Energy Probe

(Mar. 30, 2010) A recent letter from Diane Feinstein to John Kerry provides a little insight into what is currently under negotiation for a new US Senate climate change bill.

What I find quite interesting is the frequent reference to California’s vehicle emission standards as “more stringent” than US federal standards.

This requires a creative definition of “stringent”. The graph below shows that per capita road fuel consumption did realize a deeper and longer decline than the US average between 1990 and 1995. But the differential between the state and national trends appears to correlate more with the depth and length of the 1990 recession than differences between tailpipe fuel standards.

If/when we normalize the per capita road fuel trends to reflect differences in GDP trends and urbanization or population density rates, there is no evidence that California’s regulated tailpipe emission standards have outperformed the US federal standard.

In fact, given the state’s urbanization rate (which should mean lower per capita fuel consumption), it can be argued that the CA clean vehicle regulations actually under-perform the US federal regulations and that both under-perform the current Canadian regulatory context. In the graph, I show Washington state per capita road fuel consumption, where WA is a state that did not adopt the CA standards.

When we compare CA and BC per capita road fuel consumption rates, BC—without the CA tailpipe standard—appears to have the best overall performance.

Most importantly, since 2007 (when I prepared the slide below), CA statistics have eroded further. The principal issue appears to be that CA tailpipe emission regulations directly increase the price differential between new and used cars. Many families adapt to fuel price increases by extending the operating lives of older vehicles.

In 2007, when I put the graph below together, 33% of California on-road vehicles were over 10 years old, while less than 12% of BC on-road vehicles were over 10 years old.  At the end of 2009, 37% of California on-road vehicles were over 10 years old.

This is not an argument against fuel-efficient standards for vehicles. It is an argument that we must regulate “smarter” than California and should not implement exact CA vehicle emission standards into Canada. Direct implementation of CA-type standards will simply result in an extension of the road life of old vehicles and a net increase in Canadian GHG emissions.

Aldyen Donnelly, March 20, 2010

(Mar. 25, 2010) I would be very surprised if the Supreme Court (SC) rules in favour of Friends of the Earth (FOE). The problem is that the law of the land allows the PM to sign an international treaty without Parliamentary oversight. But to balance that power, the PM-signed/ratified treaty does not become law of the land unless/until Parliament passes domestic legislation that enacts the treaty in full.

The Kyoto Protocol Implementation Act (KPIA) fails to implement the Kyoto Protocol in its entirety. Further, a private member’s bill (the KPIA) is not binding on a minority government if it has budget implications. I don’t think it is possible for the Supreme Court to find that the government of Canada has a legally binding obligation to comply with the Kyoto Protocol, because Parliament has not passed a law to make the KP the law of the land.

And let’s put any potential ruling that the KP is the law of the land in context, as well.

The KP states that any party that fails to comply with its First Commitment (FC) Period (2008-2013) national target will: (1) bear a 30% penalty, i.e. the FC period emission exceedance is multiplied by 1.3 and added to any second commitment period reduction obligations the party accepts, and (2) the party has to buy Kyoto Protocol compliance instruments (AAUs, CERs or ERUs) to address the penalty at the earliest opportunity.

Canada’s FC period exceedance will be at least 1.2 billion TCO2e. It is fair to estimate that the market price for KP compliance instruments will increase to CAD$40 to 80/TCO2e in the event that Canada remains in the KP market and is assigned the non-compliance penalty. So the one-time cost to Canadian taxpayers of any such a Canadian court ruling would be between CAD$48 billion and CAD$96 billion.

What would Canadian taxpayers buy for that price? We can only comply by acquiring hot-air AAUs that were originally issued to Russia, Ukraine, Belarus, etc. and/or CDM/JI Board-issued CERs. 77% of CERs issued to date have been issued to Asian HCFC22 manufacturing plants. HCFC22 is a highly potent ozone-depleting substance and GHG that is illegal to make or import into Canada, due to its significant environmentally-damaging effects.

CERs from HCFC22 manufacturing so dominate the UN/CER credit market that it is not possible for Canada to implement a Kyoto compliance strategy while avoiding HCFC22 plant-originating CER purchases. Though on a side note, it is impossible to stop brokers from laundering HCFC22 CERs through CER/AAU swaps with market participants—most notably the World Bank—who are heavy traffickers in HCFC22 plant-originating CERs.

How do you think Canadian taxpayers will react to a ruling that compels us to subsidize 30 Asian plants that make a chemical that is so damaging to the global environment that it is illegal to make or import into Canada?

