Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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