Crawl Across the Ocean

Monday, January 31, 2005

Sticks and Carrots May Break My Bones…

...but words will never motivate me.

With the date when the Kyoto Accord comes into force approaching (Feb 16), the next couple of weeks should see the Federal government once more try to come up with a sensible plan for how to implement it.

So far their approach has consisted primarily of spending money to repeatedly ask people to stop emitting so many greenhouse gases. To nobody's surprise this campaign of words has accomplished nothing and the time is coming to bring in the sticks and carrots.

(Note: a stick is when the government makes the emitter pay and a carrot is when they make the taxpayers pay)

An article in the Globe today suggests that the government is mainly looking at carrots (subsidies for 'green' vehicles, lower taxes on co-generation plants, rebates on energy efficient appliances, extending the Wind Power Production Initiative to include not just wind but other renewables and so on).

But after talking about the various carrots for the whole article, the last line is:
The government is considering forcing auto makers to make a 25-per-cent improvement in fuel efficiency by 2010, and compelling business emitters to meet greenhouse reduction targets

so there may be some sticks in the plan as well.

If the Liberals are looking for ideas, the NDP has lots. As far as I can tell, their plan has 44 points, and seems at times to be simply a list of anything any government somewhere has ever done to try to reduce fossil fuel use.

Still, like a man with a machine gun in a shooting gallery, they do manage to make a few direct hits (such as implementing an emission trading system for large emitters and mandating appliances to meet energy-star standards), and the Liberals could do worse than to cherry-pick the ideas they like from the NDP plan (they'll probably need NDP support to get the budget passed anyway).

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In trying to decide what makes a good plan vs. what makes a bad one, I was forced to think about why we need the government to intervene in the first place.

I see three reasons: The primary one is that our pricing system is not working properly. Our emitting of greenhouse gases carries a cost, but that cost is not captured in the price we (or industry) pays to emit. That is, when you buy gas, the price doesn't include the potential cost of the planet's climate changing.

The second one is that it seems like industry often needs a push from government before it will develop new, more efficient ways of doing things. It seems odd, and certainly I'm not saying that business doesn't innovate, because it does constantly, but when government comes in and sets a standard, it focusses attention on that issue, and also reassures companies that they won't be losing a competitive advantage by pursuing something their competition is not spending any money on.

The third reason is that people tend to be irrational when they buy things in that they put more weight on the up-front cost then they do on the life-cycle cost. i.e. They buy the cheap appliance without thinking about how much they're going to spend on electricity or they buy the gas-guzzler and don't worry about the cost of gas.

Keeping these problems in mind, I generally prefer solutions which try to fix the inaccurate pricing signals or which set standards that force industry to innovate and at the same time prevent people from making the worst of their irrational purchasing decisions.

What I don't like is when the government comes up with a whole pile of one-off incentives and rebates for specific items which they have decided would be the best things to focus on to reduce emissions.

As an example, the government may decide that the best way to get me to cut back my emissions may be to give me an incentive to buy a hybrid vehicle. Or they may decide that the best way is to make bus tickets tax free so I can take the bus to work. Or they may decide the best route is to subsidize me renovating my house to make it more efficient or to subsidize me buying a more efficient washing machine. But really, why not just raise the price of emitting across the board and let me decide for myself where I want to cut back. It seems like I know what would be a smaller sacrifice for me better than the government does.

So to make a long story short, my recommendations for implementing Kyoto would be as follows:

1) Raise the federal gas tax by 10c/L, and simultaneously cut the GST to 6%. The intention is to make this a purely revenue neutral change. Not a tax increase or a tax cut, just a redirection of taxes from general goods to gas.

2) Implement an emissions trading system (with a suitable time-lag to allow industry time to prepare for it). The trading system would allow for a certain total amount of industrial emitting (with the total allowed declining over time) and auction off the rights to emit. That way whoever the emissions are worth most to (i.e. whoever is producing the most value) gets them.

3) Honour and build on the existing commitments to expand the Wind Power Production Initiative to provide a 1c/kWh for any new green energy sources up to a cap of 10000 MW. The current plan, provides a roughly 1c/kWh subsidy to the cost of wind power for the first 10 years of operation for any new wind plants, up to a limit of 1000 MW.

4) All new appliances should be mandated to meet energy-star requirements within 3 years. Because people are irrational and will take the lower upfront cost even though it means higher energy costs down the road, I think the government needs to enforce a higher standard in this area.

5) Match California vehicle standards for fuel efficiency and emissions. In order to allow auto manufacturers to be reasonably efficient, it's helpful for them not to have to deal with too many different sets of rules. By matching our standards to some of the toughest ones in the U.S. we can help create a common market for carmakers to target.

