National Round Table on the Environment and the Economy (NRTEE) indices, all other things being equal, will systemically rank a nation higher (performing better at de-carbonization) if:

• its energy and industrial infrastructure was older and higher emitting in the base year, relative to a nation whose capital stock was newer and already lower emitting, per unit of energy and industrial output, in 1990; and

• the nation has become less energy independent/more dependent on imports since the base year, relative to the nations on which it is becoming increasingly dependent for energy and industrial product supplies; and

• goods producing jobs are declining as a percentage of total employment in that nation, relative to the nations on which it is becoming increasingly dependent for energy and industrial product supplies; and

• population growth is low to negative.

The Large Picture: “Pricing Carbon” versus “Reducing Emissions”

It might be just me, but I perceive the role of the NRTEE should be to commission/compile impeccable objective research to inform Parliament and the PMO.

This is not what the NRTEE is now doing.

NRTEE staff appear to have selected a set of climate change policy options, and have now produced three reports that are works of advocacy for those policy options and that lack substantive or useful research findings. They start with solutions, and then set out to develop a methodology to ensure that any “research” results jibe with their proposed solutions.

What is the NRTEE theme? The NRTEE theme is that the primary role of government is to “put a price on carbon.”

What is the problem with this theme?

On page 36 of NRTEE’s “Achieving 2050: A Carbon Pricing Policy for Canada, 2009.  Technical Report”, NRTEE accurately communicates that GHG mitigation and control strategies can cover a spectrum of outcomes ranging from “greater price certainty” to “greater reduction certainty”. With this understanding firmly in place, however, the NRTEE has since focused on making the case for policies that establish greater price certainty—by definition at the expense of emission reduction certainty.

It is reasonable to ask: why is NRTEE favouring price certainty over emission reduction certainty given Canada’s official commitment to cut national GHG emissions, absolutely, 17% from 2005 levels by 2020?

The Role of Government versus the Role of Market Participants

Market participants compete to maintain and grow market shares on two bases only: price and innovation. The appropriate role of government is to regulate product standards to protect the environment, health and safety and to strive to develop product standards that, to the extent possible, leave technology choice to the market place. Then, market participants compete on price and innovation to deliver new products that are compliant with society’s new standards.

If/when a government sets a price—in lieu of prescribing minimum product performance standards—the effect is to reduce the tools available to the market to compete for market share. Minister Prentice and the government of Canada have, to date, legitimately and efficiently pursued product performance standard-type regulatory strategies, in consultation with the US government, i.e. the new CAFE standards for new vehicles.

There are elements we can build into Canada’s new CAFE standards to make the Canadian version more efficient than the US version—delivering a source of competitive advantage to Canadian vehicle manufacturers without breaching WTO or NAFTA conventions—which elements are not built into the current draft Canadian CAFE standard. So there is significant room for improvement.

But there is also time and opportunity to make these improvements. It is too bad, however, that not only does the NRTEE team not recognize these opportunities, the NRTEE  bias has resulted in an NRTEE “research” agenda that makes it impossible for the NRTEE to discover or recommend these easy, significant and non-partisan improvements to existing and proposed regulations.

Lessons Learned from The Leaded Gasoline Case Study

I have previously sent you copies on my short leaded gasoline case study on a number of occasions. This is an important reference, in my view, because:

• all of the data needed to complete the analysis is agreed and in the public domain

• it is an opportunity to examine the impact of the coincident promulgation of product performance standards, quota allocation and “cap and trade”-type regulation, and pollution taxes as lead discharge mitigation measures in Canada, the US and Europe.

The leaded gasoline phase out experience has been repeated in numerous other contexts, including the phasing out of PCBs, CFCs, HCFC22 and in US reformulated gasoline, ultra low sulphur diesel and renewable fuel standards. All of these historical experiences clearly illustrate that:

• markets deliver new products/services compliant with new product performance standards at least cost;

• attempts to “put a price” on pollution through government taxation always prove inefficient and less effective than product standards;

• quota-based “cap and trade” regimes—particularly regimes through which quota is allocated based on historical pollution levels—effect a wealth transfer from producers who were more efficient/less polluting prior to the introduction of the quota regime to producers who were least efficient/most polluting before the introduction of regulation.

Unfortunately, the NRTEE models all of these three significantly different measures to have identical environmental outcomes for any given tax/compliance cost. The leaded gasoline and all subsequent real-life experiences, however, clearly show the NRTEE models to be based on false assumptions. The NRTEE models, as designed, cannot identify or explore the very significant differences between the above-listed policy/regulatory options.

How significant is the difference between the these options?

