Thursday, 10 November 2011

Why Not a Carbon Tax? Some thoughts from my students

I assigned parts of my book to my students in my climate change seminar, and challenged them to come up with arguments against a carbon tax, or at least some suggestions on how to implement a carbon tax. They rose to the challenge. Here are some of the best arguments:

A carbon tax needs to be part of comprehensive tax reform, not a stand-along policy. A carbon tax simply is not politically feasible at this point, except if it is offered as part of a comprehensive package of tax reforms aimed at lowering overall tax burden. Income taxation in Canada is too complicated, and in the US is inexcusably complex. A carbon tax to displace some income taxation would be a good thing.

A carbon tax only reinforces the idea that climate change is going to cost people money. There is considerable research now that suggests that people are choosing to discount the costs of climate change because they see it as an unambiguous cost. But if climate policy were more about developing exciting new breakthrough technologies such as fusion, then maybe people would be more willing to engage with the issue instead of pushing it into the "it's too depressing to think about" category.

A carbon tax could be accomplished anyway by focusing on co-pollutants instead of carbon dioxide. Focusing on climate change is that it detracts from the other problems from polluting industries, particularly stemming from coal-fired power plants. The irony is that we just focused on reducing pollution, we would almost certainly reduce greenhouse gas emissions as well.

It is kind of interesting that all of the suggestions I get, and all of the critiques that I get about a carbon tax somehow tie into psychology. Be it "people just don't like taxes," or "people have trouble understanding climate change," or anything else, it all comes back to some cognitive gap when it comes to climate change or taxes.

Monday, 7 November 2011

Canada's Carbon Capture and Storage Mandate, part III -- command-and-control

I derive most of my funding, at this point, from Carbon Management Canada, a research unit funded by provincial and federal government to advance the development of upstream fossil fuel technologies, including most prominently at this point, carbon capture and storage technology. This is the third post, however, criticizing the federal government's mandate of carbon capture and storage technology for coal-fired power plants.

I remain skeptical of carbon capture and storage (CCS) technology. However, if Canada were to push technology CCS along, this clumsy command-and-control initiative is absolutely the wrong way to do it. If any coal-fired power plants actually take the federal government up on the regulation and install CCS, it will be committing considerable expense to a specific CCS technology. If Canada will be asked to contribute more emissions reductions in the future -- as it almost certainly will -- the firms that installed CCS technology will be saddled with an expensive piece of equipment that will have become obsolete. And this equipment will become obsolete quickly: the proposed standard only requires a 30% carbon dioxide removal efficiency. What will the owners of these plants with CCS do if Canada is pressured by its trading partners to further reduce emissions from its electricity generating sector? They will eat costs, and Canada will eat crow. This is the classic example of how command-and-control regulation hurts regulated businesses.

What every CCS advocate will tell you is that while government assistance for CCS research, development, and deployment is nice, there is one thing that is absolutely necessary for CCS to thrive: a carbon price. As the U.S. Interagency Task Force of Carbon Capture and Storage concluded in its commissioned report:
The lack of comprehensive climate change legislation is the key barrier to CCS deployment. Without a carbon price and appropriate financial incentives for new technologies, there is no stable framework for investment in low-carbon technologies such as CCS. Significant Federal incentives for early deployment of CCS are in place, including RD&D efforts to push CCS technology development, and market-pull mechanisms such as tax credits and loan guarantees. However, many of these projects are being planned by the private sector in anticipation of requirements to reduce GHG emissions, and the foremost economic challenge to these projects is ongoing policy uncertainty regarding the value of GHG emissions reductions.
It is ironic that the Canadian federal government, while trying to spare Canadian businesses any costs whatsoever, is actually harming them. This cuts against a grain of economic thinking that posits that cost savings at any time can only benefit a business. But it is not a good thing to try and insulate Canadian businesses from a geo-political environment in which greenhouse gas reductions will be pursued with much more seriousness. Some far-sighted businesses may anticipate the future foreign pressures that will be visited upon Canada to undertake more emissions, and those businesses may plan accordingly. But for a private business, that is a risky proposition to justify to shareholders. Capital expenditures, some of them very expensive and therefore sticky, will have to be made in a highly uncertain regulatory environment, and some businesses that might otherwise heed signals may wind up just taking in current policy as an indicator of future policy. The danger is that this kid gloves approach will lull some Canadian businesses to invest capital in a climate policy environment that errantly assumes regulatory life will always be this easy.