Download Standing Committee Testimony – Sawyer

House of Commons Standing Committee on the Environment and Sustainable
Development
February 6, 2008
Statement by Dave Sawyer, EnviroEconomics, as an individual
Regarding Economic Implications of C-388
Mr. Chairman, members, and guests,
Thank you for the opportunity to speak on the economic implications of Bill
C-377.
I am neither here to support nor contend Bill C-377, but rather to discuss the
economic implications of the Bill. What are the economic implications of
the Bill? Well, not surprisingly, it depends on how it is designed and
implemented. But since the Bill is not specific on this point, and you have
asked me to comment on the possible implications, I first need to identify a
policy package that informs the assessment.
The key elements of the policy package I use to assess the implications
include the following.

To attain substantial targets in 2020 while minimizing costs, we need
economy wide carbon pricing. This means cap and trade, a carbon tax
or a combination of the two. Recognizing cap and trade as the
dominant policy for large final emitters, and that cap and trade is
difficult to implement for smaller emitters like you and I, the preferred
Comment by Dave Sawyer to the Standing Committee on Environment and
Sustainable Development
1
complement is a revenue neutral carbon tax for the remaining
emissions. While I recognize that a carbon tax does not resonate
politically, the alternatives have higher costs, and frankly Canadians
may dislike income taxes even more than they dislike carbon taxes.

Second, an effective policy package would provide subsidies to low
emitting technologies such as to carbon capture storage and renewable
electricity. Targeted regulations for buildings, transportation and other
difficult to get at emissions are also needed.

Third, there will be significant financial flows with carbon pricing and
we must decide how these are distributed. Some revenue from cap
and trade is transferred amongst industry through trading markets but
some could also accrue to the public through auctioning permits. A
carbon tax shift could then have income taxes on households reduced
and targeted to address adverse competitiveness impacts on
disproportionately impacted industries.
For now, let us look at domestic action only, but later on I will revisit this.
I will also focus on 2020, because if we don’t hit the 2020 targets in Turning
the Corner or Bill C-377 we will likely not be able to achieve the longerterm 2050 targets, at least not without significant economic dislocations.
With this policy package in place, we now need an economic and emissions
baseline from which to compare the targets. With an economy growing
about 2% annually out to 2020, Canada’s GDP will grow from current
levels of $1.3 trillion to about $1.7 to $1.8 trillion. This growth will increase
Comment by Dave Sawyer to the Standing Committee on Environment and
Sustainable Development
2
GHG emissions by roughly 15% from the current level of 750 Mt CO2e to
850 to 900 Mt CO2e in 2020.
This means that to hit the C-377 target of -25% below 1990, forecast
emissions will have to drop by 50% in 2020. This compares to a 34%
decrease under Turning the Corner.
To assess the economic implications of my stylized policy package, I used
two models suited to assessing mitigation targets -- CIMS, is an integrated
energy and emission model of the Canadian economy that is widely used by
governments, industry and ENGOs alike. And C-GEEM is a
macroeconomic general equilibrium model better suited to answering
macroeconomic questions.
So, what do the models say about the costs in 2020? Applying the economywide carbon price, the subsidies, targeted regulations and the tax shifting in
the models implies the need for a carbon price of about $100 per tonne of
CO2e to hit the Turning the Corner target and about $200 per tonne for Bill
C-377.
The economic impact of these carbon prices on GDP could then range
between 0.6% for Turning the Corner and 1.2% for C-377. This finding
implies that on a national level, the economy most likely will continue to
grow under either of these targets. Please recognize, however, that there is a
significant level of uncertainty in these numbers (as is the case in all
modelling).
Comment by Dave Sawyer to the Standing Committee on Environment and
Sustainable Development
3
But these conclusions assume efficient policies and indeed the models can
show that a lower target with poorly designed policy could be more
expensive than a higher target with efficient carbon pricing. Simply, policy
design matters as much or more than targets.
The policy package I have outlined will raise prices, with increases of about
25% in electricity, 15% in petroleum products and about 10% for natural
gas. The impact on oil production costs really depends on the availability of
CCS. With widespread CCS deployment, the costs increases are small,
without CCS, oil production costs rise more so. Again, poor policy design
would change these outcomes entirely.
Now, this national picture masks some sectoral and regional variations.
While I can’t comment on the regional variation I can say something about
the sectoral impacts. While national GDP impacts seem relatively small,
sector output for the energy intensive sectors will fall, especially petroleum
refining and coal. The extent of this drop is dependent on what is happening
in the rest of the world. If Canada acts more or less in concert with the
OECD, the trade impacts are likely not that large, with small drops in
exports but also imports. Still competitiveness impacts will be real and
significant for some segments of the economy. This is not to say, however,
that we don’t seek reductions from these sectors, but rather that we design
complementary policies to address disproportionate income effects. That is,
we separate a carbon signal from an income effect.
As for the notion that manufacturing will move to China and India, I would
submit that other factors are also influencing this business decision.
Comment by Dave Sawyer to the Standing Committee on Environment and
Sustainable Development
4
I would now like to revisit the importance of obtaining low cost reductions
internationally. At domestic reductions above 20% below the 2020 BAU,
domestic mitigation costs rise exponentially. This means that at the targets
contemplated in either Turning the Corner or C-377, costs are rising much
faster than reductions. So, to minimize economic impacts, a strategy to
access low cost international abatement opportunities, that are real, is
fundamental.
I would like to finish with a short discussion on the costs of inaction, that is,
of not attaining the targets. In thinking about designing effective climate
policy, at least from an economist’s narrow efficiency lens, the economist
would prefer cost-effective reductions at the level where the costs and
benefits are balanced. But information on the scope and scale of the possible
benefits of action are too uncertain to lead to recommending targets that
balance costs with benefits.
As a result, our national climate debate continues to be informed by only a
conceptual understanding of the abatement or adaptation benefits but a very
acute understanding of the costs. Because of this information asymmetry, it
is likely that we will continue to be locked into a cycle of questioning the
appropriateness of action to attain targets, regardless of their stringency.
Indeed, without a balanced view of what we get for what we spend, we will
continue to argue about targets, discuss policy options, reveal the associated
costs and ultimately question affordability. This focus on costs and
affordability is one sided and will ultimately lead to poor national outcomes.
Comment by Dave Sawyer to the Standing Committee on Environment and
Sustainable Development
5
And oh yes, a little more focus on action and less on targets would be nice.
Thank you for this opportunity to share my thoughts.
Comment by Dave Sawyer to the Standing Committee on Environment and
Sustainable Development
6