Mark Jaccard SP SP Speaker Series: Climate Policy in Canada - Issues in Regional Impacts and US...

11/2010 Jaccard-Simon Fraser University 1

Mark Jaccard

School of Resource and Environmental ManagementSimon Fraser University

November, 2010

Canadian Climate Policy:Regional Impacts and Future Prospects


Presentation in two parts

Part I

If Canadian government wanted to reduce GHG emissions, how could it address perceptions of regional unfairness?

Part II

If Canadian government did not want to reduce GHG emissions, what could concerned citizens do?


Part I


Emissions diversity in Canada

Regions have different emission intensities because of their natural endowments of fossil fuels and hydropower, and their historic development of electricity and industry.

Hydropower in Quebec, Manitoba, BC and Newfoundland. Coal fired electricity in Alta-Sask – but also NB, NS and Ontario. Emissions from fossil fuel extraction and processing in Alta-Sask, Newfoundland and BC.

Alta-Sask assumed distinct – (1) yes, their emissions per capita are much higher, (2) but emissions intensity of their economy is not so distinct (coal-fired electricity in other regions; country-wide emissions from transport, buildings, industries like cement, and municipal landfills).


GHG emissions per capita in 2007

Peters et al, 2010


GHG emissions intensity of economy in 2007 (GHG/GDP)

Peters et al, 2010


Assumption climate policy will especially harm Alta-Sask

Assumption that climate policy will especially harm economies dominated by fossil fuel extraction and processing.

Assumption that federal “emissions pricing policy” will transfer resource-related wealth from Alta-Sask to rest of country if carbon pricing revenues returned to Canadians via federal spending programs and/or cuts in income and corporate taxes.

(Alta-Sask would contribute perhaps 40% of emissions revenue but has less than 15% of population and less than 25% of corporate income.)


Who should pay for emissions abatement? Concepts of equity

Polluter pays. Equity requires that polluters pay for emissions they cause – equal charge for every tonne with no compensation.

Equally shared costs. Unfair to penalize high emitters since they adopted technologies with societal approval. Equity requires society to share costs of abatement – equal cost per citizen.

Ability to pay. Equity requires wealthier regions or individuals to pay a greater share per capita.

The fair outcome? Equity perspectives tend to reflect self-interest.

The likely outcome? Compromise / trade-off of power politics and equity perspectives. (e.g., influence if Alta-Sask votes federally as bloc, threatens separation, etc.)


Our study? Apply state-of-the-art models to assess regional

impacts of alternative policy designs

Micro-economic model that simulates technological change as firms and households face rising cost of emitting GHGs.

Provides elasticity (price response) parameters to . . .

Macro-economic equilibrium model that simulates regional economic output change as production costs, revenues and personal incomes change with (1) technological switching, (2) tax changes, and (3) trade and investment changes.(Government fiscal position assumed not to change.)

These are standard energy-economy-emissions models.


Technology-explicit capital stock vintage model

Evolution of energy service demands determined by population, economic growth and cost feedbacks

Full integration of energy supply and demand

Technology choice and decision making represented• Market share is calculated via a probabilistic

simulation (logistic curve)• Includes behavioural parameters to reflect technology

choice/consumer preference

Declining cost functions represent technology learning and shifts in consumer preference

CIMS: technology-explicit, micro-economic model


GEEM: macro-economic general equilibrium model

Covers all major economic activities at aggregate level (investment, employment, savings, trade, government expenditures)

Regionally disaggregated into Alberta, BC, Saskatchewan, Manitoba, Ontario, Quebec, Rest of Canada;

High industrial disaggregation for emissions-intensive sectors:

• Manufacturing: petroleum refining, chemicals, non-metallic minerals, primary metals and other manufacturing;

• Oil and gas: conventional, tight and shale gas production; conventional light/medium and heavy; oil sands

Technological detail for CCS in key sectors (e.g., electricity, oil sands, chemical manufacturing, petroleum refining).


GEEM: economic flows

ArmingtonAggregator

Industry

Welfare

ConsumerExports

Imports

Capital, LabourProductionFor Export

Imports Final Demand

IntermediateInputs

ProductionFor DomesticConsumption

Leisure Welfare

To other Regionsand Rest of the World

From other Regionsand Rest of the World

Capital from otherRegions

Capital to otherRegions

Foreign Exchangefrom International Exports used to buy International Imports


Target and simulated policy designs

Target – 17% reduction from 2005 levels by 2020 (current Canadian government target)

Simulated policy designs

• Intensity based cap and trade – economy wide(past federal proposal for industry, exists already in Alta)

• Absolute cap and trade with 100% auctioning of permits with revenue recycled via federal corporate and personal tax cuts

• Absolute cap and trade with 100% auctioning of permits with revenue recycled via federal transfers to each province equal to its contribution to emissions revenue(provinces in turn cut corporate and personal income taxes).


