A wonk’s thread: An Emission and Cost Assessment of “A Real Plan to Protect Our Environment”

Adopting a tweet style, here goes:

Our assessment answers 3 questions (paper is here):

1. What are the GHG reductions & costs? 9.1Mt more GHGs: $3.8B more costs.

2. What is the net cost impact on households? $295 in “backstop” provinces; BC, QC & NL $187/HH.

3. Can the Plan hit the 2030 Target? The Plan is not scale-able to the target.

Our Approach. Compare changes against ECCC 2018 “additional measures” projection, which includes federal, provincial, & territorial GHG & clean-energy policy in place or developing. 79 Mt gap under current & developing policy.

What are the GHG reductions & costs?

We sort the Plan's measures into 3 buckets:

1. Existing measures to be removed increasing GHGs

2. New Plan measures that decrease GHGs

3. Measures with little or no impact on GHGs

Research empirical data on policy performance, model impacts in 2022 and 2030.

Measures removed by Plan

• Carbon tax: In 2022, 232 Mt covered GHGs subject to backstop or with own policy to avoid backstop. Forecast GHGs to 2020 and 2030; apply sector cost curves for covered GHGs to estimate increase in emissions.

• Clean Fuel Standard. Remove regulatory requirements of CFS on transport fuels in 2022: 4% reduction in the GHG intensity of liquid fuels; industrial gases and solid fuels regulated starting in 2023 so not included in 2022.

• Output Based Pricing System. For large emitters, no data on policy stringency; assume Plan implements at same level as OBPS (generous assumption). But, no voluntary opt-in for emitters 10 to 40 kt in Plan. Lower coverage under Plan than OBPS of 6% of 15.5 Mt.

New measures in Plan

• Green Technology and Innovation Fund. $250M leverages private funding. Use SDTC performance as proxy for GHG cost. Assume rapid R&D deployment (generous assumption). Innovation subsidies rank low effectiveness relative to other R&D policies. See Popp (2016).

• Green Home Tax Credit. 2-year $1.8B to improve energy performance. NRCan internal evaluation of ecoEnergy program found reductions cost $439/t.

Others estimated free-rider rate 70%, $100-$800/t. Highly regressive, benefiting high and middle-income households.

• Green Construction. Promote low-carbon building materials. ECCC 2018 projection includes increased use of wood; Plan adds low-carbon cement.

Solicited industry input on GHG reduction. We assume carbon cost of $50 in 2022 ($50) as proxy for the opportunity cost of the GHG reduction (carbon market value).

Measures with limited, no impact. Already in the GHG projection, or vague.

• Green Patent Credit

• Energy Savings Performance Contracting

• Green Home Retrofit Code

• Net-Zero Ready Building Standard

• Supporting the Agriculture Sector

• Greening the Grid measures

What is the net cost on households in 2022?

Drivers of household cost:

1. Cancels or alters existing measures; avoided costs, lost carbon tax rebates

2. Subsidies paid from general revenue via personal income tax @ 50% of federal revenue

3. Companies pass on changes in carbon costs

The cost to households in 2022 is $295 in all provinces, territories with a federal carbon tax backstop or with carbon pricing implemented to avoid the backstop. Those in other provinces (B.C., Quebec, and NL) face lower costs of $187 per household.

Can the Plan hit the 2030 Target?

The Plan does not have a reasonable chance of achieving Canada’s 2030 target: Compared to the “additional measures” scenario, we calculate a net increase in emissions of 29.8 Mt in 2030, widening the existing gap by 38 per cent.

The Plan introduces 12.5 Mt of new reductions; but can’t offset the losses from cancelling the carbon tax (11.5Mt), Clean Fuel Standard (30Mt), and changes to large industrial emitter program (1Mt).

Could green exports close the gap?

The 2030 forecast of LNG exports of 16M tonnes would have 18Mt of potential GHGs credits (adopt 50% as per CAPP): Equals US$500M in China's carbon market, 5% of the LNG price. A compliance asset in China not transferred freely (or easily).

Close the gap with the large emitter program?

To close the Plan's 109Mt gap, the large emitter carbon price would need to be ~$300/t with a total cost of $17B. An integrated economy-wide model would likely chock on this scenario, with huge trade and sector output declines.

Final Thoughts

The Plan could conceivably raise costs & GHGs relative to current policy. It is therefore unique relative to the long list of CDN climate plans abandoned by politicians of all stripes. After 20 years of climate policy churn, we should expect better from those that wish to govern.