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From: "Gary Gallon, Canadian Institute for Business & Environment"
<cibe@WEB.NET>
Subject: [GAIA-L] Analysis of Climate Change Economic Study in Canada
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THE GALLON ENVIRONMENT LETTER
Canadian Institute for Business and the Environment
Institut Canadien du Commerce et de l'environnement
506 Victoria Ave., Montreal, Quebec H3Y 2R5
Ph. (514) 369- 0230, Fax (514) 369- 3282
Email cibe@web.net
Vol. 2, No. 22, August 18, 1998
********************************************************
ANALYSIS OF DRI ECONOMIC STUDY ON CLIMATE
CHANGE FOR CANADA
*********************************************************
STANDARD & POOR’S DRI CLIMATE COST STUDY
The Government of Canada commissioned an economic study by
Standard & Poor’s DRI. Standard & Poor’s DRI is a business unit
of The McGraw- Hill Companies headquartered in Lexington,
Massachusetts. The study, entitled, “Impacts on Canadian
Competitiveness of International Climate Change Mitigation:
Phase II”, was completed November 1997, but not released to the
public immediately. It was commissioned by five Canadian
government agencies including Environment Canada, Natural
Resources Canada, Industry Canada, Department of Finance,
and the Department of Foreign Affairs and International Trade
(DFAIT). The report itself can be found at the website
<http://www.dri.mcgrawhill.com/canada/ec2/index.htm>http://www.dri.mcgrawhi
ll.com/canada/ec2/index.htm
The authors of the study also wrote an article summarizing the
results of the study in the “Conservation Ecology” journal. The
article is entitled, “Impacts On Canadian Competitiveness of
International climate Change Mitigation” and was written by
DRI authors Christopher Holling and Robin Somerville. The
article can be found at
website
<http://www.consecol.org/Journal/vol2/iss1/art3>http://www.consecol.org/Jour
nal/vol2/iss1/art3).
************************************************************
ACHIEVING STABILIZATION OF 1990 LEVELS BY 2010
The primary scenario modelled by the DRI study was on the basis of
Canada achieving stabilization of its carbon dioxide emissions at 1990
levels by 2010. This was modelled in the months prior to the Kyoto
Protocol where Canada committed to reducing 1990 emissions by 6%
by the year 2012. The objective of the report was to determine the
potential negative economic impacts on Canadian competitiveness.”
*************************************************************
THE DRI MODEL
“DRI maintains and uses a number of large econometric models which
were used to simulate the impact of each QELRO (model) on a single
country’s economy, its energy markets or its regional markets. ....
“This study uses Standard & Poor’s DRI modelling system...The heart
of each planning scenario is the target and mechanism adopted. The
target refers to the QELRO assumed for the scenario while the
mechanism is the means to achieve that goal.” .... “The definition of
six scenarios in which the Canadian government agreed to meet one
of the QELROs through the application of either a CO2 emissions
trading scheme or carbon taxes..... The study uses a top down
macroeconomic model to assess the potential impact of various climate
change mitigation strategies. The choice of modelling system is not,
however, a trivial one and can have an important bearing
on the results obtained.”
DRI uses as its primary model a, “planning scenario wherein countries
adopt a single target of stabilising COs emissions at 1990 levels by 2010.
This target is achieved by means of a national emissions trading scheme
that is announced in 2000 and introduced in 2010. For Canada, meeting
this target involves reducing CO2 emissions by 34%, or 150 million metric
tonnes from Business as Usual levels in 2010, and by a further 50 million
metric tonnes in 2020.”
DRI warns that, “substantial disagreement exists in the literature regarding
both the appropriate measures to take to mitigate global climate change and
the costs of these options.”
************************************************************************
DRI ECONOMIC MODEL LEFT OUT THREE COST BENEFITS
The Canadian government agencies that designed the parameters for the study
did not include three major positive cost competitive impacts. First, they
did
not ask DRI to measure the positive economic impacts of the development
of new technology innovations and services for meeting the stringent Kyoto
reductions. There is no measure of potential competitive advantage for Canada
in the international export market for GHG reduction technologies like
energy efficient motors, renewable energy sources and conservation measures
that will be created as a result of the effort. Secondly, the ministries
guiding the
study did not require DRI to examine the benefits of avoiding the costs of
climate
change that would result if there were world inaction on meeting Kyoto
targets.
