Unlikely Alliance

canada            I read a quick article in Bloomberg Businessweek last week that detailed an unlikely alliance between tar sands producers and environmentalists to put a pollution tax on the dirty, heavy crude coming out of Alberta.  Yes, that is correct.  Tar sands producers are actually lobbying for a carbon tax or cap-and-trade system that would help to clean up their operations. In British Columbia, a province that enacted a carbon tax, families are paying an average annual premium of $376 and have reduced their per capita emissions 10%.  The producer’s biggest fears are to be viewed as “too polluting” by other nations, resulting in no market for their exports.  America’s opposition to the Keystone XL pipeline highlights this fear. Unless the tar sands can change their appearance, it seems that the world would be okay without the product.  An oil industry spokesman even said that “If your country looks at Canada and says your energy exports are too carbon intensive, then it becomes and economic competitiveness issue.”

tarsands            Standing in the way of this unlikely alliance and subsequent carbon pricing is the Prime Minister Stephen Harper.  Harper has traditionally emphasized business and job creation over environmental issues and is responsible for pulling Canada out of the Kyoto Protocol, the only nation to do so.  Failure to embrace cleaner regulations on the tar sands may soon become an environmental and economic problem for The Great White North.

tar sands movers            The winds of change are blowing, and nations are figuring out how to monetize carbon.  If Canada can enact sensible regulation that appeases both oil producers and environmentalists, then it can be a leader in the carbon markets.  If it fights the winds of change, then it risks being left behind by the rest of the world.  The simple answer is to put a price on carbon and use the proceeds to invest in clean technology developments.

Melting Ice Caps

The ice sheets on Greenland and Antarctica are melting, sea levels are rising, and the rate of ice loss is increasing.  These are the conclusions a new peer-reviewed report published in the journal Science came to.  The study, authored by 47 experts from 26 institutes, used satellite images to show that the ice sheet melting has contributed to an 11 mm (0.4 in) rise in sea levels.  The Greenland ice sheets contributed 2/3 to this rise while Antarctica contributed the remaining 1/3.  Also startling were the comments on the Pine Island Glacier, an iceberg the size of New York City that is set to calve off in the upcoming months.  While most of this information is probably not news to you, it does offer scientific proof that the planet is warming.  We must act now.  Please inform yourselves about solutions to climate change – whether through cap-and-trade or a carbon tax – and pressure your elected officials to enact policy measures.  The only way to slow the rate of warming is to reduce our emissions through every means possible.  Use less energy by making energy-efficient upgrades to your house.  Write a letter to your representatives to end subsidies for fossil fuels so renewable technologies can compete on a level field.  Or simply turn off electronics when they are not in use.  Climate change is a problem that touches all areas of modern society – it is a national security issue, an economic issue, a development issue, and a humanitarian issue.  And as this study proves it is getting worse.  The paradox is that by the time we see changes that affect us, it may be too late to stop it.

ice sheet

Four Climate Change Policy Ideas for the Next President

Congratulations! We are finally out of this election cycle and all the negative ads. And no matter who the winner is, I hope that we can all come together to build a stronger economy and a healthier society. While we wait for the mudslinging over the fiscal cliff to begin, here are the top four recommendations on climate change policy for the incoming (or returning) president as stated in Businessweek.

1) Put a price on carbon. I alluded to this in a previous post called Carbon Emission where we discuss the differences between a carbon tax and a cap-and-trade policy. Businessweek says that “A $20-per-ton carbon price—collected as a tax or by auctioning carbon allowances—would raise on the order of $100 billion per year while creating powerful economic incentives to curb pollution in the most cost-effective manner (and develop new technologies to do so). A carbon price is also an ideal way to help address the coming “fiscal cliff”: Using some of the revenue to pay for lower taxes on labor or capital would provide a double dividend by reducing distortions in our tax system. For that reason, a carbon price enjoys broad support from economists across the political spectrum, from N. Gregory Mankiw, Douglas Holtz-Eakin, and Arthur Laffer on the Right, to Paul Krugman, Joseph Stiglitz, and Jeffrey Sachs on the Left.”

