4

No, carbon pricing alone won’t be enough to lower emissions

A response to economist Trevor Tombe’s argument against blocking pipelines


 

TransCanada-1024x768

The economist Marc Blaug defined economic models as “mental exercises without the slightest possibility of ever being practically relevant.” These models and their fanciful assumptions look convincing on the back of an envelope, but they provide little real-world policy guidance.

Enter University of Calgary economist Trevor Tombe’s timely and counterintuitive back-of-the-envelope argument against rejecting new oil pipelines as a way of reducing greenhouse gas (GHG) emissions. Tombe concedes that a moratorium on new pipelines would lower GHG emissions domestically (upstream) and globally (downstream). But he thinks there’s a more efficient approach. Namely, a carbon price of approximately $50 per tonne.

Tombe’s admittedly rough calculations estimate the implied costs for Alberta if new pipelines are blocked. Rejecting new pipelines, he argues, poses a massive economic opportunity cost for Alberta oil producers, “far above the likely damages from a tonne of GHG emissions.”

The likely damage of a tonne of carbon emitted into the atmosphere is called the “social cost of carbon,” for which Tombe relies on the federal government’s updated estimate of $40. Tombe argues that pricing carbon at about $50 per tonne—which the government’s plan does by 2022—will reduce emissions more cheaply than prohibiting pipelines.

Tombe’s argument is just the kind of economic thinking best left to classroom chalkboards. As a basis for Canada’s climate policy, it falls short in three ways.

First, Tombe assumes without justification that Alberta oil producers’ implied costs—purely notional costs not actually borne by anyone—are relevant to a public policy whose purpose is to reduce emissions and the very real costs we’ll all actually have to bear if we fail to stabilize our climate.

Second, the government’s estimated social cost of carbon might vastly underestimate the true cost. While most economists agree that pricing carbon is the ideal way to reduce emissions, economists also appear to agree that economic models seriously underestimate the future costs of climate change. Models of the social cost of carbon depend on modellers’ assumptions, including how much to discount future damages. Estimates vary, but many economists think the true cost is closer to $200 than Tombe’s $50.

Think of it this way: if Canada’s proposed price of $50 by 2022 were really high enough to reduce emissions and stimulate “clean growth” by sending a clear signal to the market to shift production from fossil fuels to renewable energy, we wouldn’t even be having this debate! In a world where carbon is properly priced and not substantially subsidized, building new pipelines would be economically unthinkable. Which is kind of the point.

But because $50 is almost assuredly too low, we can’t rely on it alone, no matter how economically ideal it may seem. Instead, we must pursue a mix of policies, including one Tombe agrees will work – blocking pipelines.

The Minister of the Environment and Climate Change gets this—mostly—when she explained that “some people say just have a price on carbon. If you were to do that, the price would be so high it wouldn’t make any sense. So that’s why you have to have a variety of different measures.” Minister McKenna’s absolutely right, of course, if what she means is that a full carbon price wouldn’t make sense politically.

Finally, Tombe assumes other oil producers like Saudi Arabia will fill the gap left by Alberta’s forgone production. As his calculations show, however, even if Saudi Arabia fully makes up for Alberta’s reduced production, global emissions will still decline. More importantly, Tombe’s assumption reveals a corrosive cynicism about the Paris Agreement, which both Canada and Saudi Arabia have ratified. As a developed country, Canada is legally obligated to reduce its absolute economy-wide emissions. Building new pipelines squarely contradicts this obligation, and it tells developing countries that Canada is prepared neither to lead nor to innovate. If each oil-producing signatory to the Paris Agreement looked at the world the way Tombe seems to, each would conclude that its foregone opportunity costs would be too high to phase-out oil production, leading to a tragedy of the global commons through a collectively-fulfilling prophesy.

But as the renowned climate scientist James Hansen and his colleagues recently concluded, “we have a global emergency. Fossil fuel C02 emissions should be reduced as rapidly as practical.”

Canada needs to heed this policy guidance. Otherwise, we’ll never have Paris, only pipelines that will soon outlive their purpose.

