Balancing the economy and the environment

My attempt to explain the Trudeau-Notley compromise: take climate change seriously, halt Alberta's growth in emissions, and use a rising price on carbon to cut Canada's fossil CO2 emissions, while continuing to export Canadian oil and trying to get the best price for it instead of leaving money on the table.

For the full story, see the Leach Report.

Introduction

There's two related problems:

  1. Lack of pipeline capacity. This is costing the Canadian economy something like $15 billion per year, due to spikes in the discount on Canadian oil exports.

  2. Climate change. By burning fossil fuels, we're cranking up the global thermostat.

Trudeau's line (similar to Notley's) is that we have to find a balance. We can't ignore either the economy (like Horgan) or the environment (like Scheer, Ford, and Kenney).

Trudeau's strategy has been to pursue both: on the pipeline front, to add Line 3, Keystone XL, and the Trans Mountain expansion. On the climate change front, to put a price on pollution, using a steadily rising carbon price to cut demand for fossil fuels.

Carbon pricing

Economists are pretty much unanimous that a rising carbon price, offset by income-tax cuts (as in BC) or dividends paid to households (as in the federal backstop plan) is the most cost-effective way to reduce fossil fuels. William Nordhaus (who just won the Nobel Prize in economics) also argues that it's the best way to coordinate international action, rather than trying to use quotas.

Under the federal plan, each province can either implement carbon pricing itself (as in BC, Quebec, and Alberta), or the federal government will do it for them (as in Ontario). Ottawa is setting a price floor: $20/t in 2020, about 4.5c/L, rising $10/t each year to $50/t in 2023. All the money raised in each province stays in that province, instead of going to Ottawa, so it's not a federal tax grab.

At $50/t, Canada's emissions should be about 20% lower than without pricing.

According to the IEA, the price path required to stabilize CO2 at 450 ppm is US $20/t by 2020, $100/t by 2030, and $140/t by 2040. A key point is that even in the IEA's 450 ppm scenario, while coal usage drops off rapidly, oil consumption is pretty steady, and additional sources of oil will be needed to supply demand.

Everyone hates taxes, of course. It's going to be a shield issue for Trudeau in 2019. Some key points here:

  • All the money goes either directly back to households as a refundable tax credit (90%) or to schools, hospitals, and small businesses (10%). Because fossil-fuel use varies a lot between households, the estimate is that 70% of households will be better off - they get more back than they'll be spending.

  • To protect Canadian competitiveness for industrial sectors which use a lot of fossil fuels, Ottawa is adopting an approach developed by Alberta, called output-based allocations (OBAs) developed in Alberta. Basically it means that within each sector, the dirtiest firms are worse off and the cleanest firms are better off.

Pipelines

Most of the $15 billion/year economic benefit of additional pipeline capacity will go to Alberta, of course, but not all - the oil sands bid up wages across the country, especially for the trades.

There's a lot of resistance to climate change policy in Alberta, which is natural - what do Albertans get out of it? This is why both Notley and Trudeau have made clear that the Trans Mountain expansion wouldn't have been approved without Alberta's climate change policy.

This is why Trudeau has put so much political capital into getting TMX built. There's two remaining legal hurdles at this point - assessment and mitigation of the increase in tanker traffic, and mitigation on First Nations issues.

Note that with both Keystone XL and TMX underway, Energy East didn't actually make economic sense - there's not enough oil production to fill the pipes (Energy East's capacity would have been huge).

Criticisms

Naturally, a compromise position can be attacked from two sides.

From the left: climate leaders don't build pipelines.

Because Canada's a leading supplier of fossil fuels, it's natural to ask whether we can reduce global emissions by withholding supply (e.g. not building additional pipelines) as well as reducing demand. Unfortunately, all that means is that oil-importing countries will buy their oil elsewhere. (If I buy all my groceries from my local Safeway, and it shuts down, I won't starve.) Because of OPEC, which keeps the price of oil in a target range, it won't even raise the price of oil.

So trying to reduce global emissions by withholding supply is ineffective as well as expensive. If we need to reduce emissions faster, we should focus on demand-side measures (e.g. vehicle fuel-efficiency standards).

From the right: we're too small to matter.

Unfortunately this isn't true either. Canada has the world's third-largest oil reserves (after Venezuela and Saudi Arabia). The oil sands are too large to hide from the spotlight. As climate change gets worse and worse, pressure on governments to do something will increase, and the Canadian oil sands will make a convenient scapegoat.

So even you're pessimistic (or cynical) and think the international effort to fight climate change goes nowhere, we still have a self-interested reason to pursue carbon pricing: it's a shield against environmentalists claiming that Canada is destroying the climate. We can say, "Hey, we're doing our part to reduce our emissions, and if everyone else does the same, we can stabilize CO2 levels at 450 ppm."

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