Policy simulations: growth rates (2010 to 2020)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Business-as-usual Intensity-based cap-and-trade system

Auction with FederalPersonal and Corporate

Income Tax Cuts

Auction with ProvincialPersonal and Corporate

Income Tax Cuts

Annu

al G

row

th in

GDP

(%)

Alberta and SaskatchewanRest of Canada

Peters et al, 2010


-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Intensity-based cap-and-tradesystem

Auction with Federal Businessand Personal Income Tax Cuts

Auction with ProvincialBusiness and Personal Income

Tax Cuts

Fina

ncia

l Tra

nsfe

rs b

etw

een

Regi

ons

(% o

f GDP

in 2

020)

Alberta and SaskatchewanRest of Canada

Policy simulations: revenue transfers (2020)

Peters et al, 2010


Sensitivity analysis:mobility of capital

Baseline assumption in all simulations• no significant emissions pricing by major trading partners• no emissions border tax adjustments by Canada• level of foreign investment unchanged by Canadian

emissions pricing (assume zero capital mobility)

Sensitivity analysisRelax the assumption that level of foreign investment in Canada

cannot change (assume frictionless capital mobility across borders in search of highest returns)


Sensitivity resultsResultsGiven model’s design and parameter values, relaxed capital mobility

did not change GDP growth much from simulated rates (.02% lower growth rate)(model design and parameter values available from authors)

Explanation?• Short timeframe to 2020 – capital stock change.• Modest climate target, thus modest changes in cost of

production.• Corporate tax reductions retain rates of return close to baseline

levels and thus spur economic output in some sectors.

Intensity-based cap-and-trade system

Auction with Federal Personal

and Corporate Income Tax Cuts

Auction with Provincial Personal

and Corporate Income Tax Cuts

Alberta and Saskatchewan 2.10% (-0.02%) 1.87% (-0.01%) 1.99% (-0.02%) Rest of Canada 1.86% (-0.02%) 2.05% (-0.01%) 1.99% (-0.02%) Total 1.91% (-0.02%) 2.01% (-0.01%) 1.99% (-0.02%)

Peters et al, 2010


Caveats: issues external to this study

Analysis ignores that emissions pricing elsewhere (perhaps globally) may lower GDP of Alta-Sask and Newfoundland because of lower international oil price and/or reduced oil exports (recent MIT study). This results from global effort, not Canadian target or policy.

Analysis ignores the GDP and non-GDP impacts to Alta-Sask and other regional economies from climate change.


Study conclusions

Without substantial harm to national economic growth, Canada could initiate today an emissions pricing policy to achieve its promise to reduce 2020 emissions to 17% below 2005.

The emissions pricing policy could be designed to meet different concepts of regional equity including:

• Similar, but small, decreases in rate of economic growth in Alberta, Saskatchewan and rest of Canada.

The emissions pricing policy could be designed to ensure:• No new transfer of wealth from Alberta and Saskatchewan

to rest of Canada.


Part IIWhat if government does not want to reduce emissions?


The broader context: regional impacts as convenient excuse

In spite of a 2020 emissions target that requires immediate policy action, Canada’s Conservative minority government has found excuses not to act and now used Senate to block a bill.

Convenient excuse # 1 Widely held assumption that climate policy will concentrate costs

on specific regions, notably Alta-Sask.

• Federal government not conducting studies (like this CD Howe report) to show Canadians that regional impacts can be mitigated.

• Federal and Alberta governments react negatively to efforts to explore these issues – David Suzuki Foundation / Pembina report funded by TD Bank.


Convenient excuse #2:“waiting for Godot”

Convenient excuse #2 Thus far, no political cost in Canada to “waiting for US”. Rationale:

• Canada going first may hurt economic recovery.

• Waiting and coordinating with US cap and trade may reduce emission reduction costs.

• Matching US policy should prevent US border tax adjustments on Canadian imports.

• If no US cap and trade, likely admin and econ benefits to matching US regulations on vehicles, electricity, industry, etc.


The more things change, . . .

Canadian climate goals and profile depends on party in power. But the outcome in terms of policy does not.

• From 2000-2006 Canadian Liberal government distinguished itself from US / George Bush by retaining aggressive Kyoto target. Strong talk, but ineffective policies (neither emissions pricing nor significant regulations).

• In power since 2006, Canadian Conservative government has, since the Al Gore scare, evolved toward no action and no talk of action.

