?

    • answers.com ~ “A cost borne by many businesses for the removal and/or reduction of an undesirable item that they have created. Abatement costs are generally incurred when corporations are required to reduce possible nuisances or negative byproducts created during production.”

      If marginal abatement costs are similar to definition I found, is NRTEE talking about costs to business and government to get people to switch over to hybrid or electric engines?

      Public doesn’t want electric cars, they cost too much, performance isn’t good, batteries are not good for environment and electricity used to power the car often cancels any gains made from being fuel less because producing electricity isn’t clean. Massive subsidies were given to automakers so they would produce electric cars and incentives have to be offered to consumers as well because the public isn’t buying them.

      • Tony, I was asking for someone who knew. Thanks for the predictable rhetoric, tho.

        • In late 1990s, automakers had developed fuel cell engine at no expense to government and then left wing kooks came along and sidelined actual tech that would have progressed us and instead focused on ineffective electric batteries that people don’t want to buy. Both Canada and US have spent billions of $$$ on ineffective technology that was discarded over century ago and consumers still don’t want to buy them.

          If by rhetoric you mean facts, you’re welcome.

          NY Times Aug 2009 ~ Seeking to put the nation back in the lead on an important technology, the Obama administration awarded more than $2 billion in grants on Wednesday for manufacturing advanced batteries and other components for electric cars.
          —–
          Daily Finance Sept 2012 ~ How to Lose Money on a $39,995 Sale

          Why are improving sales for the Volt a mixed blessing? It turns out that those sales are expensive ones: Reuters recently reported that GM is losing a bundle on each Volt it sells — despite the little plug-in hybrid’s steep $39,995 base price.

          A Washington Post editorial this week took the Volt to task, as part of a larger argument against the U.S. government’s subsidies of electric car technology. It expected Nissan to sell 25,000 Leafs this year. But through August, the automaker had sold fewer than 5,000 here in 2012. It also predicted that GM would sell 120,000 Volts this year. The reality: Fewer than 14,000 Volts had been sold through August in the U.S. in 2012.

          Both of these cars, like much of the still-emerging U.S. electric-car business, were heavily dependent on government aid. GM’s massive bailout is no secret, but some of the other Department of Energy aid programs are less well-known: Among other grants and loans, Nissan received $1.5 billion in low-cost loans to refurbish the Leaf’s Tennessee factory, and Tesla got a $465 million line of credit to help get the Model S into production.

          • Thanks, but subsidies are not the same as CAFE standards, or are you claiming they are a major component? If not, then yes, it is just rhetoric.

          • It’s also rubbish, but that’s Tony for ya.

          • “In late 1990s, automakers had developed fuel cell engine at no expense
            to government and then left wing kooks came along and sidelined actual
            tech that would have progressed u…”

            Do tell us more about these “facts”. *snort*

    • I think the cost of increasing emission standards is pretty minimal if a) you don’t expect people to replace their existing vehicles in shorter time frame than they normally would, and b) market forces prevent any real increase in the cost of vehicles.

    • As recently as a few years ago in the US the penalty for falling below the CAFE standard was about $50 per mpg per vehicle sold, which means (since automakers tend to sell many hundreds of thousands of vehicles) that the total fines were well into the millions of dollars.

      But of course the manufacturers are going to try to recoup those costs when they sell more vehicles, so they only need to obtain an extra $100 (+/-$50) per vehicle: the penalty seems rather modest.

      I gather that substantial fuel economy improvements (ie near double) could probably be achieved for ~$1000 per vehicle. If you start with 20 mpg and go to 40 mpg CO2 make drops by about 30 tonnes over a 10 year lifespan >> $33/tonne. Of course if you start at 40 mpg and go to 80 mpg you only save 15 tonnes CO2, so the cost is $66/tonne.

      Admittedly my number crunching is very “back of the napkin”, so I find it fairly easy to believe the NRTEE assessment that raising CAFE standards actually does not fall into the “low hanging fruit” category. [edit]And you’ll let me know if I’ve made a math error….

  4. Great post Gordon. In addition to kcm2′s plus-sized simian, there is another cost associated with such a tax. Low carbon emission processes are by law highly efficient processes, and all manufacturing tends towards higher efficiency over time. As a result, a well designed carbon tax encourages increased investments in future technologies. This will no doubt burden Canada with a surfeit of high paying, high skill jobs.

    To quote a hero of mine “there is no such thing as a good tax”.

    • Canadian businesses are notorious for not investing in productivity enhancing equipment, despite the fact that, in doing so, it may save money in the short/medium/long term. This results in a persistent and it appears growing productivity gap with the US.

      What makes you think by adding GHG productivity to the mix (beyond what already exists through incentives) will result in investment directed here? More tangible?

      • Are you calling for higher CITs…commie!

        Are you further suggesting a high dollar policy is pointless?…marxist commie!

      • If companies see 3 year paybacks, they make the investment without batting an eye. Carbon taxes are handy because they provide more price certainty and hence return certainty on investment.

