Tuesday, 28 June 2011

Better urban transport: equity versus efficiency

Yesterday the New York Times ran a story on how European cities have tried to make driving as costly and difficult as possible to induce people to take transit, walk, or bike. Whereas American cities synchronize lights to make automobile traffic move as quickly and efficiently as possible, some European cities actually sync lights to slow traffic down as much as possible, timing successive traffic lights to turn red just as drivers arrive from a previous stop at a traffic light. I'm in favor of making drivers pay more; it is difficult to believe that drivers pay for all the external costs of their automobile use, even at high European petrol prices. But this idea that cities should impose time costs instead of monetary costs to discourage driving is interesting. Why not just make drivers pay more?

There are several possible answers. First, gasoline prices are already high in Europe. It could be that pricing incentives are reaching diminishing marginal returns for affecting behavior. And if European cities truly want to make inner cores more pedestrian-friendly, then it must by force and not by price drive drivers out of their cars. It must not only be more costly in terms of money but also time to drive into the inner core. The article suggests that some inner core businesses have seen visitorship increase with a more pedestrian-oriented inner core. The second possibility is a little more speculative, but more interesting. Some people are uncomfortable with the idea that if driving is to be reduced, that it be allocated by ability to pay. Why should it be that driving is the privilege of the rich? There are a lot of responses to that question, but suffice it to say a lot of people feel that way and won't be persuaded otherwise. So the idea of pricing driving in terms of time instead of money is something that appeals a little more to this crowd: we are all endowed with pretty much the same allotment of time -- everybody has 24 hours in his/her day, so if driving is time-costly, it affects everybody the same, regardless of wealth. In fact, if wealthy people have higher opportunity costs of their time, a time-price is likely to affect wealthier people more. That might sound good, but giving less wealthy people greater access to driving doesn't actually effect any income redistribution, like a higher gasoline tax could.

Tuesday, 21 June 2011

A simple way to reduce carbon tax regressiveness

Don Fullerton, Garth Heutel, and Gilbert Metcalf have a paper out, Does the Indexing of Government Transfers Make Carbon Pricing Progressive? There is a widespread perception that carbon pricing is regressive (meaning that it hurts poorer individuals and household more than rich ones), even among economists that study carbon pricing and think about regressiveness. This is almost certainly true to at least some extent, but this recent paper casts a new light on the question: what if we took into account where the poorest Americans get their income from? The answer is, for the poorest quintile, government transfers. The insight in this paper (and an earlier paper addressing this same question) is that when government benefits are indexed to inflation, increases in energy costs that would be disproportionately borne by poorer individuals and households are offset by the benefit increases. For many of those that derive almost all of their income from indexed programs, there is no net increase in burden. That is not a complete answer, of course. As Fullerton, Heutel and Metcalf point out, not all federal US programs are indexed for inflation. For those that are recipients of government benefits that are not indexed to inflation, the regressiveness problems still stands. Which raises the obvious question: what if we just indexed all low-income government benefit programs for inflation? That would go a long way towards solving the regressiveness problem for carbon pricing for the lowest quintile (or maybe the lowest quartile, now).

I raise a couple of other questions about the regressiveness of carbon pricing. First, what exactly do we mean by "regressive"? Do we demand that every quartile, quintile, or decile be progressively better off relative to each quartile, quintile, or decile above it? Second, what do we use to measure wealth? Relying solely on income is problematic, as it fails to account for vast differences in income at different ages -- rich retirees are often wealthy, but have little income, and students often have little current income but prospects of high future incomes (think medical students, business students, and some law students). Third, focusing on direct energy costs exaggerates the impact on poor individuals and households. Low energy prices are embedded in a wide variety of goods and services, and substituting away from many of these goods and services would be invisible to poor individuals and households (think production processes).

This is not to trivialize the impacts of carbon pricing on the poor. But this is a call to avoid yielding to sympathy entrepreneurs that exploit the issue for political gain.

Thursday, 16 June 2011

Keystone XL, part II

The Stanley Cup Finals are over, the Vancouver Canucks emerging as the slightly less violent and significantly less effective team over seven games. Some of us supposedly urbane and gentile Vancouverites, however, seem to be trying to make up for the Canucks being the less violent team. Some appear eager to hear the words "Vancouver" and "Detroit" used in the same sentence, in the hopes that the words "Stanley Cup" might also be appear.

The Keystone XL controversy will be much more drawn out, and perhaps violent and riotous in its own political way. Is there any law to rescue discourse on Keystone? Probably not much. Sometimes I get carried away with being an all-knowing economist, and forget to pontificate about the legal aspects of an environmental problem. Such was the case with my recent posting on Keystone XL.

There are, as I see it, four legal factors involved with oil sands development and the necessity of the Keystone XL pipeline: (1) the legal implications of greenhouse gas emissions; (2) the transboundary pollution issues from the pipeline, (3) the local pollution and resource effects of oil sands development, and (4) environmental assessment practices. None of these seem very constraining on oil sands development, except for the last one.

