Tuesday, June 21, 2016

Economists opine on tools to reduce greenhouse gas emissions

I've noted a flurry of opining on pricing emissions, perhaps because I'm Canadian and the small, homogenous eco-econo group heard a blast that disturbed the herd, but two recent works from south of the border also caught my attention.

Carbon pricing under binding political constraints, by Jesse Jenkins and Valerie Karplus, provides an explanation of why a straight carbon tax is rarely implemented - and when it is, generally at very low levels.
...persistent political economy constraints motivate a search for climate policies that are politically feasible, environmentally effective, and economically efficient. As in many other domains of economic regulation, second best (and third and fourth best) climate policy mechanisms abound. By paying close attention to the distributional impacts of different climate policy instruments and their interaction with potentially-binding political constraints, economists, political scientists, and policy makers can help design climate policy responses that are both palatable enough to be implemented today and economically superior to alternative second-best instruments.
... we implement constraints of varying severity on:
  1. the maximum feasible CO2 price itself; 
  2. the maximum tolerable increase in final energy prices; 
  3. a maximum tolerable decline in energy consumer surplus; and 
  4. a maximum decline in fossil energy producer surplus.
The full paper contains many, many equations. The stated "main objective of this exercise was to put an analytical framework around," and I think that's achieved more in noting the contraints than in the attempts to measure them. The authors' conclusion invokes scenarios where public opinion could be moved towards increasing the price of CO2, as the first best option, but...

Meredith Fowlie delivers a warning that policies taken outside of pricing carbon have been to the detriment of carbon prices, in Time to Unleash the Carbon Market?

What’s a ton of carbon (dioxide equivalent) worth? Not much if you ask the world’s carbon markets. The graph below summarizes prices and quantities covered by existing carbon emissions trading programs (green) and carbon taxes (blue). Nearly all carbon market prices are below $13/ton.
...when complementary measures mandate relatively expensive abatement options, the carbon price we observe in the market will not reflect the marginal cost of reducing emissions. Second, a reliance on complementary measures to reduce emissions can significantly drive up the costs of hitting a given emissions target.
In California and in Europe, there is growing evidence that low allowance prices in the carbon market belie much higher abatement costs associated with complimentary policies. For example, this paper estimates that the California Solar Initiative delivered emissions reductions at a cost of $130 – $196 per metric ton of CO2. California’s LCFS credit price (which reflects the marginal incentive to reduce a ton of MCO2e) is currently averaging around $120 per metric ton CO2. In Europe, researchers estimate that the implicit costs of renewable energy targets per metric ton of CO2 are on the order of hundreds of euros for solar (and wind in some locations).
The full post should be read at the energy at HAAS blog.

There's a counter-productive nature to these subsidies pushing down carbon pricing according to one of my favourite works, Lion Hirth's 2013 The Market Value of Variable Renewables. That paper showed industrial wind would have lower market penetration under higher carbon pricing as nuclear and carbon-capture-and-storage (CCS) projects were built - unless those technologies were specifically banned:
...both higher and lower CO2 prices reduce the absolute market value of wind power (Figure 21). At a CO2 price of 100 €/t, about half of all dispatchable capacity is nuclear power, such that the merit-order effect is so strong that even absolute revenues of wind generators are reduced – despite a significant increase in electricity prices. This might be one of the more surprising results of this study: tighter carbon prices might actually reduce the income of VRE [variable renewable energy] generators, if the adjustment of the capital stock is taken into account.
Being a cynic, I'd say when one sets a carbon price at an ineffectual level due to concerns for political constraints, and then supplements it with subsidies for politically popular things (like renewable energy), one is just making the economics up - and exposing their whimsy.

Whimsy seems like a good time to cover a couple of articles from Mcleans, a Canadian magazine. The first one that caught my eye was by "University of Calgary economist Trevor Tombe".
It’s ridiculous to call a carbon tax a sales tax. Here’s why.
...Words matter. Thoughts matter. How we communicate and debate matters.This question matters.
So are they correct? Is a carbon tax a PST? No. The two taxes have different effects, different objectives, are levied on very different things, and have different legal implications. In short, a carbon tax is no more a sales tax than income taxes are.
This argument seems rigorous and obvious. Bravo.
In the real world it's also insulting.

