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Kyoto Economics: The Cost to Canada – Part 3

March 19th, 2007

The last report I studied on Canada’s Kyoto costs is Industry Canada’s Sectoral Impacts of Kyoto Compliance (note: PDF file). It is a lengthy report, and more reliable in my estimation than either the Suzuki Foundation report or the Canadian Manufacturers & Exporters report that I have previously reported on. It examines various sectors individually and jointly, looking at possible outcomes if there is a national policy, and if you allow sectoral exemptions from policy.

This report again makes the point that Canada’s ability to convert coal power to natural gas is limited, and Canada’s large hydroelectric reliance means “Canada has one of the higher marginal costs of reducing CO2 emissions.” Canada is, in fact” relatively energy-intensive, but not carbon-intensive…” This causes Canada to have “limited scope for low-cost abatement.” In short, Canada is already outputting little carbon relative to the energy we use, reducing carbon is going to be expensive.

In Energy use the case is made that carbon taxes may end up being higher on clean burning natural gas than on dirtier coal: “Since natural gas may be cheaper per BTU than coal or oil, it may end up having a high carbon tax (as proportion of value) even though natural gas has relatively low carbon emissions per BTU.”

Electricity generation is broken into three sectors, fossil fuel generation (coal, natural gas), non-fossil fuel generation (hydro, nuclear) and greenhouse free generation, which amounts to the renewable sector (windmills &tc.). The significant point in this sector is that the third generation option does not become viable until “costs per unit of output are 67 percent higher.” Take your current electricity bill, add two thirds (i.e take a $300 bill and make it a $500 bill) and it now becomes financially feasible to start generating electricity by non-renewable/greenhouse emission free generation.

This study comes in at costs of a carbon tax or carbon permit scheme to be 1.1% GDP for Canada, or $7.02B. However, a theme that repeats in this study is that abatement plateaus at $250(US) tonne of carbon. At a reduction cost of $250 tonne, it is a $225B cost to reduce the necessary 900 mega-tonnes of CO2 that Canada needs to reduce to meet it’s Kyoto commitments. Note, however, they actually call for a global price of Carbon of $45.79, much closer to other predictions, and the effective price noted by many reports, including the Stern Report. That figure puts Kyoto costs at $41.2B.

This is a large report that covers a lot of ground, and I have condensed different findings from different areas of the report into one conclusion. This can be a bit misleading, but is, I think, the most effective way to summarize the report in this format. The reports conclusions are that Kyoto costs are dramatically reduced with the inclusion of a carbon trading market, and when governments begin exempting some sectors from the costs of carbon reduction, the overall costs rise considerably. Kyoto’s costs need to be born over the whole of the economy, and a made in Canada only solution will be much less cost effective, although will do a much better job of reducing CO2 emissions.


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