Alberta Climate Change Leadership Plan: OBAs and Indirect Costs - - PowerPoint PPT Presentation

Alberta Climate Change Leadership Plan: OBA’s and Indirect Costs

International Summer School on the Geopolitics of Energy and Natural Resources

• G. Kent Fellows

The School of Public Policy University of Calgary May 17th, 2017

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

A Short Primer on Emissions Pricing (1)

Production of output goods and services implies demand for pollution. Put another way, firms “demand” some quantity of CO2e emissions

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

A Pollution Demand Curve

$/Tonne of CO2e Demand for emissions 224 to 236 MT Tonnes of CO2e (depending

• n the year)

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

A Pollution Demand Curve

With carbon pricing, we want to do one thing: Reduce the Quantity Demanded of CO2e. Cap and Trade- Decide where on the curve we want to be, and let price adjust Carbon tax - Decide what price we are willing to accept, and let quantity adjust

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

Cap and Trade

$/Tonne of CO2e Demand for emissions Emissions Cap (quantity of permits issued) Effective emissions price (?) 224 to 236 MT Tonnes of CO2e (depending

• n the year)

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

Carbon Tax (Alberta’s approach)

$/Tonne of CO2e Demand for emissions $50 /Tonne Quanity of Emissions (?) 224 to 236 MT Tonnes of CO2e (depending

• n the year)

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

Cap and Trade vs Carbon Tax (1)

At a basic level, Both Cap and Trade and a Carbon Tax are doing the same thing: Increase the price of emissions to lower the quantity demanded They differ in three key respects: Administrative: Different specifics on implementation and admin costs Relative uncertainties: the shape of the emissions demand curve is unknown and Government can pick only price or quantity The relative costs/benefits to government vs firms

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

Cap and Trade vs Carbon Tax (2)

The relative costs/benefits to government vs firms: Under Cap and Trade, firms generally receive some quantity of permits directly (which they then trade) There is an asset vs liability calculation with respect to initial permit allocation vs how much the firm is going to emit Under a carbon tax, the initial approach includes only a liability, but this can be adjusted/addressed by using “output based allocations”.

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

A note on Consumer Effects

End Consumers: Domestic Households: Rebates + effect of OBAs Domestic Governments: OBAs + Tax Revenue (for AB government) International consumers (export partners): OBAs

(AB is not as concerned with welfare of our export partners)

Intermediate consumers: OBAs

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

Output Based Allocations (1)

OBA’s essentially function as a subsidy on output. The marginal effect of the carbon tax stays in place, but the OBA reduces the average carbon tax rate. Firms still pay the same price for emissions (i.e.- $50 per tonne) but also get an effective subsidy per unit of output (eg- per barrel of oil). Calculated as a percent rate (using a $50 per tonne tax): Marginal Rate = $50 × Intensity Price of Output Good Average Rate = ($50 × Intensity × Quantity) − (OBA × Quantity) Price of Output Good × Quantity

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

Output Based Allocations (2)

Marginal Rate = $50 × Intensity Price of Output Good Average Rate = ($50 × Intensity) − OBA Price of Output Good Important: If done right, a firm that can reduce it’s emissions intensity, keeps the associated savings.

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

Output Based Allocations (3)

Carbon Tax Rate % Marginal Tax Rate (per unit of output) Average Tax Rate (per unit of output) Emissions Intensity Value of Output Based Allocation

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Background Carbon Tax (AB Approach) Consumer Types OBAs Indirect Costs Final Point

Indirect Costs (1)

Carbon Taxes have been referred to as “A Hidden Tax on Everything” Hidden? (not really) Tax on Everything? (probably)

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Indirect Costs (2)

Source: Fellows and Dobson 2017

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A Final Point

New Technology developments and capital investments can lower the demand (and by extension quantity demanded) for CO2e emissions:

$/Tonne of CO2e Future Current $50 /Tonne 224 to 236 MT Tonnes of CO2e (depending

• n the year)

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