The Carbon Tax

Posted in civics on Sunday, August 26 2018

I thought I'd take a moment to talk about Alberta's carbon tax and think aloud about what I think are some problems with how it is supposed to work. I am not an economist, nor do I know anything about government policy. So clearly I am the most qualified to spout opinions.

The Carbon Tax

So Alberta's carbon tax can basically be divided into two broad things, the tax us regular shmucks pay and the tax big industry pays (the details of which are in the Carbon Competitiveness Incentives Regulation). The regular shmucks tax is a tax on fuels, pretty easy.

The tax on industry is where I have problems, but first I have to explain how it works. The idea is pretty simple: industry produces stuff, the government assigns an allocation of how much CO2 industry can emit per unit of stuff, any amount over that gets taxed.

Let's put this in a concrete example, suppose you own a power plant. You make electricity which you sell to the grid. Regardless of how you do that you are allowed to emit 0.37 tonnes of CO2 per MegaWatt-Hour (MWh) of electricity you export. Cool.

Suppose you produce 10,000 MWh of electricity, that means you are allowed to emit 3,700 t CO2.

Now let's suppose you have a crappy plant that isn't as efficient as it could be and you produce 5,000 t CO2 making that electricity. Well you have to pay the tax, but only on the extra 1300 t CO2 you emitted. This is taxed at \$30/t currently so that's \$39,000.

There's different ways you can pay that tax, you can pay it with money (so called Fund Credits) or you can pay a portion of it with carbon credits. You get these credits from other people, more on that later.

So what happens if you re-vamp your plant and now you emit only 3,000 t CO2 for the same 10,000 MWh of production? Congratulations you just earned some carbon credits that you can sell to other people. You earned 700 credits, what you were entitled to emit but didn't. Huzzah. The value of these credits moves around, but it's definitely less than \$21,000 (the price of a Fund Credit). This is incentivizing you to find improvements in your plant.

Note though, you earn credits through reduced carbon intensity not for halting production. If you decreased your emissions to 3,000 t by just producing less electricity, say 6,000 MWh instead, then sorry no you don't earn any credits. Your allocation has gone down to 2,220 t CO2 and so all you've accomplished is reducing the bill to \$23,400.

This gets at the root of my problems with the Carbon Tax

The Atmosphere Doesn't Care About Your Bottom Line

The way the Carbon Tax is implemented it is all about intensity. As long as plants meet their intensity targets they can continue to expand production and continue to expand overall greenhouse gas emissions. Lets go back to that power plant, you've made improvements to your plant, you are meeting the targets set by the province, so you decide to double capacity.

Now you produce 20,000 MWh of electricity while emitting 6,000 t CO2, and hey! wonderful news! Now you also earn 1,400 credits, worth at most \$42,000. At this point you are being paid to emit more CO2 than you were before.

The only way this works out to a reduction in overall emissions is if either the economy stops growing, demand stops increasing, or the intensity target keeps ratcheting downward faster than the economy grows. Otherwise increases in production will blow out any gains made in intensity and net greenhouse gas emissions will increase.

This is my first problem with the carbon tax. It doesn't tax carbon. It taxes intensity. The atmosphere doesn't care how productive you were when producing the CO2. The same catastrophic consequences happen whether the CO2 was emitted from a very cutting edge highly efficient plant that produces piles of economic benefit as at one that just literally sets piles of coal on fire because fuck it some people just want to watch the world burn.

The atmosphere does not give a fuck about the economy.

The Laws of Nature Don't Care About Your Emission Targets

So that intensity target has to ratchet downward, not just to meet the reductions outlined in the climate change agreements, but also to out-pace economic growth. Because, as already noted, economic growth will wipe out any gains in intensity pretty quickly (don't believe me? look around you, the average car is significantly more fuel efficient than back in the 1950s and yet overall emissions from vehicles are significantly higher than the 1950s. Growth in automobiles has wiped out any gains in fuel efficiency).

This presents a real problem: There are limits to efficiency, and efficiency growth.

The law of diminishing returns is an iron law of engineering. Efficiency gains always come at a greater and greater cost. There is a practical limit to how efficient a given technology can be made. There are hard theoretical limits as well (for example the second law of thermodynamics). There is a line where no matter how much further the government pushes the target it will always be cheaper (either because the technology is too expensive or the technology could not exist) to just pay the tax and continue production.

I don't know where that line is, but it's there. I suspect that it is much closer than we all realize, because if plants could make huge gains in energy efficiency they would have done so already.

At that point there are only a few options:

  1. A dramatic increase in carbon sequestration
  2. A more dramatic decarbonization of every energy source in the province
  3. Cut production, halt growth.

The second point would be a lot more disruptive than maybe it appears. This would mean taking every facility that uses natural gas to generate heat and having them use something carbon neutral. At this point, regardless of what that medium might be (hydrogen say), this would amount to a large-scale shift towards electrifying everything. So this is a double-whammy. The grid would have to radically decarbonize to meet it's own goals, but it would also have to hugely expand in size to make up for essentially all energy provided by fossil fuels. It would have to do so with a moving target, because the economy continues to grow.

Having One's Cake and Eating It Too

I think the Carbon Tax as currently designed wants to have a painless reduction in emissions while continuing to have a growing economy, along with growth in overall production. But these are incompatible.

This was the problem with the old carbon levy, the Specified Gas Emitters Regulation, which a big study found accomplished essentially nothing in terms of curbing the total emissions of the province. The new carbon tax is functionally very similar, they just gave it more teeth from a regulatory point of view. It will be more financially painful for industry, but I don't think it will substatiantially reduce overall emissions (unless it is so painful that plants shutdown and planned expansions are halted, which is the opposite of what it is intended to do).

I guess my main issue can summarized in the following chart, this comes from the 2018 National Inventory Report that the Government of Canada publishes under the UNFCCC, it shows the change in total emissions of greenhouse gases from 1990 until 2016 (the last year of data availale) and the change in "Intensity", which Environment and Climate Change Canada defines as the total emissions/GDP. We have made huge strides in reducing our carbon intensity. However over that same period overall emissions have risen. In recent years emissions have dropped/stagnated but that coincides nicely with first the financial crisis and secondly the global drop in oil prices. Which both had a huge impact on the economy. Intensity gives us a false sense of progress.

Change in Intensity and Total Emissions