Daily Archives: July 1, 2007

Carbon needs to cost $160+ a tonne, Canadian policy advisers say

I’ve been trying to get my head around the numbers in this (PDF), an interim report from Canada’s National Roundtable on the Environment and the Economy on what an appropriate price would be for carbon emissions if we’re going to meet various possible greenhouse-gas targets by midcentury.

The summary, directed at the federal Conservative government: The longer you wait, the more meeting your own declared targets is going to hurt. Wait long enough, and you’re essentially betting you won’t be in power when the hard stuff need to be done.

The NRTEE is a federally-funded think tank with a board of business leaders and smart environmentalists and lawyers, ranging from the ubiquitous Mark Jaccard to the chief operating  officer of Suncor, an extremely major player  in Alberta’s oil industry. Although the top people have a noticeably Liberal-red tint (the last president of NRTEE, David McGuinty, is now the opposition Liberals’ environment critic and the current chairman is Glen Murray, the largely well-regarded former mayor of Winnipeg but a failed Liberal candidate there), the organization itself is a thoroughly respectable source of ideas and forecasts on the environment file.

It’s also been screwed around with a bit. This report is “interim” because it’s a response to the federal government’s clean-air and climate-change policies announced in their Clean Air Act last fall, all of which went out the window when the Conservatives declared those policies inadequate and replaced them with others in April. So there’s a new “final” report on the way sometime.

Some highlights from this one:

  • To cut Canada’s greenhouse-gas emissions by 45 per cent below 2003 levels by 2050, carbon-dioxide emissions will have to cost at least $160 a tonne by then. That’s if we start hiking the price per tonne soonish; if we wait, it’ll be $200 a tonne because deeper cuts will eventually have to be made in less time.
  • To hit a more ambitious target of 65 per cent below 2003 levels, the range is $270 a tonne to $300 a tonne.
  • Depending on which path we take and using different economic models, the NRTEE predicts a total loss to the economy in 2050 of 0.9 to 2.6 per cent versus business as usual (noting that the whole point of this discussion is that “business as usual” won’t be possible if we don’t do something).

Now, a price of $160 a tonne to emit carbon dioxide (the NRTEE is agnostic about whether a carbon tax or cap-and-trade is better) is way, way beyond anything even the federal government’s revised policies call for. For heavy emitters, the Conservatives are planning an intensity-based cap-and-trade system with a safety-valve price of $15 per tonne for emissions over each emitter’s limit.

What’s exceptionally clever about this NRTEE report, though, is that it doesn’t say that necessarily has to change. The body very carefully doesn’t set itself up as an opponent or critic of government policy, so the Conservatives don’t have their backs put against the wall, forced into a position where they either have to cave in or just reject this advice entirely:

[I]t is possible to attain long-term targets with either a “fast” or “slow” start.  However, the “slow” start requires a significantly higher emissions price in the latter years to compensate for the low emissions price in the beginning years, which allow emissions to grow more.  Regardless, however, the modeling shows that the emission reductions targets are achievable.

The change that’s needed under the NRTEE analysis, though, is that even in a “slow” scenario, a $10-a-tonne carbon-dioxide price has to kick in immediate and apply countrywide and to all emissions, not just to the over-the-limit emissions of heavy emitters. That’s not likely to happen under this government. That’s OK, the NRTEE says — it’s just going to mean a bit more pain later.

The other thing the government needs to do, according to the think-tank, is set prices much farther into the future than 2020, which is as far as even the Conservatives’ revised plan goes:

When businesses and individuals make investments with a long lifetime, they implicitly or explicitly consider the financial performance of those investments over the expected life of the investment. The analysis conducted for the NRTEE assumes that the government clearly communicates to businesses and individuals a schedule for GHG prices well in advance and inspires confidence in firms and consumers that the policy will be enduring. As a result, businesses and individuals have some expectation of a future GHG price, and use this knowledge to make decisions about carbon-reducing technology investments. This type of clear communication can dramatically improve the effectiveness of a policy.

Conversely, if the government neglects to clearly communicate the GHG price schedule well in advance, it risks causing serious economic dislocation when it actually implements each increase in the price, because society’s capital stocks will not be well prepared for the abatement effort required.  GHG reductions would then be smaller for the same GHG price.