Modeling climate change reduction strategies
National Post Dinosaur-in-Chief Terence Corcoran has nothing but bile to spew at the David Suzuki Foundation and its recent report on carbon pricing. With characteristic bombast, he still seems to think that global warming is a vast left-wing conspiracy to overthrow capitalism.
But Terry is right about one thing. All of the modeling for greenhouse gas reduction scenarios comes from a single source: Mark Jaccard and a crew of his past students, using the CIMS model that integrates energy and economics. It would certainly be of benefit to have some competing models, but then again making it so is a rather complex and time-consuming undertaking. So in the absence of alternatives, it is pretty easy to say “if you are so smart where is your model?”
I have tried to enhance my understanding of the CIMS model for this very reason. My initial assumption was that the model was simulating changes in behaviour due carbon pricing (whether a carbon tax or cap-and-trade), so the key question or uncertainty was around the elasticities of response to the price. But I was wrong â€“ that is not how the model works.
Instead, the CIMS model is based on the notion of capital stock turnover. That is, at certain points in time corporations replace and upgrade their machinery and equipment, and households replace their furnaces, hot water heaters and cars. By estimating cost curves based on available or likely-to-be-available technologies the CIMS model then can insert various paths of carbon prices that change the nature of the decision when it comes time.
I’m simplifying here and still have not seen the blueprints behind the model. But what is fascinating about this approach is that it highlights a major avenue by which we can reduce our carbon emissions: the steady shift over the course of decades to less carbon-emitting technologies. This is an important insight.
On the other hand, the model will not be able to capture changes that result from new technologies that are not around yet, nor will it be able to handle deeper structural changes such as urban design plans that facilitate greater walking and bicycling if people can live closer to where they work. But if anything this means the model understates the potential for GHG reductions, perhaps not a bad thing.
The recent Suzuki report is actually somewhat different. It starts with CIMS and incorporates it into a computable general equilibrium (CGE) model. And the analysis tests scenarios of carbon pricing plus various revenue recycling options. Personally, I am pretty skeptical of CGE modelling. It tends to reflect the assumptions of the person doing the modeling in the choice of parameters. And there is a lot of guesswork involved where we to not have a clear empirical understanding about elasticities, functional forms and so forth. Plus assuming perfect competition in all markets is highly problematic when compared to the real world.
Of course, it is easy to criticize from the sidelines. One of the authors of the report, Dave Sawyer, is going to be on a PEF panel on carbon pricing this June at the Canadian Economics Association meetings in Vancouver. So we can get into it more then! My read of the paper is that they authors understand the nuances but one needs to model this somehow.
Back to Sir Terence, who says:
Different things happen, depending on the policy. If the government used 14% of the carbon tax money to subsidize green energy and carbon capture technology, gave 40% to industry and used the remaining 46% to reduce payroll or income or other taxes, then there might be offsetting benefits. But not enough to offset the losses from the tax, which would still leave the economy in the red by upwards of $45-billion a year, a figure that increases annually with the loss of compounding growth.
The Suzuki report spends a lot of time ventilating the idea that there might be a “double dividend” in a carbon tax. Bring in a tax, the government recycles it back to taxpayers, and then everybody collects an environmental dividend. In the end, though, the report concedes (most clearly in a footnote) that there is a growing consensus in economics that the prospect of such a double dividend is “weak.”
The Suzuki-Jaccard study is premised on the theories of Arthur C. Pigou, a 20th-century economist who believed you could use taxes to change behaviour. Mr. Jaccard calls his tax the “Pigovian carbon price.” The trouble with Pigovianism is that it requires revival of the ancient and discredited economic art of central planning, using taxes as substitute for prices. But a tax is not a market price. It’s a bureaucratic planning device–as Mr. Jaccard’s elaborate economic modellings prove. And it’s no way to run a market economy.
What’s interesting about this critique is that rather than specify a percentage of GDP, Terry chooses to go with a big-sounding number to bolser his case. But while $45 billion is big to you and me, the Canadian economy is about $1.5 trillion, and will be closer to $1.8 billion in 2020 (real terms, 2003$). Thus, $45 billion is about 2.5% of GDP, a one-time hit that means we hit a certain GDP a year later than we otherwise would have.
But Corcoran is disingenuous as he chooses the worst case of all scenarios modeled and at the highest carbon price. Overall, the scenarios average out to a one-time cost in the neighbourhood of 1% of GDP (in fact most of the scenarios have results that cluster closely together and the one higher cost scenario is the one chose by Corcoran). In fact, the scenario cited by Corcoran above is one of the 1% of GDP scenarios; it is a lump-sum transfer that has the worst outcome of 2.5% of GDP at a carbon price in 2020 of $200. Even though this is the “outlier” the difference between a 1% reduction in what GDP would have been in 2020, and a 2% reduction, does not keep me awake at night, especially if the latter led to a better distribution of income (which other distributional modeling by the Congressional Budget Office and others finds is the case).
Ultimately, we would want to set all of this against the costs of doing nothing, which as the Stern Review found, is greater than doing something.
Finally, Corcoran’s appeal to a “market economy” is strange given that economists argue that GHG emissions are an externality and that by internalizing it the price mechanism would work better in terms of resource allocation. What Corcoran is defending is not a market economy but capitalism as we know it.