Thirdly, they did not ask DRI to calculate the positive impacts of the
incidental
reduction of other pollutants, such as heavy metals, NOX, and sulphur
dioxide,
as a result of reducing greenhouse gas emissions. DRI, itself stated in the
report
that, “... this study has not attempted to determine the potential benefits
associated
with climate change mitigation”. Further, DRI authors admit that, “the study
does not
address the important challenge of quantifying the economic benefits of
mitigating climate change by reducing GHG (greenhouse gas) emissions.”
DRI authors state that, “Although it is becoming increasingly clear that the
future economic costs of failing to act now are potentially high, a large
range
of uncertainty is associated with each element of the cost/benefit equation
of
climate change mitigation.”
************************************************************************
ONE -- CANADA COULD LOSE COMPETITIVE ADVANTAGE
IF IT DOESN’T ACT QUICKLY ON CLIMATE CHANGE
If Canada drags it feet on taking meaningful measures to reduce GHG
emissions, other countries within the OECD will jump ahead in
technology development and worldwide sales of energy efficient
equipment and renewable energy systems, such as wind and solar.
Right now Canada is very competitive in the environment industry,
selling more than $1.4 billion overseas in eco--efficient goods and
services. Canadian companies currently provide over 80% of the $15
billion annual environmental demand in Canada. That’s because of the
strong regulator and fiscal drivers set up by Canada to clean up the
environment in the 1970s and 1980s. But now it is possible that Canada
will slide competitively. Without strong fiscal and legislative measures,
Canada will lose its innovative drive and end up losing its share of the
international eco--efficiency market. But more importantly, it may well
be forced to import the billions of dollars of equipment and services it
will need in the domestic market by the year 2010 in order to meet its
Kyoto commitment.
************************************************************
TWO — INACTION ON GLOBAL WARMING COULD COST
CANADA AND COUNTRIES AROUND THE WORLD FROM
US $17.5 TRILLION TO $20 TRILLION
If governments don't do anything meaningful to reduce global warming
gases, the cost of the damage and remediation efforts to the economies of
the world could range in the order of U.S.$17.5 trillion to $20 trillion
(Myers and Kent, June 1995, p. 152). In the U.S. alone, the EPA estimates
that a one meter sea level rise by the year 2100 (the upper end of the IPCC's
estimate) will require $91.25 billion to $138.75 billion in cumulative
capital
costs to protect developed areas with bulkheads and levees.(U.S. EPA, 1989,
p. 123). It will also result in a loss of 25 to 80 percent of U.S., Mexico,
and
Canada’s coastal wetlands, which would harm fisheries and recreation, flood
protection, and habitat for numerous species of migratory birds (EPA, 1989,
p. 123; Fankhauser, 1995, p. 32; IPCC, 1995).
*******************************************************
THREE — ANCILLIARY BENEFITS, CATCHING OTHER
POLLUTANTS WHILE REDUCING GHG EMISSIONS
There is acid gas emissions that harm forests and lake fisheries. There
are mercury, cadmium, and other heavy metals emissions from coal fired
electricity plants that fall out to harm health and add to medical costs.
There is NOX and smog-- making pollutants that ruin urban air and
damage crops. All of these would be incidentally reduced as a result
of reducing greenhouse gas emissions. These benefits are not calculated in
the DRI study. The U.S. think tank, Resources for the Future (RFF) confirmed
these types of benefits from the reduction of greenhouse gases. RFF found
that the “ancillary benefits could be in the order of 30% of the incremental
cost of GHG reduction. It adds that ancillary benefits may be as high as US $7
per ton for modest carbon reductions”. It reported that, “greater benefits
from
pollution
reduction could be obtained with larger GHG reductions, RFF found, although
the costs of greenhouse gas reduction would also be much greater.”
The RFF study is called, "The Benefits of Reduced Air Pollutants in the U.S.
from Greenhouse Gas Mitigation Policies". It is authored by Dallas
Burtraw and Michael Toman. For more information visit the website
<http://www.rff.org/NEWS/ancben.htm>http://www.rff.org/NEWS/ancben.htm.