Saturday, 4 June 2011

Keystone XL, the oil sands and the Stanley Cup finals

This blog comes to you from Vancouver, on the night that the Vancouver Canucks' Alex Burrows, le Vampire du Quebec, stunned the Boston Bruins with his second goal a mere 11 seconds into overtime. The City of Vancouver, with its ubiquitous car flags and Canucks jerseys, reminds me of Green Bay the weekend of a Packers game; only this isn't a city of 100,000 people, it's a metropolis of two million.

The Stanley Cup finals isn't the only thing that is getting Canadians and Americans worked up about their relationship. Controversy continues to roil the fate of the Keystone XL pipeline, the planned $13 billion pipeline that would transport crude from Canada's oil sands ("tar sands," to some inclined to criticize it), to refineries in the Gulf Coast. Tensions are particularly high after the US Department of Transportation ordered Canadian pipeline builder and operator TransCanada to shut its smaller Keystone 1 pipeline after leaks were detected [NYT story].

The pipeline is the flashpoint for a much bigger controversy: Canadian development of its oil sands in Northern Alberta. This blogger recently toured Suncor oil sands facility in Fort McMurray, a guest of Suncor and Carbon Management Canada, which provides some research funding for this blogger. What I learned on this trip was nothing eye-opening or surprising. In fact, it should surprise no one that Suncor, in conducting some 150 tours a year of its oil sands refinery, is fully prepared for people that are extremely critical of the whole business.

Oversimplifying a bit, the Canadian oil sands industry literally draws bitumen from the oil sands, or the sandy soils of Northern Alberta, which are especially rich in bitumen content. Northern Alberta's oil sands are estimated to contain as much crude oil potential as the world's total reserves of conventional oil. The process requires that huge chunks of earth be dug up, and run through a "upgrading" process in which steam and hot water are used to separate the bitumen from the sand, which is thereafter refined into petroleum and petroleum products. There are a lot of "primers" out there, and what is interesting is that people can disagree vehemently about whether we should be doing this, but they seem to agree on descriptions of the process. This primer by Environment Northeast, and environmental NGO, seems helpful.

Here are a few facts worth knowing about oil sands, some courtesy of the Director of Sustainability for Suncor, who helped lead the tour:
  • Although most oil sands facilities recycle water repeatedly, the upgrading process is extremely water-intensive. Suncor's water recycling rate is about 95% -- 95% of the water going into the upgrading process goes back into water that will be used again. And yet, about 2.5 to 3 barrels of water is required to produce one barrel of oil. If water were not recycled, it would require something more like 50 or 60 barrels of water to produce one barrel of oil.
  • Suncor, with an old, fully depreciated facility (about 40 years old now at Fort McMurray), can produce a barrel of crude for $30 to $35 per barrel. This is compared to the $5 to $8 that it costs producers in Saudi Arabia to produce a barrel. With oil prices at around $100 per barrel, though, this is a highly profitable business.
  • Suncor's direct greenhouse gas emissions are about 0.099 tons of CO2 per barrel. But over a lifecycle analysis, according to Environment Northeast, total emissions are more like 4 tons. This is about 5 to 10 percent more over the lifecycle emissions of conventional crude oil production.
So what do these facts tell us? Is this worth doing or not? And what does this have to do with the Stanley Cup??

It is easy to look at the impacts of oil sands and conclude that this is not worth doing. We are talking about ripping up entire forests and sucking the oil out of it, then trying to put it back. It sounds preposterous. And the footprint is huge: over the 40-year life of the Suncor Millenium facility, about 17,800 hectares have been disturbed. 1200 have been reclaimed. And the water consumption is hard to get around. The current oil sands production output is about 1 million barrels a day, which means it is consuming about 2 to 3 million barrels of water per day.

But that's a little too blithe. As behemoth an enterprise as the oil sands is, it is still a price taker on world oil markets, as everybody is. Shutting down the oil sands will accomplish nothing. And for Canada, it would be extremely disruptive economically.

But what seems more important to observe about the oil sands is that Canadian supply of oil to the US is, on the whole, a much less disruptive relationship than that presented by alternative suppliers, even the second-largest US supplier, Mexico. There is something important about doing something right, and as environmentally disruptive as the oil sands are, my adoptive country is doing it about as well as it can, and undertaking much greater care than any oil producer in the world. If you start thinking about the oppression, corruption, and political upheaval that oil has produced in the Middle East and in places like Nigeria, ripping up huge swaths of northern boreal forest starts to look less and less evil.

And finally, as an American transplant living in Canada, I can say that Canadians are just a little too insecure about what they bring to the table in a bilateral relationship with the US. Some might say that the obsession with oil sands is a manifestation of that insecurity. Alberta Premier Ed Stelmach recently said, "A good neighbour lends you a cup of sugar. A great neighbour supplies you with 1.4 million barrels of oil per day." That's a little clumsy and more than a little self-serving, but there is something valuable about this co-dependency: a reason for the two countries, which share the largest undefended border in the world, to value each other is important for a whole host of reasons beyond environmental and economic ones. It makes possible the positive excitement over a transboundary Stanley Cup, which hasn't happened very often recently. Could you imagine what International Cricket would be like if Pakistan and India actually got along?