Green Shift or Red Shaft?

You've all heard the basic principles of the plan. Here are some Q and A's about the Liberals new climate change policy and election platform..

Is the policy it tried and tested?
No. There is no example of a similar and successful policy for a country analogous to Canada. It's neither tried nor tested and the complexities will ensure many challenges will be encountered if it even manages to proceed. The flaws of the Kyoto policy was a good example of serious issues that will be encountered in trying to implement untested climate change policies.


What complexities?
Let's say for example that you are renting your residence and your landlord pays the heating and electricity bills (they are included in the rent). If and when a "carbon shift" is applied, then you will get income tax refunds and your landlord will get the higher bill. This doesn't make any sense, so obviously complicated provisions will need to be made for for these scenarios, including for people who are currently under a rental contract. This is but one example of the many complexities that will arise with an untested plan of this scale.


Will it reduce greenhouse gases?
Most likely. But even the liberals admit they don't know exactly how much. On a global scale, Canadians produce an estimated 2-3% of the world's greenhouse gases. That means even a significant reduction in CO₂ emissions for Canada would be fairly modest on a global scale. At best, it represents a symbolic 'first step' more than anything else.


Will it be bad for the economy?
The jury is still out--but it would certainly result in a shift of the economy. Ultimately though, there will be no net flow of Canadian dollars outside the Canadian economy unlike some of the international Cap and Trade policies. It is certain that some industries could be put at a competitive disadvantage while others will flourish under the plan. Economists are split on whether or not it would be good, bad or neutral for the Canadian economy overall.


Can it pass with the Conservatives in power?
No. Even if the liberals garnered the support of all the other opposition parties, the government is not required to follow any policy that includes significant budgetary spending measures. Dion's release of the plan marks an unofficial but irreversible start of an election campaign.


Is it really revenue-neutral?
Sort of. There will be significant administrative costs, particularly with the complexities of this plan. Ultimately though, all of the revenues should be returned to Canadians. That's a bit of a moot point though, because all government revenues are always returned if not at least owned by Canadians--It's really a question of how revenues are distributed and to whom. It's unrealistic to think that everyone will get back exactly what they paid. Some will get more, others less. For example, farmers that require the use diesel will be hit much harder than someone living in a small condo with electric heating (energy sourced from hydroelectricity or nuclear). To compensate, they have added a provision to give more revenues to rural area residents and northern residents. Very complex systems are needed to help even out the imbalances and even then it will still create some winners and losers.


Who are the biggest winners?
Most likely Canadians living below the poverty line. While Dion claims revenue-neutrality, he doesn't claim revenue-equality.

"The Green Shift will be especially targeted to decrease poverty with further emphasis on helping children in poverty."

-Dion at the 'Green Shift' kickoff speech

Clearly the Conservatives claim that it is a masked tax has some legitimacy.


Who are the biggest losers?
Probably Albertans and Saskatchewanians. Alberta's electricity grid relies on coal for nearly 50% of its power and natural gas for almost 40%. Saskatchewan is similar but with more hydroelectric and less natural gas generators. Ontario is basically the next closest electricity carbon-emitter with 20% of its electricity generated from coal. Electricity costs would go up in those provinces--by a lot. It would add over $600 million to Alberta's total electricity cost in year one, and over $2 billion by year four. I'm not sure how much would be returned to Albertans in personal and corporate income taxes but I doubt the figure is proportional to what Quebecers receive. Quebec uses over 97% hydroelectric power. The plan was "adopted wholesale" from Jack Mintz, a tax-policy specialist and chair of Policy Studies at the University of Calgary. Ironically, Mintz hails from Alberta, and received his first degree in economics at the University of Alberta.


Will it harm oil sands development?
Possibly, but not as much as one might think. The taxes are point-of-sale, which means oil sands producers can continue to release CO₂ and as long as the oil is sold to the United States (as most already is), the massive carbon emissions produced will bypass the plan. This is another strange irony because the oil sands are Canada's largest industrial CO₂ emitter. But no plan that destroys Canada's economic towboat would be supported by any economists. However, industry lobbyists will exercise their right to complain because it sets a pretty bad precedent for the future. Still, a precedent has already been set by the United States which banned the purchase of 'dirty' fuels by the Feds. Some say Alberta's oilsands are exempt under the U.S. bill. Either way, I don't believe precedent is a concern in the face of such high prices of an essential commodity.