***************************************************
WRI STUDY PROVIDES METHODS FOR BETTER
ECONOMIC STUDY BALANCE
A report by the World Resources Institute (WRI), “The Costs of Climate
Protection: A Guide for the Perplexed” examined sixteen widelyused
economic models. The WRI study identifies two areas of policy agreement
among the underlying economic models revenue raising policy instruments
and joint implementation. Firstly, the economic impacts will be much more
favorable if policy instruments such as carbon taxes or auctionedoff emission
permits are used to achieve carbon reduction targets and the revenues are
used
to make cuts in other more burdensome taxes on labor and capital, such as
income and payroll taxes. Secondly, the models also agree that joint
implementation
would significantly reduce the overall costs of CO2 abatement for individual
countries. Dr. Robert Repetto and Duncan Austin, the authors, recommend that
nations negotiate with other nations to gain acceptance for an international
system of joint implementation (JI) of greenhouse gas reductions. This report
is
the first in a series to be produced by the Climate Protection Initiative a
partnership
between WRI and private firms to identify acceptable policies and business
strategies
for achieving strong climate protection goals. This institutewide effort is
motivated
by the belief that there is a positive link between climate protection and a
sound
economy. For additional information on the Climate Protection Initiative,
visit
WRI's
website at: <http://www.wri.org/wri/climate>http://www.wri.org/wri/climate/
*********************************************************
CANADA COULD SUFFER 2% GDP LOSS IN FIRST 10 YEARS AND
THEN RECOVERS THEREAFTER
The DRI study found that even without including the economic benefits
mentioned
above, that, “in a typical scenario, in which tradable emission permits are
used
to achieve stabilization at 1990 levels by 2010, (Canada’s) GDP (Gross
Domestic
Product) is depressed from the Business as Usual (BAU) scenario by about 2%
for the first decade, after which it recovers to business as usual levels (in
about
2020).” That’s it. Not a bad economic hit for such an important gain.
DRI goes on to state that, “generally, for all scenarios, the economic impact
of climate change mitigation impose a transition cost on the economy, but the
long term productive capacity of the economy is not significantly affected.”
DRI reiterated that, “Reducing CO2 emissions will impose short to medium
term transition costs on the Canadian economy. After 10 to 15 years (post
2013),
the Canadian economy is expected to produce about the same level of output as
under business as usual conditions, albeit at a reduced level of CO2
emissions.”
We at CIBE found that the projected 2% drop in economic activity and a
relatively
quick return to a strong economy under Business as Usual is very good
considering
the tremendous adjustments that will be required to reduce greenhouse gas
emissions. We predict that if the DRI study were to include the three
economic
benefit factors listed above in its econometric modelling, the 2% drop would
disappear altogether.
****************************************************************
IMPACT ON OIL, COAL AND GAS PRODUCTION AFFECTED
Expectedly, the DRI report found that, “large energy price increases are
required
to affect consumption patterns in a way that will achieve the GHG emission
targets.
These relative price changes impose significant short term transition costs on
the
economy.” The study added that, “to stabilise carbon dioxide emissions in
Canada,
DRI estimates that total primary energy consumption must be reduced by 17% in
2010 and 19% in 2020, compared with Business as Usual (BAU) levels.”
**************************************************************
COST OF COAL 400% HIGHER, OIL 50% HIGHER
ALBERTA AND SASKATCHEWAN MOST AFFECTED
DRI reports that the, “oil, gas and coal production and petroleum refining
and marketing industry suffer significantly.....because of the carbon-based
economies, Alberta and Saskatchewan are most adversely affected both in
the short and long term.” It states that, “in Canada, end-user prices are
higher
under carbon stabilization as a result of permit prices that range from $325
(1995) Canadian dollars) per tonne of carbon (toc) in 2010 to $425 per toc
by 2020. As a result, the energy cost, expressed in 1995 dollars, rises by
about 50% for oil products and rises by 400% for coal products by 2020,
relative to the price level expected in the business ans usual outlook.”
As expected the study reports that, “oil, gas and coal production and
petroleum refining and marketing industry suffer significantly.....because
of the carbon-based economies, Alberta and Saskatchewan are most a
diversely affected both in the short and long term.”
DRI adds that, “the energy related sectors of the Canadian economy are
the most adversely affected industries in a carbon constrained environment.
Coal mining, and oil and gas extraction combine to form the mineral fuels
industry which declines nearly 10% relative to Business-as Usual levels in
2020. Services to mineral extraction are also adversely affected because the
mineral fuels sector accounts for a significant proportion of their activity.