 

Jason MacLean is an assistant professor at the Bora Laskin Faculty of Law, Lakehead University


 

No, carbon pricing alone won’t be enough to lower emissions

  1. It is unclear why this article has been posted as the author demonstrates within the text that he simply does not understand the topic at hand. In his article Dr. Tombe primarily discusses the social cost of carbon which was defined by the EPA as:

    an estimate of the economic damages associated with a small increase in carbon dioxide (CO2) emissions, conventionally one metric ton, in a given year. This dollar figure also represents the value of damages avoided for a small emission reduction (i.e., the benefit of a CO2 reduction).

    At the conclusion of Dr. Tombe’s article he completes a calculation using Alberta numbers to show that a $50/tonne carbon tax would have the same effect as an activity that would cost Albertans $1000/tonne (i.e. blocking the pipelines). Thus demonstrating that of the two alternatives the economically sensible one would be to price carbon and not block pipelines.

    In this article Dr. MacLean leans on the research of Dr. Jaccard (used as the basis for that $200 value in the discussion). Dr. Jaccard’s research addresses the emissions price necessary to achieve our Paris Agreement emissions targets. These are two entirely different goalposts and to conflate the two demonstrates a woeful misunderstanding of the topic.

    Dr. Tombe is showing that a carbon tax of $50/barrel will have the same net emissions decrease that blocking the pipelines will do, but at 2% of the implied cost to the Alberta economy. Dr. Jaccard, meanwhile is looking at what it will take to reach our Paris Agreement goals nationally which a completely different story. How can anyone take an article seriously when the author doesn’t appear to even understand the work he is criticising?

    • Prof. MacLean does not misunderstand, he is simply not distracted by the red herring argument put forward by Prof. Tombe.
      We need to reduce emissions, as soon and as much as possible.
      One way is to leave the oil in the ground.
      The “costs” of leaving the oil in the ground are not actual costs someone has to pay. They are income opportunities not taken for a reason. Like working 5 days a week instead of 7. Or 8 hours a day instead of 24. These are choices we make, and the way we make these choices determines our quality of life.
      If we choose to take the oil out of the ground, and burn it, and release the carbon into the atmosphere, there are real costs that we all will pay, in many ways. Real costs that will have to be paid for with real money (and in some cases more than money), by everyone. The actual dollar value of that cost is not known, but is much debated. A carbon tax is an attempt to apply that cost up front, to reduce the otherwise existing subsidy that is granted to the oil industry to profit from the extraction of the energy without paying for the damage it causes.
      A carbon tax can have the effect of reducing emissions, but only if the rate is high enough. $50 / ton is not enough. That’s why the industry agrees to it. It wouldn’t reduce emissions, it would only make people pay more for the energy. A carbon tax of $200 per ton is more like what the real cost of the emissions is to the global commons, and at that rate it would eliminate the subsidy that currently exists to carbon based energy, thus allowing other energy sources to compete. Since no one is proposing a carbon tax of $200 per ton (or if the are, governments aren’t insisting on it and the oil industry certainly isn’t agreeing to it), reducing emissions will require more than just a (too low) carbon tax.

  2. Great article, thank you. This is the kind of clear thinking about the big picture that we need.

  3. There is no path from legislation to implementation. The authors and counter arguments believe we will somehow transition smoothly from a carbon economy to a their utopia. Please look back, but look closely at our history. Humans have never done anything in concert around the entire globe. And we never will. Darwin realized that species evolve based on environment as much as biology. The entire premise of our history is “winners and losers”. To think that Trump election was somehow a one-off is to be extremely naive. I have concluded that people on the other side of our biosphere could care less of my daily struggle to provide a life for my family. I equally believe that given a choice, the survivor in all of us will chose differently then any UN sanctioned agreement fro Paris. But keep up the idea that we will Kumbaya to resolve this. My personal view is we are to selfish and localized to care what happens to other continents when it comes down to the rubber hitting the road.

Sign in to comment.