At this time, largely due to the largesse of the World Bank Carbon Fund, Asian HCFC22 manufacturers are earning $2 for CER sales for every $1 they earn for product sales. One US EPA study found that the UN CDM/JI Board’s decision to approve this massive new KP-based subsidy for HCFC22 production will add some 2 billion TCO2e to the earth’s atmosphere by 2020, which incremental GHGs would not have been discharged in the absence of the UN decision to issue these CERs.

And while the UN/CDM-JI Board is comfortable issuing CERs to HCFC22 manufacturers, they have decided not to issue CERs to developers of wind power in China.

How are these decisions rationally explained to Canadians?

Does FOE really think that the Canadian taxpayers will support any political party or NGO that acts to impose such a large cost on the Canadian tax base—a cost that can only be mitigated by hot-air Kyoto compliance instrument purchases? I think Canadians do want to finance environmental progress. But CAD$50+ billion for no global environmental gain?  I don’t think so.

Note that under the provisions of the KP, Canada does not have any alternative compliance options—meaning the treaty does not permit us to elect to address the KP penalty by, say, committing to deliver CAD$50 billion in funding to mitigate climate change impacts in developing nations over, say, a 10 year-period.

Note, as well, that (theoretically) if we shut down 100% of oilsands production, we would reduce Canada’s KP liability by less than 5%. To the extent that oilsands sales are replaced by new crude oil sales from Nigeria, and or California heavy oil sales, global GHGs go up, not down, as a result of the decision to shut down the oilsands.

My guess is that any ruling that backs Canada into the KP penalty situation—especially given that the EU27’s Copenhagen commitment is to cut GHGs only 2.7% from 2005 levels by 2020, after increasing EU27 GHGs every year since 1994—will turn the majority of Canadian voters entirely against both the Kyoto and Copenhagen processes.

Regardless how the Supreme Court rules, it seems to me that Canada’s PM (Conservative or Liberal) has no choice but to formally file the permitted one-year’s notice of Canada’s intention to withdraw from the Kyoto Protocol—and do so pretty soon. The only question is whether or not this necessary and inevitable administrative action will garner good or bad polls for the PM/party that initiates it.

My guess is that if/when Canadian voters understand the CAD$50+ billion liability associated with the KP, as well as the HCFC22/CER story—both easy stories to tell—there will be general support for withdrawal from the KP. But the risk is that Canadians will also lose faith in our ability to address GHGs. This is the worst possible environmental outcome.

It would be best, I feel, for Canada and the global environment for the FOE to back off and for the parties to the KP to agree that the Copenhagen accord is a new treaty, replacing and not an extension of the KP.  Then the FOE and others should focus on what parliament needs to do to ensure that Canada keeps our Copenhagen commitment.

Aldyen Donnelly, Marych 25, 2010

(Mar. 22, 2010) Question: If Canada stopped selling leaded gas in 1986, and stopped making leaded gas in 1989—what happened in the intervening years when access to the US market was restricted? Why would our refiners eat the 30% premium to enter the US market? Is it just because they had to exhaust their leaded gas capital, or is there another story here?

The Canadian and US regulatory stories differ in the way they treat production facilities in the leaded gasoline case, just as they do in the ultra low sulphur diesel context. While no Canadian refinery was making leaded gasoline in 1990, most had actually cut out the production of lead ahead of 1986—even though Canadian law did not require early refinery changes.

Our primary leaded gasoline market was the US, and the US allowance-based tariffs on our leaded gas exports made the economics of producing lead in Canada unfavourable. The small volume of leaded fuel that was still made in Canada in 1990 that was not marketable to domestic specialty markets (car racing, for example) was exported to US refiners who blended it in with the leaded fuel they then exported to developing nation markets.

Despite being net exporters, could we mirror the protectionist scheme in the US if it ends up happening?

