How to do Kyoto on the cheap

Andrew Coyne
National Post
October 16, 2002

This just in from the Kyoto doom watch: The global climate accord, the one Alberta’s environment minister warns would sound the “death knell” for the Canadian economy, is now forecast to cost an astounding, stupendous, catastrophic . . . $5-billion. That’s measured, not against current output, but as a reduction in expected economic growth over the next eight years.

Those are the latest figures from the federal government: On the most probable set of assumptions, a reduction in economic growth of 0.4%, or about 61,000 jobs. To put the latter figure in perspective, that’s about as many jobs as the economy currently spins off every six weeks. True, the feds also produced a “worst-case” scenario. Brace yourself: If everything that can go wrong does, the economy could be 1. 6% smaller eight years from now than it would otherwise have been. Oh, the humanity …

It is getting harder and harder for Kyoto’s critics to sustain the illusion that Canada’s participation in the treaty would bring on some kind of biblical disaster. It may be that the science is uncertain – while many credible scientists believe that global warming is a reality, that we caused it, and that its effects will be calamitous, many others think the contrary – but most of the critics have given up that fight. Rather, they concede that global warming is real, but say the costs of fighting it would cripple the economy. It is increasingly difficult to say that with a straight face.

Yet in one sense the critics are right: The costs of Kyoto are almost certain to be much higher than they need to be. If so, the critics themselves can take much of the credit. It’s probably too late to derail ratification of the accord altogether. But they may yet succeed in stampeding the government into adopting a plan for reducing carbon dioxide emissions that, while more costly to the country overall, shifts much of the costs away from the industries that are responsible for most of the emissions and onto the general public. Who knows – that may even have been the point of the exercise.

This is no mere speculation. It was evident as long ago as last April, when Ottawa released a discussion paper offering four options for achieving the required emissions reductions

– about 240 megatonnes, from a projected 809 MT. What was clear from the paper was that the simplest option was by far the least costly. This would have achieved most of the reductions by means of a “cap-and-trade” system, auctioning off a limited quantity of emissions permits, and requiring firms to purchase rights to emit in excess of their allotted quotas on the open market.

In practice, this would have meant the international market, assuming such a mechanism can be constructed, since the cost of reducing emissions is likely to be much lower in countries using relatively “dirty” technologies, such as coal, than in Canada. Assuming a market price for permits of $10 a tonne – the best guess of most experts – the paper predicted industry would purchase 128 MT in credit for emissions reductions achieved abroad, while domestic reductions accounted for just 16 MT.

The paper also included three other options, which placed less reliance on tradable emissions permits and more on so-called “targeted measures” – subsidies to encourage industry and consumers to reduce their emissions, or regulatory measures to the same effect. Yet it was clear from the government’s own figures that these must be more costly: Not only do they focus on forcing reductions in domestic emissions, rather than purchasing cheaper credits overseas, but they do so only by such means as occur to the regulators, rather than leaving it up to consumers and industry to come up with newer and less costly ways of achieving the same result.

Subsidizing producers to reduce their emissions is a particularly inefficient approach: It may encourage them to produce in ways that emit less CO2, but it doesn’t get around the fact that you are subsidizing them to emit CO2. But it does have the cardinal political virtue of spreading – and disguising – the costs. Instead of making firms pay for every megatonne they emit, the general public is forced to pay them for every megatonne they don’t emit. Lo and behold, the government hinted strongly it was leaning in this direction. Even Option 1, the cheapest option, contained a large admixture of such “targeted measures.”

Yet as a recent study by the C.D. Howe Institute observes, there are even cheaper options. Suppose the government levied a carbon dioxide tax on all fossil fuels at a rate of $10 a tonne, which would yield (so the economic models predict) about 30 MT in domestic emissions reductions. It could use the proceeds to buy the other 210 MT on the international market, at a cost of $2.1-billion, and still have money left over with which to cut everybody’s income taxes. The net cost to the economy: almost nil.

This is the real Kyoto scandal: not that the government is proceeding with the accord, but that it is doing so in much costlier ways than necessary. And we have Kyoto’s critics to thank for that.

Andrew Coyne is a columnist for the National Post and a member of Energy Probe Research Foundation’s board of directors. Energy Probe is a division of Energy Probe Research Foundation.


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