2) Cut Non-CO2 Greenhouse Gases. CO2 is obviously the biggest contributor to global warming, accounting for over 80% of GHG’s, but it is not the most potent. Other GHG’s such as Methane, Nitrous Oxide, and other flourinated gases such as hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride are numerous time more potent warmers than CO2.  I wrote a paper on this earlier this year and will post it later this month.  Needless to say, focusing attention on these High Global Warming Potential gases may do more in the short-term to curb warming and create some international “good will” for tackling the CO2 problem. 

3) Promote Clean Energy and Energy Efficiency.  The administration should further the transition to renewable energy sources by removing subsidies for fossil fuels and encouraging smarter subsidies for clean energy.  I wrote extensively on this subject here.  In short, current subsidies to fossil fuels should be removed and invested into R&D.  The current subsidies in place for renewable energy promote widespread deployment of these technologies, but do nothing to increase their output and reduce their cost.  A better subsidy policy would promote increases in efficiency or reductions in cost in order to make these technologies competitive with cheap and abundant natural gas.  After all, the taxpayer wants to see results from their money.

4) Use the Clean Air Act.  Finally, the new administration should take full advantage of the Clean Air Act that sets new vehicle mileage standards, sets limits on pollution from industrial sources, and sets more protective standards for air quality.  “The next administration should build on these steps by setting carbon-pollution emission standards for stationary sources, including new and existing power plants. In doing so, the EPA can draw on a proud tradition, dating back to the Reagan administration, of making clean-air rules as economically efficient and flexible as possible—for example, by allowing averaging and trading so companies can meet standards on a fleet-wide basis rather than at each facility individually. The EPA should also design the carbon standards in a way that rewards states that implement their own rigorous programs—such as the innovative cap-and-trade approaches already in use in the Northeast and getting under way in California.”

There you have it.  In only a few hours from now we will know the next leader of the United States of America.  Now if the time for action on climate change.  The four steps outlined above are only the beginning, but they will help to reduce our dependence on fossil fuels, improve the health of our citizens (and the other 6.7 billion citizen of this planet), and even provide opportunities for the growth of new industries.  This is a tall order, but we have never backed down from a challenge before, why start now?

Carbon Emission: Regulatory Controls vs. Market Based Solutions

Many of you have been asking what the difference is between regulatory approaches and market based solutions to carbon emissions.  The answer is fairly simply but depends on what you want the outcome to be.  The whole question can be boiled down to: Tax or Trade?

A carbon tax is a pure price instrument that establishes a certain price on pollution.  While the price is guaranteed, the final emissions reduction is not.  For example, a $5 tax/ ton on CO2 emissions for a firm that pollutes 100 tons of CO2/ year would cost the firm $500.  This policy creates certainty for businesses and governments, but leaves uncertain the amount of emissions reduction. 

On the other hand, a cap-and-trade system (or quantity instrument) determines the final output of allowed emissions, but leaves the price uncertain.  In a certain year where polluters find it hard or costly to reduce emissions, the price of each credit would rise as companies bid up the price of the allowance.  In a different year, the price of the credits might fall as many industries would have a surplus of their pollution credits available on the market.  As companies find it harder to meet the required pollution allowances, the price of each credit would increase with demand.  Every so often credits would be removed from the market in order to achieve the desired level of emissions.

So which one is better?  Depends.  It all depends on what the predicted damage costs are.  If the marginal damage costs are high, then it is better to use a quantity mechanism because you know the level of pollution output.  The market will set the rate.  If the marginal damage costs are low, and policy makers are worried about the high costs of transition to a low-carbon economy, then a price mechanism would be the better option because it would provide more clarity to the business community when making future investment decision.  Hit me back and let me know your thoughts.