No, and that is the problem. Let’s say Canada and the US agree to the same national GHG reduction schedules and the same GHG quota allocation scheme. The problem is that we are net exporters and they are net importers. 70% – 80% of the GHGs for the transportation fuel life-cycle is in the form of tailpipe emissions. 60% of the natural gas life-cycle GHGs occur at the point of end use. 80% to 90% of coal life-cycle GHGs occur at the point of end use. So every time the US, EU, Japan or South Korea cut back coal, petroleum, natural gas or LNG consumption, they cut back imports from Canada. The result is:

• Canada loses export revenues,

• the Canada-other nation trade balance shifts in favour of the other nation and

• for every TCO2e in global GHG reductions, Canada gets 0.2 to 0.4 TCO2e in credits bankable to the Canadian GHG inventory and the traditional carbon commodity importing nation gets 0.6 to 0.8 credits bankable to the their national GHG inventory

And:

• in a closed, global cap-and-trade market (such as the one that the UN proposes), if Canadian exporters wished to divert carbon-based commodity exports from the US to a new export market, Canada’s new foreign customers would have to buy GHG quota from the open market to cover the GHGs arising from their consumption of new Canadian imports. In that closed global cap and trade market, Canada’s new customers would likely have to source their GHG quota requirement from the US customers who would be sitting on surplus GHG quota due to their declining dependence on Canadian carbon-based products.

In a fairer quota market, 100% of the global GHG emissions associated with our domestic production would be booked to Canada’s national GHG inventory and 100% of the global reduction credits associated with a Canadian reduction in output/sales would also be booked as reductions in Canada’s GHG inventory if/as Canadian petroleum product sales decline over time.

The reason the US does not propose this fair accounting method is the method the US proposes delivers a systematic wealth transfer to the US from all energy, food and building product exporting nations on which the US currently depends.

While I do acknowledge that a way does exist to construct a fairer quota market system, I still oppose quota as a GHG control mechanism because any quota regime introduces significant inefficiencies to any market. Continental or wider-reaching product standards without any quota allocation—like the ultra low sulphur diesel product standard—can spawn efficient, fair and free secondary markets for emission reduction credits.

Remember, “cap and trade” for carbon-based commodities is really no different from how Canada’s dairy quota market works.

In 1970, Canadians agreed that, in perpetuity, each province’s continuing share of total Canadian milk and butterfat production quota would reflect their shares of total national dairy product consumption in 1970.  So, today, Quebec gets 37% of all Canadian dairy quota/production rights. BC gets only 2.7%.  But BC’s share of total dairy product consumption has grown to 13% and Quebec’s share is now down below 25%.

The net result is that BC is forced to be inefficient and import 30% of the milk products we consume in BC from Quebec, because the national quota regime precludes us from producing locally to meet our needs.

If/when we agree to introduce a similar quota regime to govern the location of the production of all carbon-based products (energy, food and building products) and if/when we agree to assign national and sub-national carbon production quota allocations based on historical consumption levels, we achieve the same highly inefficient outcome for energy, food and building products that we currently live with in the dairy market.

This quota system favours, over time, any regional economy with high carbon product consumption and import levels in the base year for quota allocation, at the expense of any economy that is more efficient, has a smaller population and is a net exporter of the soon-to-be-quota-governed products in that same base year.

Is this case study written up in a journal somewhere? Would be nice to pass more formal docs around?

I have not seen it written up in a journal article, though the topic is indirectly addressed in Reitze, Arnold. “Mobile Source Air Pollution Control.” Environmental Lawyer 6 (2000): 309–27.

All of the data and information in the slides I have attached is from official government sources and in the public domain. So to contradict my slides one would have to use data that contradicts the official information provided by the governments involved.

One big problem, in my view, is that our academic community tends to have their eyes on modelling and not facts. Most of the relevant work in academic peer-reviewed journals fails to consider actual data and deals only in modelled (and often unrealistic) outcomes.

I also find that the mainstream academic community is not receptive to evidence that consumption taxes may not always be efficient behavioural change mechanisms.

On the question of how quota affects markets, I find the track record of mainstream academia quite puzzling. To date, most leading western economists quickly describe “cap and trade” as a mechanism that will lead to market efficiencies. However, most of the very same academics have documented the inefficiencies of the Canadian dairy market that derives directly from the quota regime. I cannot explain why they recognize the inefficient nature of the exact same market mechanism in one application but not in the other.

On taxes, I should note that the issue is not the economic theory, but the modelling techniques that our leading economists have adopted. General Equilibrium economic theory suggests that consumption taxes are the most efficient mechanisms for incenting consumer behavioural change if/when:

• the tax is applied at the point of a primary consumption decision and

• demand for the taxed commodity or service is price elastic.

But Canada’s (and many other) ”leading” economic modellers describe a world in which:

• the tax is applied at the point of a secondary consumption decision (most energy purchases derive from the home and vehicle purchase decisions we have made, and are, therefore, not primary consumption decisions); and

• the taxed commodity income, not price, is elastic, and then

• project that consumers will behave as if the tax was applied at a primary consumption decision and demand for the commodity is price and not income elastic.