What about Airlines?
Aviation fuel is not taxed in year one of the plan but 6.2 cents per litre would be tacked on by year four of the plan. Flight prices are already up 30-40% since last year and are likely to continue rising. High oil prices have hit this industry hardest. Airplanes are among the biggest CO₂ emitters, and there are some indications that CO₂ released at higher altitudes could have more impact on the environment compared to ground-level emissions. All this is to say that the aviation fuel tax is very unlikely to be removed from the plan. Truckers will have a similar grievance. Admittedly though, to put it in perspective, the cost of diesel and aviation fuel is on the order of $2 per litre, so it would add somewhere from 1-3% to the cost of flying/trucking.


And other Industries?
Because it is point-of-sale, it is a tax on consumers on the basis of estimated carbon emissions from fuel sources rather than on carbon dioxide emitters directly. Of course, industries can be large consumers as well as individuals. The steel industry, for example, might be hit hard because they use lots of coke (which is essentially coal) in the refining process. As I've said, coal-fired power plants will also be hit hard and ultimately coal miners that sell domestically.


Do all liberal MP's support it?
No. If it comes down to a vote they will all stand up of course. However, there are certainly many liberals that are concerned about their constituents kicking them out of office in the next election. Saskatchewan MP Ralph Goodale's place in the House of Commons could be collateral damage for example. On the other hand, this is the first issue Stephane Dion has actually taken a stance on. Some within the Liberal ranks will support it on the basis that the plan would either succeed (and get the liberals elected) or fail and have Dion exit the Liberal Party. Either way it's a resolution.


Will The Plan Succeed?
It's too early to tell but here are some interesting notes:

• The liberals have obviously scrutinized the plan extensively with political analysts and economists. Early response to the plan indicates economists are split on the economic sensibility of the plan.


• Gasoline taxes were excluded simply because it would be too unpopular and not because it is already taxed (diesel is already taxed but did not escape the carbon tax).


• The NDP has shunned the plan and said they will not support it.


• The Conservatives seem to be taking potential for public acceptance of the plan quite seriously. Stephen Harper seemed to indicate his intent to have a fall election the day after the plan was officially released.


• It will likely garner support from Quebec and result in a shutout of the liberals in Alberta (again) and quite possibly Saskatchewan. BC has already committed to implementing a carbon tax that includes an additional gasoline tax--BC residents may not like being squeezed by both the provincial and federal governments at the same time.


• Senators McCain and Obama both have more accepting perspectives on anthropogenic climate change predictions compared to their predecessor. This could furter influence public opinion on climate change.


• If oil and energy prices fall in the coming months, then more people will soften to the plan. Demand destruction is happening as we continue to see economic growth casualties from the continued high prices. At the same time, a serious disruption to supply (devastating hurricane or a terrorist attack of epic proportions) would undoubtedly cause oil and gas prices to rise.


• At first pass I'd guess the plan will ultimately fail to get the liberals elected (and be enacted) because of the complexities, uncertainties and divisiveness of the plan--and also because of the general perception that Dion is not a good leader.

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On a side note, while I'm not crazy about poetic symbolism, tulips (pictured above) actually have some very interesting economic history in 17^th century Holland (see Tulip mania). Furthermore, no one really knows for sure whether or not the "Green Shift" will put the economy "in the red". Lastly, it seems the Liberal party has (temporarily?) added green, in addition to red, as it's second colour.

A Changing Climate or a Hurricane of Hoaxes?

There is no irrefutable evidence of climate change. Most of the speculation about anthropogenic climate change (caused by humans) are based on computer models, which are improving but still rather difficult to validate. That's because even if we can approximate a history match of past climate conditions, we are now trying to extrapolate these models for carbon dioxide levels that have not existed for several millennia on the Earth, if ever. Computer modelling is sometimes considered as much of an art as it is a science because it requires so many assumptions. Good engineering assumptions produce good approximations but bad assumptions produce erroneous results. The only way to have confidence in a solution is consistency. The model must be consistent with historical data as well as with current data. The more data we have that turns out to be consistent with what the model forecasted, the higher confidence we will have that the model is valid. Click here for a recent article on climate change consistency. But some judgement is required to assess how much consistency is required to constitute irrefutable evidence. I don't think we've reached that point yet.


Any sound political and free market policy will be one that considers the economy, society and the environment as an inseparable whole rather than as independent entities. Ignoring the environment in favour of the economy allows the economy to flourish in the short term, but could be detrimental to the longer-term economy. On the other hand, undue and overly-aggressive environmental policy would be crippling to the near-term economy. A sound policy would strike the correct balance between the economy and the environment such that strong but sustained economic growth can be achieved. I don't propose to know where that balance lies, but it certainly won't be reached without international cooperation and commitment. There is no broader a public interest than billions of molecules of air pollution that refuse to adhere to any regional, national or geographical boarders.

