Tuesday, September 27, 2022

Opinion: Beyond just carbon pricing, the federal budget will help accelerate Canada’s energy transition

Grant Bishop is the Calgary-based founder of Knight Forkwhich builds data-driven tools for carbon pricing and the energy transition.

You’d be hard-pressed to find an economist who doesn’t support a carbon tax. Pricing greenhouse gases ensures that companies and consumers internalize the costs of climate change. This pushes production and consumption decisions closer to what is economically efficient and socially optimal.

Of course, Ottawa has already won the battle to impose a nationwide carbon price, and last week’s federal budget goes well beyond just pricing emissions. However, while not an unqualified endorsement, this budget launches important initiatives to accelerate action on decarbonizing the Canadian economy, while managing the unavoidable upheaval of the energy transition.

Some economists may take issue with the budget’s climate change spending – particularly its subsidies for electric vehicles (EVs) and carbon capture, use and storage (CCUS). Subsidies can be a waste of money by helping to finance actions that would have happened anyway, and the actual incremental effects of Canada’s climate spending will doubtless be fodder for debate in the coming years.

Nevertheless, a carbon price cannot do all the heavy lifting of decarbonizing Canada. First, although it will ramp up to $170 per tonne of greenhouse gases in 2030, our present price of $50 per tonne is well below the likely social costs of carbon – that is, the economic toll of the damage that unabated emissions are likely to inflict through climate change. Second, there may be value in accelerating emissions reductions, even at higher costs, especially to build key networks for long-term decarbonization.

Continuing to subsidize electric vehicles helps accelerate the transition of Canada’s vehicle stock – which, because an average car can be kept on the road for more than 12 years, cannot happen overnight. A new car with an internal combustion engine represents a decade or more of emissions.

In a paper on decarbonizing Canadian transportation last year for the CD Howe Institute, my co-authors and I estimated that zero-emission vehicles would need to steadily climb to 70 per cent of passenger vehicle sales by 2030 just to hit a roughly 30 per cent share of the stock and achieve the federal government’s transportation emission target. While battery electric and plug-in hybrid vehicles grew to more than 5 per cent of new vehicle registrations in the third quarter of 2021, much greater EV market share is needed to meet Ottawa’s target.

Subsidies will involve some waste, and we shouldn’t pretend that because dealerships won’t adjust their prices upwards. But this will get more EVs on the road quicker and arguably pay off in accelerating emissions reductions for transportation.

The budget’s investment tax credit for CCUS is another irritation for certain economists. Some question whether it is truly necessary, given the incentives from carbon pricing to abate industrial emissions – particularly from oil sands extraction and processing. Instead of costly subsidies, Blake Shaffer and Dale Beugin, in a note for the CD Howe Institute last year, proposed that the Canada Infrastructure Bank help spur decarbonization investments by “forward contracting” with project proponents to remove industry uncertainty around the carbon price.

As well, conversations about CCUS largely ignore the likely huge incentive for investment under the upcoming Clean Fuel Standard, which involves credit prices up to an inflation-adjusted $300 per tonne (the government’s modeling in its regulatory impact analysis statement indicates that CFS credit prices would hit that cap).

Nevertheless, by reducing costs of new investment by roughly 50 per cent, the tax credit can hasten CCUS rollout to reduce industrial emissions more quickly. The budget estimates the government’s cost for the credit at $8-billion over the coming decade, and that private-sector projects will account for more than $17-billion in CCUS investment.

It’s also notable that Ottawa’s emissions reduction plan foresees an added 640,000 barrels per day of oil sands production – an increase of 21 per cent – ​​by 2030 relative to 2020 production. At the oil sands’ present emissions intensity, this would increase its emissions to roughly 100 megatons.

The Oil Sands Pathways to Net Zero, a consortium of the majority of oil sands producers, earlier announced plans for 22 megatons of reductions by 2030, with CCUS accounting for roughly a third. Much more CCUS is required if the oil sands producers are to reduce emissions by 2030 to the 55 megatons envisioned in the federal plan while still increasing output.

Governments face an unenviable and messy task of both rapidly reducing emissions in the face of climate change’s urgent threats and mitigating the immediate hit to industrial viability and households’ standards of living. Economists should scrutinize the actual impacts, but in the fog of war against the threat of climate change, this budget makes important advances.

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