I displayed a graphic from the Fowlie article showing Sweden with, by far, the highest carbon tax. The Jenkins-Karplus article I cited notes:
Sweden, for example, appears to have the highest carbon price in the world. Yet the carbon tax was implemented as part of a series of reforms in 1991 that simultaneously reduced existing energy taxes by 50 percent. The total effect was to lower overall tax rates on fossil energy consumption
This is real-world carbon pricing - melted with sales and fuel taxes and manipulated to avoid taxing business but not displease the electorate so much that political power is lost.
In Ontario energy was excluded from general sales taxes up until 2011, and then it wasn't, and for 2017 carbon pricing will impact energy costs some more.
Elsewhere energy is often taxed at a lower rate than the more broadly applied Value Added Tax.

"more" or "another", are the most polite adjectives many people use for a tax - much more so than "carbon" and "sales" - and that's because many people learn experimentally, although perhaps not those at the University of Calgary.

The following day the same Mcleans site carried "The economic cost of carbon policy" by Andrew Leach, noted as "professor of energy policy at the University of Alberta" and "The chair of Alberta’s climate change advisory panel." Leach politely notes, in The economic cost of carbon policy, the event in Alberta prompting academics to opine on carbon taxation, which was the leak of an internal government analysis on the impacts of carbon pricing obtained by the Calgary Herald:
According to a projection for Finance Minister Joe Ceci and obtained by the Herald, the climate plan would lower the province’s gross domestic product by 1.0 to 1.5 per cent by 2022, “due to the decline in energy investment, weaker production and lower consumer spending.”
Oil exports would be crimped by 0.5 per cent from the business-as-usual (BAU) case in 2018-19, the study says.
Consumer spending would fall by almost two per cent by 2022, “due to the impact on employment and slower wage growth.”
As well, corporate profits would decline about $1.5 billion, or 1.7 per cent, from the BAU scenario by 2022.
These key impacts are based on several assumptions rolled out by the province on Nov. 22, such as implementing a $30-a-tonne carbon tax by 2018, phasing out coal-fired power plants and investing in renewable energy.
That's one carbon pricing tool, and two other things - banning (regulation) and subsidizing angels (renewable energy) - which hopefully people are starting to see as one step towards pricing carbon and two steps away from doing so meaningfully.

Maybe not.
From Professor Leach's article:
...people need to understand that carbon pricing in and of itself is not a magic bullet. Below are some of the reasons why.
First, stringency matters: there’s no reason to expect that a carbon price will do more than a stringent set of regulations—economics simply tells us that in most cases, a carbon price applied broadly could likely accomplish the same outcome at a lower total cost to the economy than would be possible through a suite of regulations...
Second, interaction with other policies and constraints matters...
Third, there are distributive impacts of policies which a textbook analysis of the first best can often ignore...
Fourth, and related to each of the points above, political constraints matter...
Economics students should review their majors if politics seem to be the only thing that matters.
What would likely exist as an alternative is a world where Alberta faces increasingly discriminatory and punitive policies and barriers to trade both from within and from outside Canada, and where firms face mounting shareholder and institutional investor pressure not to invest in Alberta. The costs of these are speculative, and more difficult to quantify, but we are confident that they far and away exceed the cumulative costs of the actions we’ve recommend. Simply put, if you assume there is no value in reducing emissions, you’ll find that there’s no value in reducing emissions. We believe that our policy recommendations will be of net benefit to Alberta, yes in terms of the avoided costs of greenhouse gas emissions and air pollution, but also in terms of the avoided costs of discriminatory and punitive policies imposed upon Alberta,
Canada had a federal election last year where the "sunny ways" party won largely on a storyline that reducing emissions would be good for the economy.

Now Canada has a $30 billion a year deficit planned - and in the quiet of non-election seasons, elite economists who say there's a price to pay for reducing emissions.

No comments:

Post a Comment