It is this mobility of global pollution that makes it such a challenging issue. For example, the U.S. and Australia refused to commit to the Kyoto protocol because it would put them at an economic disadvantage to developing nations like China, who were given a more liberal license to pollute--they had a valid complaint. At the same time, China and other nations still only produce a tiny fraction of pollution per capita compared to developed nations--this view is also valid.

While there is no consensus on the magnitude and scale of anthropogenic climate change, there is a growing belief that regardless of the extent, climate change beliefs will dictate both public and corporate policy.

John R. Fanchi, a petroleum engineering professor, writes:

One [oil and gas] industry response to environmental and social concerns in the context of sustainable development is the triple bottom line (TBL). According to this view, sustainable development must integrate social and environmental concerns into a development plan that optimizes economic profitability and value creation. The three components of sustainable development, and the three goals of the TBL, are economic prosperity, social equity, and environmental protection. The focus of TBL is the creation of long-term shareholder value by recognizing that corporations are dependent on licenses provided by society to do business.

He also states that (Royal Dutch) Shell has taken strongly to this approach. Many other large corporations are advertising themselves as 'green' including all six oil & gas 'supermajors' (ExxonMobil, Royal Dutch Shell, BP, Chevron Corporation, Conoco Phillips and Total S.A.), as well as the two largest North American automakers (GM and Ford) to name a few.

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The Cost-Benefit analysis of climate change
Given the massive uncertainties of climate change, it makes sense to do a cost-benefit analysis to assess risk. It could well be that climate change reports have been prompted by alarmist environmental extremists and sensationalistic news reporting, or they could be genuine. The probable scenario is somewhere in between. There are essentially three scenarios that would come out of such an analysis:

Scenario 1: (best case scenario) Climate change predictions turn out to be totally wrong. There is no consequence to inaction and any mitigation steps taken would do nothing but harm global economies.

Scenario 2: (worst case scenario) Dire climate change predictions are mostly right. The consequence to inaction would ultimately devastate global economies and strong mitigation action plans would be the only way to keep long-term economies afloat.

Scenario 3: (best guess scenario) Climate change predictions are partially right. A balanced approach should be taken to mitigate emissions in such a way that economies are able to achieve long-term continual growth.

An economic/environmental success story was the phasing out of CFC's. It was found in the seventies that the ozone layer was being depleted. The culprit was found to be CFC's, were are used as refrigerants and aerosol propellants among other uses. Global agreements were made to phase out the chemical and it is now estimated that the ozone layer will approach natural levels by the year 2050. Suitable alternative chemicals were found with few negative consequences, if any, to global economies. Unfortunately, the climate change issue is much more complicated and far-reaching than the ozone layer was...

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And finally, a primer to the next post--Stephane Dion's proposed environmental policy..

What is the logic behind a carbon pricing?
The logic is that because world economies are driven by free-market capital, we should try to estimate and apply a price of an intangible cost (the adverse effect of GHG emissions on our environment). As I've said, nobody has any clue what the environmental and ultimately financial cost of 1 tonne of CO₂ is. If indeed severe weather events can be induced by climate change, then ideally those who created the greenhouse gases would be charged proportionally for the damages it caused. Now, it's unrealistic to think that we will ever know for sure if climate change causes sever-weather damages, let alone how much and get the polluters to pay proportionally. Re-Insurance companies have taken note of the issue some time ago. Re-Insurers are those who insure the insurers--often in the case of natural disasters. For example, in the months following the Mississippi river flooding, a local insurance company might go bankrupt without the reinsurance provided by a company like Swiss-Re. Swiss-Re is the worlds largest reinsurance company, and it has taken note of the climate change issue. They also realize that there is no way to deny insurance claims to large CO₂ emitters on the basis of negligence (they would need irrefutable proof that doesn't exist).

What is the logic for a Carbon Tax?
The basis for a carbon tax is that the environmental cost of greenhouse gases should be priced in monetary terms (again, no one has any idea what that cost is). Then this cost can be added to the price of emission sources via a tax to create artificial disincentives. This is the opposite of fuel subsidies to artificially encourage economic growth (but can also have adverse consequences). It's similar to the logic for taxing cigarettes. Especially since Canada has a public health care system, smoking adds to the financial burden of hospitals with the health issues it causes. By taxing cigarettes, these revenues can be recycled back into the health care system. No one really knows what that incremental financial burden is, even in the comparatively simple case of cigarettes. Add in all the complexities of a global phenomenon like climate change and you have yourself an analogous carbon tax shift.

Next post: Green Shift or Red Shaft? Some Q&A on Stephane Dion's climate change proposal.