June 5, 2006

Existing approach to climate change policy is both costly and ineffective, says new study

For the past 15 years, federal policies on climate change have reflected essentially the same approach under a variety of names, all equally ineffective, says a new study from the CD Howe Institute. The combination of information and subsidies to encourage voluntary reductions in greenhouse gas (GHG) emissions has been singularly unsuccessful: not only have GHG emissions not declined, they have in fact risen by 25% since 1990 and projections suggest that continuing this policy approach would cost at least another $80 billion over the next 35 years, still with no reductions achieved.

Burning Our Money to Warm the Planet - Canada's Ineffective Efforts to Reduce Greenhouse Gas Emissions analyzes 15 years of government policies for reducing GHG emissions, along with 25 years of programs by electric utilities to reduce or shift electricity demand. These policies and programs, say researchers Mark Jaccard (of Simon Fraser University's School of Resource and Environmental Management) and Finn Poschmann (of the CD Howe Institute), provide a large body of evidence for assessing how effective subsidies and information initiatives have been in influencing energy use and GHG emission reductions.

Initiatives under the various policies, starting with the 1990 Green Plan and progressing through the 1995 National Action Program on Climate Change, the 1998 Action Plan 2000 on Climate Change, the 2002 Climate Change Plan for Canada and finally Project Green in 2005, targeted different sectors with varying degrees of intensity, but all involving voluntary measures, subsidies, funding support and provision of information.

GHG emissions have continued to rise, however, missing by a wide margin reduction targets set at the 1988 World Conference on the Changing Atmosphere, the 1988 G7 meeting and the 1992 Earth Summit in Rio de Janeiro. Moreover, adds the study, the government's own estimates indicate that Canada's emissions remain on a path to missing its Kyoto target by almost 30%.

The authors cite previous studies examining the effectiveness of voluntary policies for environmental protection, noting that in general, these have found such policies to have a negligible effect. Of particular note is the failure to take into account "free riders," i.e. those who benefit from subsidy programs but who would have invested in energy efficiency improvements anyway, thus adding to the program cost without having any effect. The study also points out that improved energy efficiency, instead of leading to reduced GHG emissions, has in fact led to increased energy use, with corresponding increases in emissions.

Without substantial restrictions of charges for emitting GHGs, Canadian emissions have continued to rise. Investments in energy supply, infrastructure, buildings and energy-consuming devices are continuing on a GHG-intensive path, which will make future diversion from this path even more costly in the future. This, says the study, is to be expected in a market economy where businesses and individuals benefit from burning fossil fuels, a high-quality form of energy. Voluntary GHG reduction efforts are simply not enough to offset this trend.

In spite of mounting evidence that the information and subsidy approach is not effective, Canada's latest climate change policy, Project Green, has served only to intensify this approach. Among the various measures and programs embodied in this policy package are a system of intensity targets for large final emitters (LFEs), an offset system, incentives and subsidies for renewable energy, the climate fund, partnership fund and a memorandum of understanding with automakers.

The study authors project that continuing Project Green would not only contribute little to the achievement of Canada's policy objective, it would cost a great deal-a total annual cost estimated at $12 billion by 2012 and $83 billion by 2040. The total costs over the 35 years would be equal to $32 billion in present value, based on a discount rate of 6% for the time value of money. Meanwhile, emissions would continue to increase, by as much as 50% within this time period. Even the anticipated regulation of industrial emissions would be swamped by growth in key sectors such as oil sands production and fossil fuel-based electricity generation.

If Canada is serious about reducing GHG emissions, alternative policy approaches, should be given serious consideration, including policies that legally or financially impede GHG emissions, such as a gradually increasing tax on emissions. The study notes that decades of experiments with environmental taxes, including CO2 taxes in several jurisdictions, have shown that a properly designed tax can achieve its goals at a reasonable cost. Other taxes could be reduced so that there would be no net tax increase, and industries whose exports were threatened could be provided some exemptions and assistance with emission reduction.

Another policy option is market-oriented regulations requiring the development and adoption of non-GHG-emitting technologies. The study cites a California requirement that vehicle manufacturers achieve a growing market share for vehicles with zero and near-zero GHG emissions. The regulation permits them to trade among themselves to meet their obligations, and the long time frame allows for development and market testing of options such as battery-electric, plug-in hybrid, hydrogen fuel cell and biofuel-powered vehicles. Penalties for non-compliance ensure that manufacturers are motivated to focus their research and development and marketing efforts toward cleaner vehicles.

Another market-oriented regulation, adds the study, would shift the burden for emission management back to the fossil fuel industry, requiring this sector to take responsibility for the fate of the carbon it handles, just as other industries are required to do with other potentially harmful substances. This carbon management standard would require those extracting carbon from the earth to ensure that it did not end up in the atmosphere.

As envisioned, this requirement would initially apply to a small percentage of the carbon extracted, with the percentage gradually rising. This phased-in approach would give industry time to gain experience without incurring large increases in production costs. Companies engaged in various aspects of carbon extraction and processing (e.g. oil sands production, oil refineries, coal mines, electricity generators, pipelines, gas processors) would be allowed to form consortia in order to meet the total requirement as cost-effectively as possible.

Although policies such as these would likely be more effective, they would entail substantial costs. The question, concludes the study, will be whether Canadians are willing to make these investments as part of an international effort to address the risks of climate change.

The study may be viewed on the CD Howe Institute Web site, www.cdhowe.org. More information is also available from Mark Jaccard, 604/291-4219.

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