Saving grace?Some provincial governments have implemented stronger

policies, but are constrained by inaction elsewhere in North America (e.g., future increases in BC carbon tax).


Huge difficulty of global action

Global public good problem. – Virtually everyone’s contribution is small enough that individual

initiatives are of little value.

– Without compliance enforcement mechanism, incentive to free-ride.

Delayed effects problem.– Action must be taken far in advance to avoid impacts, but human

decision-making (individual, market, politics) often myopic.

Who pays problem.– Perceptions of equity aligned with self-interest (polluter pays vs equal

payment per capita or GDP vs historical responsibility)

Uncertainty problem.– Complex earth-atmosphere system means ongoing uncertainty, but

also substantial risk of catastrophic outcome


Huge difficulty of national action

Perceived concentrated costs. – Alberta pays or the poor pay or rural people pay or soccer moms pay.

Easy to blame others.– Alberta’s fault because of tar sands vs Ontario’s fault because of

automobile industry. Industries’ fault vs consumers’ fault.

No easy alternatives.– Energy efficiency not easy or effective, renewables, nuclear and CCS

alternatives have own impacts and risks.

– Everyone has a clever rationale for continuing what they do – more efficient coal plants, oil sands to US and China, natural gas to US.

Individual and collective self-deception about policy effectiveness.– Assumed effectiveness of information / education and of subsidies.


What options if government won’t act?

Common assumption that individual actions as consumers and firms make a difference – voluntary actions, offsets. More likely? Zero effect and even negative by letting governments off the hook.

Make a difference? Civil actions that prevent major investments linked to GHG emissions. Actions? Political, legal, public demonstrations, civil disobedience. Targets? New fossil fuel developments, including extraction, pipelines, refineries, coal-fired electricity plants, vehicle manufacturing plants (gasoline and diesel vehicles), retailers selling emitting products (propane patio heaters), urban planners and developers.

Model for civil organization? MADD – lobby for behavioral change, but more importantly pricing and regulatory policies. RAGE – residents against greenhouse emissions.


Extra slides


Provincial governments – Alberta

International and national public relations challenge because of oil sands and coal-fired electricity. In 2007 introduced performance standard for industrial fossil fuel emissions.

– Required initial 12% intensity reduction (emissions per unit output) then intensity reduction of 2% per year.

– Fee of $15 / tCO2 for emissions in excess of standard.– Revenues collected from fee are accumulated in a technology fund for

distribution to industry based on competing bids.– Additional government revenues added to technology fund to

especially subsidize investments in carbon capture and storage.

Optics– Alberta points out it was first in North America to price emissions.– Claims emissions taxed at $15 / tCO2– But fee only applied to excess emissions – average fee for industry

fossil fuel emissions less than $5.


Provincial governments – BC

2007 – for electricity, commits to 90% clean energy standard (like RPS but focused on emissions rather than renewables).

– Effectively disallows coal plants and natural gas plants without carbon capture and storage – two planned coal plants and one natural gas plant cancelled.

– Rapid development of run-of-river projects, some wind and some biomass.

2008 – carbon tax on all fossil fuel combustion emissions– 2/3 of revenue collected from industry, 1/3 households;– revenue neutral with all revenue returned via corporate income tax

and personal income tax cuts (and tax credits – low income)– tax of $10/tCO2 in 2008, rising by $5 every year to reach $30 by 2012

(post 2012 not yet decided).

Other policies– Implementing low carbon fuel standard, and other policies (municipal

planning, transit investment, etc.).


Provincial governments – Ontario

Commits to phase out all coal-fired electricity (initially almost 1/3 of production) by 2014.

– Initial target was 2007, but extended to 2014, some closure has already occurred.

– Rapid development of natural gas plants.– Policies to foster renewables via feed-in tariff subsidies, with

higher subsidies for high cost renewables (PV).– Renewables support linked to local manufacturing investment,

but currently subject to challenge under trade laws.

Other policies– Host of other “green policies” but no emissions pricing– Policies include transit investment, municipal planning, etc.


Provincial governments – misc

Quebec to develop only hydropower and small renewables (especially wind) in electricity generation. Also has small carbon tax, with funds used to support alternative energy.

Other provinces have various soft policies, but no emissions pricing or strong regulations.

Several provinces (BC, Manitoba, Ontario, Quebec) involved in Western Climate Initiative and its effort to create regional cap and trade system. Ongoing negotiations, but ultimately dependent on will of US state governments (fading as governments like California address other priorities).

Mark Jaccard SP SP Speaker Series: Climate Policy in Canada - Issues in Regional Impacts and US...

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