Since most of the models we are now using to project consumer behaviour are inconsistent with the economic theory they purport to represent, it should not be a surprise to use that the modelled projections will fail to be realized.  As far as I can see, the economic theory is pretty sound. The problem, as I see it anyway, is that many of the econometric models we have come to rely on for projections have abandoned the theory in critical areas.

And we have also come to confuse “model projections” with “forecasts”. These are very different things.

Aldyen Donnelly, March 22, 2010

(Mar. 15, 2010) According to my research, Canada is the only country that experienced any growth in goods producing jobs between 1990 and 2007. In fact, Canada is the only country in the entire developed world that in 2007 had more goods-producing jobs than were in place in 1990.

While Canada has certainly lost goods-producing jobs since 2007—as a result of the global recession—our overall goods-producing job losses were relatively small, compared to other countries. Still, immediately post-recession, Canada’s goods-producing jobs count was still substantially above 1990 levels, while every other developed OECD nation is currently looking at a goods-producing jobs count well below 1990 levels.

“Goods-producing” includes: agriculture, forestry, fishing, mining, quarrying, manufacturing, enegy and water utilities and construction.

100% of the “green jobs growth” in Europe since 1990 has been jobs in the taxpayer and health care premium-financed sectors.

This is a cautionary tale.

While among the nations examined, only Germany’s goods-producing sectors carry fewer public service wages-earners than Canada’s (even the US number is worse than Canada’s, because of the US health care situation), and while Canada is the only western nation that has realized increases in goods producing employment since 1990, Canada has also experienced the second highest rate of growth in public sector/taxpayer-financed services among the sampled nations.

Clearly, Canada’s trend to public sector/service job growth is no more sustainable than any other country’s. The good news is that we have not yet devastated our goods producing sectors the way the other nations have.

The key question here is: how many public sector jobs can governments ask goods-producing taxpayers to support before the whole market crashes?

I do not know the answer to this question. But, clearly, the trend is not sustainable.

I have also produced a little graph that shows that except for the US and Denmark, net foreign direct investment (private capital) has fled the European government-centric, jobs-growing nations for Canada, in a big way, over the last two decades. The message here, is that it would be unwise for Canada to implement the very European tax and energy policies that have resulted in capital flight from Europe to Canada.

Key Problems With the Economic Modelling That Favours Carbon Taxes

A tax shift in which income tax cuts are financed with carbon tax revenues, by definition, results in an increase in government spending as a % of GDP.

When any specific government debt-to-revenue or debt-to-GDP ratio appears to be constant over time, but government spending/wages and services are increasing as a % of GDP, the economy is actually becoming weaker. Focusing on GDP and debt as a % of GDP, without considering shifts in the mix of taxpayer-funded and private investment-supported economic activity, is a large mistake. But that mistake characterizes most of the economic analysis that results in recommendations that our governments introduce carbon taxes and recycle the revenues to cut income taxes.

Also, the economic model (MKJA’s CIMs model) favoured by the Canadian environmental movement and the National Round Table hold that there is no negative impact when taxes and social transfers are increased relative to overall economic activity. In those economic models, there would be no negative impact on GDP if, tomorrow afternoon, our leaders decided to expropriate privately-held assets and convert Canada into an entirely government-controlled and owned economy.

Of course, the CIMs and other models fail to anticipate that private investment will decline as the economy becomes more centrally-managed by government.

Note that the Economic Modelling Equates “Cap and Trade” to Carbon Taxes

As you know, “cap and trade” is simply a fancy name for quota-based supply management.

All of the leading and most cited Canadian economic models equate cap and trade to carbon taxes.  For any given market price for quota, the models anticipate that the market will react to a “cap and trade” regime in exactly the same way that it will react to consumption taxes of equivalent price. The models fail to recognize that a quota-based supply management regime is far more than/different from a production or consumption tax.

Think of Canada’a quota governed dairy markets, or most municipal taxi markets. Every quota regime, no matter how administered (and even if/when quota is 100% auctioned) delivers unprecedented market power to market incumbents with large pre-quota regime market share and or large cash positions, usually at the expense of innovators and new market entrants. None of the Canadian economic models anticipate the market distortions and inefficiencies that we all know can be attributed to quota regimes, in their analysis of the carbon quota regime proposal.

Aldyen Donnelly, March 15, 2010