To get the lead out of gasoline, Canada and the US implemented identical gasoline product standards. We got the lead out over a period of real decline in baseline gasoline prices. When both leaded and unleaded gasoline were available in the North American market place, the price differential between unleaded and leaded gasoline peaked at US$0.21/litre and settled (in the last year that leaded fuel could legally be sold) at US$0.02/litre. In other words, the premium that North Americans paid to get the lead out of gasoline was significantly less than US$0.03/litre over a declining base price for gasoline.

These price differentials are significantly lower than the increase in gasoline prices that most “experts” deemed necessary to get the lead out of gasoline prior to the implementation of the phase out in North America. The Retail price of regular leaded gasoline in the US in 1981—the first year of the lead phase out—was US$0.346/litre. The retail price of regular unleaded gasoline in the US in 1990—the last year leaded gasoline could legally be sold in the US by regulation—wasUS$0.306/litre.

This actual and subsequently repeated experience is impossible under the NRTEE modelling exercise. Note that throughout the phase out, in any one year the North American retail price of unleaded gasoline was always higher than the retail price of leaded gasoline. But over the phase out period, the average price consumers paid for all gasoline declined, absolutely, by 12%.  This decline in price reflects real, unfettered price competition in the gasoline market throughout the phase out.

Canada, the US and EU member states initially adopted identical goals of eliminating lead in other-than-specialty market gasoline between 1978 and 1981. Canada, the US and EU member states all set out to phase lead out of gasoline by/before 1990. However, EU member states elected not to regulate a product performance standard for gasoline.

Instead, EU member states jointly agreed to: Introduce a “lead differential tax” to ensure that the retail price of leaded gasoline would always be higher than the retail price of unleaded gasoline. Different member states were permitted to set the lead differential tax at different levels, as long as the resulting retail price of leaded fuel was always higher than the retail price of unleaded fuel.

How did the EU strategy work out?  In the late 1980s, three EU member states adopted Canadian-style product standards after it was apparent that the tax-and-subsidize new industrial infrastructure strategy was not working.  In 1990, the remaining EU member states agreed to aggressively increase lead differential taxes to address their failure to phase lead out by 1990.

But by 2000, leaded gasoline had only been phased out in incremental EU member states that unilaterally decided to introduce Canadian-style product standards sometime between 1990 and 1995.

In late 1990/early 2000, the remaining EU member states met and agreed to introduce an EU-wide Canadian-style gasoline (“petrol”) product standard to ensure that leaded gasoline would be fully phased out by 2006. Three countries–Greece, Italy and Spain–refused to participate in the 2000 EU unleaded product standard, arguing that they could not afford to give up lead differential tax revenues at that time. Leaded petrol is still sold in those three nations today.

Leaded gasoline still dominated European retail supply, notwithstanding the fact that the lead differential tax resulted in a leaded fuel retail price premium of US$1.11/litre in the UK; and over US$0.40/litre in all other states that had not yet implemented a product standard—10 years after North American markets had successfully phased out lead over a period of absolute decline in the market price for all gasoline types.

This fact-based historical experience is an impossible outcome in the NRTEE models.

It is important that instead of denying the relative inefficiency of consumption taxes as product quality management strategies, NRTEE shift to an analytical process that focuses more on explaining why the apparently traditional economic theory that is embedded in NRTEE modelling does not actually prove out in real life.

Please note that per capita demand for transportation fuels grew faster in most EU member states than in Canada and the US over the lead phase out period. So the available facts do not support an argument that EU’s high fuel tax/price policy  held back growth in demand.

Linking the Leaded Gas History to Today’s GHG Control Challenge

I repeat, NRTEE’s current suite of GHG management policy recommendations is closely analogous to the EU strategy for phasing lead out of gasoline, not the proven faster, more efficient, lower cost Canadian and US leaded gasoline phase out strategies.

The table below shows you most recently reported electricity rates in Europe, reflecting—at least in part—the consumers price impact to date of European GHG management strategies. Given the similarity between the EU strategy to reduce lead and the suite of policies adopted to reduce GHGs, should NRTEE not assume that European price impacts are higher than we should accept for efficient Canadian policy?

Given this available data, and our understanding of the very, very different compliance cost/retail price impacts revealed in the Canadian, US and EU leaded gasoline phase out, NRTEE should be noting and asking the following:

• German households that consumer less than 1,000 kWh of electricity per year currently pay more than 36 euros/kWh for that privilege.  Why has Germany failed to secure an unlimited supply of renewable, low carbon energy at such a high price? What is the policy/regulatory failure in play?

• German, UK and other EU-based “energy-intensive businesses” (businesses for whom energy costs account for 3% or more of production costs), are exempt from up to 100% of ALL energy taxes (not just carbon taxes). This largely explains the massive differential between household and industrial electricity rates by demand group in the table below. When NRTEE advocates for EU-style policies and measures, is NRTEE actually advocating for the measures that EU nations have implemented—i.e. a massive shift of energy system costs from industrial to small residential customers?

Aldyen Donnelly, May 26, 2010