6) Reduce investments in road projects and divert infrastructure money to transit projects and an expanded hydroelectric grid. Almost everyone agrees that government has a role to play in building infrastructure. What's not so clear is how much of a role the federal government should have. But given that they already spend a lot on infrastructure projects around the country, it makes sense for them to refocus from building more roads to building more transit and supporting development of renewable energy sources.

For example, a hydroelectric link between Manitoba and Ontario could potentially allow Southern Ontario to close down some of its coal plants which are among the biggest emitters in the country.

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I guess the biggest problem with this plan is that it could be political suicide, but hey I'm an optimist (plus, I'm not going to be up for re-election). As this random example I came across on the web indicates, raising gas taxes (even in a revenue neutral way) may not be all that popular. Reading stuff like that just leaves me amazed that the country is in as good shape as it is.

So far, the various details which have been leaking out seem to suggest a reasonable plan, but I hope the Liberals don't chicken out and go with all carrots and no stick, and I hope they don't just put together a laundry list of small targeted subsidies and rebates and tax breaks and programs and incentives rather than sending clear across the board pricing signals and demanding that industry meet a higher standard where that is appropriate. I guess we'll see.

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4 Comments:

  • Good post - well thought out as always.

    If all the first world nations agreed to implement these sorts of proposals, it would be an enormous step foreward for mankind.

    My concern is that a lot of these rules will make Canadian industry less competitive vs US industry.

    Suppose I live in Ontario and the price of BC fruit and Florida fruit is currently comparable. Now extra gas taxes raise the price of BC fruit. Presumably the BC industry will adjust to the new costs so that the entire tax increase is not passed to the consumer, but it seems reasonable to assume that the end cost will be higher. Now all Ontarians buy Florida produce and reward the companies that continue with the gas-guzzling transportation systems. And as the gas is bought in the States, Cdn government coffers are not growing. And BC fruit companies get put out of business. The obvious solution is to place a tarriff on goods that are brought into the country through polluting ways - but there's no way that international trade bodies would allow that.

    Similarly, for big smokestacks - Cdn companies will have to pay costs for emissions that US companies are not subject to.

    I would suggest that Canada should do a sustained media blitz in the United States. Once, we've won the battle for their hearts and minds, perhaps we could set up a North American agreement to impose standards similar to your suggestions.

    BTW, I see that the Reader's Digest posters seem to accept the idea of gas taxes paying for road maintenance. It seems to me that a media campaign that ties gas taxes to the environmental and societal costs of pollution has a chance of being accepted.

    By Blogger dejour, at 10:18 AM  

  • Well done Declan. I agree generally on all your points. Unfortunately that includes the one on political suicide. This to me is a far truer test of the will of Canadians and their government than even things like BMD. Dejour's points on competitiveness are also good. That may require revisiting our whole dependance on the US through NAFTA.

    By Blogger mahigan, at 10:38 AM  

  • It's true Dejour, Canada faces the problem of being at a disadvantage since the U.S. is not going along with Kyoto. Meanwhile the U.S. plan (http://archives.cnn.com/2002/WORLD/asiapcf/east/02/15/japan.climate/)
    is unlikely to accomplish anything since while companies may want to cut their emissions they face the problem of being at a disadvantage vs companies that don't - because the U.S. plan is voluntary.

    And of course, the U.S. justification for not joining was because they would be at a disadvantage since China and India were not going along.

    It's collective action problems all the way down! (http://en.wikipedia.org/wiki/Turtles_all_the_way_down)

    At some point, like Mahigan says, it just becomes a matter of Canadians saying that we have to do something and if the Americans want to freeload, we can't stop them.

    By the way, do you think the Readers Digest tax ranters are mollified if they saw today's article in the Star, http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&c=Article&cid=1107298213621&call_pageid=968332188492&col=968705899037&DPL=IvsNDS%2f7ChAX&tacodalogin=yes
    that some of the existing gas tax will now, "go to environmentally sustainable infrastructure projects such as public transit, water treatment, community energy and roads and bridges."

    Incidentally the Star (and the government) framed this as being money targeted towards Kyoto - I guess that depends on how of the money goes to roads and bridges vs . transit

    By Blogger Declan, at 6:33 PM  

  • Regarding dejour's objection about increasing costs to Canadian producers relative to their American competitors:

    There are days when I wish we had the same kind of find-any-excuse-to-restrict-trade approach that our American cousins often have. Imagine, for example, applying the same logic to any U.S. export involving fossil-fuel inputs that the U.S. applies to softwood lumber: that American inaction on Kyoto is tantamount to an illegal subsidy to U.S. industry.

    That doesn't answer the half of the problem that dejour didn't mention, of course, which is the higher costs imposed on our exports in the short run. But how much of that greater cost will be recouped over the medium and longer term through greater efficiency and the growth of the conservation and alternative energy industries?

    By Blogger Rob Cottingham, at 10:07 AM  

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