Manufacturing of petroleum and coal products declines over 15% relative to
the Business as Usual case in 2020, reflecting the fact that domestic
consumption
of energy products declines by more than production of energy products.”
*************************************************************
SITUATION NOT ALL BLEAK FOR OIL AND COAL PRODUCERS
However, the situation is not all bleak. Yes, the burning of fossil fuels is
creating massive costs and climate change havoc around the world outside the
OPEC nations and other oil and coal producing regions. Yes, fossil fuel
burning
must be restricted in order to reduce carbon dioxide emissions, and this means
a reduction in energy income. However, these are off set by other benefits.
The
first is that regions like Alberta can and are developing alternative energy
sources.
Alberta has Canada’s largest wind power farm. Secondly, finite supplies of
valuable conventional oil sources will be better husbanded and retained for
higher
end uses -- such as petro--chemical, plastics, fertilizers, etc., -- rather
than be
burned in a low end use like energy generation. Thirdly, natural gas will
become
a premium fuel in fuel switching as energy companies shift away from oil and
coal.
****************************************************************
U.S. DEPT OF ENERGY STUDY SHOWS COMPETITIVE ADVANTAGE
A study conducted by five Department of Energy laboratories and
peerreviewed by industry and academic experts demonstrated that
the United States could hold down the costs of meeting climate change
goals through technological solutions such as advanced natural gas
turbines, biomass and biofuels, and energysaving appliances. Overall,
the study concludes that progress in reducing greenhouse gas emissions
can be achieved without increasing the nation's energy bill. Many
consumers and businesses could actually save money through reduced
energy use and lower overall energy bills. The study estimated the
potential costs of the reductions at $50 to $90 billion per year. Costs in
the study include incremental investments to deploy clean energy or
energy efficient technologies by consumers and industry as well as those
associated with hypothetical increases in energy prices. In addition,
Energy Department experts reviewed energy cost savings resulting from
the use of these technologies; these estimated savings through 2010 total US
$70 to $90 billion per year. This indicates that the clean energy investments
could produce energy cost savings roughly equal to or greater than the costs
of implementation, on a lifecycle basis. The "bottomsup" approach in the
study examines 200 specific technologies in four major sectors of the
economy, buildings, industry, transportation and electric utilities, and
analyzes
the possible advances in each sector. For the buildings, industry and
transportation sectors, the study analyzes the impacts of enduse energy
efficiency improvements and lowcarbon technologies on carbon emissions.
To obtain a copy of the study, entitled, “Scenarios of U.S. Carbon
Reductions:
Potential Impacts of EnergyEfficiency and LowCarbon Technologies by
2010 and Beyond” , get it from the websites
<http://www.eren.doe.gov/carbonstudy>http://www.eren.doe.gov/carbonstudy/,
or
<http://www.ornl.gov/ORNL/Energy_Eff/CON444>http://www.ornl.gov/ORNL/Energy_
Eff/CON444/
*************************************************************
WHITEHOUSE REPORT FINDS ECONOMIC IMPACT OF MEETING
KYOTO NOT COSTLY
The Whitehouse in the U.S. just came out with a similar study that found
quite
the opposite of DRI. The report, “ The Kyoto Protocol and the President's
Policies to Address Climate Change”, prepared for the Congress shows that
the country can meet the greenhouse gas reduction targets with a “modest
cost to the economy”. The study finds that it would cost an average household
US$70 to $110 per year more for energy. You can find a full copy of the study
at <http://www.whitehouse.gov/WH/New>http://www.whitehouse.gov/WH/New/.
************************************************************
A HEALTHY ECONOMY IS A CHANGING ECONOMY
There is no doubt that there would be some economic dislocation and adjustment
as the country shifts from a full to low fossil fuel economy. We do know,
however,
that the only constant in a health economy is change. It is the changing of
the
economic opportunities that keep free enterprise strong. It is often the
forces
of
status quo and stagnation that drag down an economy. Shifting to a more energy
efficient society should be considered an economic opportunity and not a loss.
And we, in a vibrant free enterprise economy, should not be frightened by a
host
of incomplete economic studies with questionable assumptions that are
designed
to warn against change.
**********************************************
************************************************************
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*************************************************************
*****************************************
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Copyright (c) 1998 Canadian Institute for
Business and the Environment, Montreal
All rights reserved.
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