        Burdensome regulation is not the way to encourage companies to invest. If the compliance costs are high (and they must necessarily be the same or higher than under a carbon tax), they may opt to pull up stakes and go to another jurisdiction.

        • I think you may be optimistic to suggest, if you are, that all of the investment will occur in the first three year period. I think you will find that it requires a great deal of education and a much longer time frame, with less than 100% conversion.

          • First, we need to think about the transmission mechanism. For most firms, they will see this tax built into the cost of fossil fuels. Most firms are already familiar with making investments to save fuel–especially the big consumers (manufacturing, transportation, mining, real estate, etc.). It may take a while for investments to be made, but the firms who make them will be at a competitive advantage. I think it would be a lot faster, too, than waiting for industry-by-industry regulatory programs, with long implementation windows, etc.

          • I don’t disagree, in principle, with what you are saying – just playing devil’s advocate, in a sense. And reflecting a bit of experience with demand side programs (PowerSmart) and resource sector development.

            One example from the 90s. At one time, when oil was in the vicinity of $15/barrel, Suncor was turning an operating profit with direct costs in the neighbourhood of $12 /barrel and the CEO Rick George indicated a renewed focus in working with firms to get the costs down to $9/barrel (this is all from memory, so don’t quote me on the numbers).

            When oil prices recovered, and took off, the focus of management changed. Expanding production and doubling the stock price every five years became management’s new priority. Efforts by management to focus on costs no longer made economic sense. Better returns were elsewhere. (It should be noted, however, that with run away costs/inflation, Suncor with a new CEO, and its jv partners are cutting back on its growth plans and delaying investment- while at the same time many economists are promoting more and more unfettered FDI).

            So, how companies respond to incentives depends. Especially when management priorities lie elsewhere.

  5. I like those UK traffic lights or pie wedges for Ontario food labelling. Weird the U of A paid-for-nothing nutritionist or pork lobbyist or whatever, is using unknown portion size as an argument against. Suggested portion size kills her ideological rhetoric.
    I need: Cdn Shield railroads, economics of setting up modular fast growing tree farms (might need white rot resistance or fast growth GMOing which are easy), and to not get eaten by a bear, and I can figure out how to sequester trees and peat. Turning lakes into phenolics bioreactors would be even cheaper…thick bogs can be taken apart and recombined over cut logs/lumber/wood chips….it will make jobs. C.Freeman likes using the trees as a logging road.

  6. Deny this:

    The millions of people in the global scientific community
    that are not reacting to the world walking away from their crisis
    “warnings”, proves climate change was just an exaggeration.

    *In all of the debates so far, Obama hasn’t planned to
    mention climate change once.

    *Obama has not mentioned the crisis in the last two State of
    the Unions addresses.

    *Occupywallstreet does not even mention CO2 in its list of
    demands because of the bank-funded carbon trading stock markets run by
    corporations.

    *Julian Assange is of course a climate change denier.

    *Canada killed Y2Kyoto with a freely elected climate change
    denying prime minister and nobody cared, especially the millions of scientists
    warning us of unstoppable warming (a comet hit).

    • Your first claim and your last are flat out false. All the ones in the middle are completely irrelevant.

      • If there were real legal consequences for your CO2 death threats to our children, you wouldn’t be shooting your mouth off still.

    • Harper accepts (at least pays lip service to) climate change.

  7. Hahahahaha! Ya RIGHT!!!
    *In all of the debates so far, Obama hasn’t planned to mention climate change once.
    *Obama has not mentioned the crisis in the last two State of the Unions addresses.
    *Occupywallstreet does not even mention CO2 in its list of demands because of the bank-funded carbon trading stock markets run by corporations.
    *Julian Assange is of course a climate change denier.
    *Canada killed Y2Kyoto with a freely elected climate change denying prime minister and nobody cared, especially the millions of scientists warning us of unstoppable warming (a comet hit).
    News editors cause climate change.

  8. You doomers wanted this crisis to be real. Why?

  9. Eureka!! Solved the hard part of making a fake peat bog with logs sequestered underneath. Thx to C.Freeman for two recent papers and everyone’s free pre-prints, and the U of A student who gave me her password.
    I’ve got a sketch of logs at the bottom of a trench, perhaps it is a string bog or perhaps it is a dried up pond. Add water, ideally phenolic-rich. Then you vacuum nearby catotelm, the dead underlayers of sphagnum fuscum peat. You sprinkle the catotelm (bought in stores for gardening) over, and maybe you added it with the logs. This gives you a surface to add acrotelm (living top layer) or acrotelm and seeds. Not sure if clippings or strips or what…then top up the water so it hydrates the living layer. The key is controlling the water table so it reaches the acrotelm (as opposed to a natural bog that lets the water table slip low). Many other uncertainties, but this prevents AGW from running away.

  10. The simple sensible thing to do is leave the bitumen in the ground until we reach 350ppm

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