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2007 03 02
$100 Billion Environmental Challenge
Reading Toronto's sister site, http://www.corporateknightsforum.com announced the CKmagazine's $100 Billion environmental challenge this week. Here is the text from Editor Toby Heaps:

Tuesday, February 27, 2007

Climate change presents a unique challenge for economics: it is the greatest and widest-ranging market failure ever seen. The Investment Proposition: If we start investing 1 per cent of our annual global GDP today, we can avoid GDP losses of 5 to 20 percent tomorrow.

"Everybody talks about the weather but nobody does anything about it"—Commonly attributed to Mark Twain, 1897

That was true back in 1897, but not anymore, according to the most recent Intergovernmental Panel on Climate Change (IPCC) report. The report, which is an expert-reviewed synthesis of the most up-to-date scientific research published on climate change from around the world, upped the ante. It concluded that it is "very likely" humans are causing global warming, or, in quantitative terms, more than 90 per cent certain (up from "likely," or more than 66 per cent certain, in 2001).

So now that we have proved Mark Twain wrong, what are we going to do to fix it?

Most people, from the leader of the Green Party to the chief executive of the Canadian Council of Chief Executives, as well as our current Prime Minister, genuinely agree that it is time to pull back on the high-carbon throttle and carve out a new low-carbon path for our economy.

Just after the IPCC report was released, Prime Minister Harper made clear which path Canada would take: "I think the first realistic step in any such plan will be to try over the next few years to stabilize emissions and obviously over the longer term to reduce them." A few days later, the usually laissez-faire economist told an audience at the Canadian Club in Ottawa that he was going to crack down on industrial polluters and automakers with tough new regulations, concluding with the high-handed statement, "The era of voluntary compliance is over."

But when you ask "how fast and at what cost?" the consensus fades fast. Rhetoric enters. Reason leaves. The topic of greenhouse gases leads to vast expulsions of hot air from politicians and pundits. Meanwhile, the climate warms, as carbon dioxide spews out of smokestacks and human-generated toxic emissions singe the hallowed halls of parliament.

On one side, you have the Conservative Minister of Environment John Baird, saying: Whoa, not so fast, "Canadians don't want the country to face economic collapse."

On the other, you have Stephane Dion, the Liberal Leader of the Official Opposition, saying: "We will make megabucks by reducing megatonnes [of greenhouse gases]."

They both sound delusional to me.

This is a war, a fight against old wasteful lifestyles and carbon-intensive ways of doing business in order to avert catastrophe and make the world safe through clean economies. Winning this war against greenhouse gases is not about economic boom or bust. It is about re-engineering the DNA of our economy. And like any fundamental change, there will be winners and losers.

Each one of us will have to give something up.

We should not sugarcoat the nature of the existential challenge facing our planet. When Sir Winston Churchill rallied the English-speaking world to defeat the Nazis in WWII, he didn't talk about seizing export markets and profit-making opportunities. He talked about the high stakes of preserving our civilization against dark forces and the high price, "blood, toil, tears and sweat," he personally would pay to prevail. Or, as John F. Kennedy might put it, "Ask not what your climate can do for you, but what you can do for your climate."

It's true that our economy might reap big dividends from early and accelerated action on implementing low-carbon technologies, efficiency improvements, and conservation measures, but we have to be ready to pay first. Trying to enlist public support with a sugarcoated version of reality is counterproductive and unnecessary. Who cares if support for action on climate change is a mile wide, but only an inch deep? As soon as gas prices rise, heating bills climb, and a few factories close down or shift their operations abroad, public support will crumble. The talisman of tough action on climate change will turn into a hot potato that no one wants to touch.

The other delusional line of rhetoric, still clouding reality, was originally delivered by former Environment Minister Rona Ambrose. Its can't-do, won't-do, won't-even-try attitude sounds like surrender, and goes something like this: "The Kyoto target is unachievable. We would have to pull every truck and car off the street, shut down every train and ground every plane to reach the Kyoto target negotiated by the Liberals." This sounds daunting, but the situation is actually more daunting in one sense and less daunting in another. Even if we eliminated all planes, trains, and automobiles, it would not be enough to meet the Kyoto target, if that's all we did. That's because planes, trains, and automobiles are relative crumbs making up less than 20 per cent of Canada's total greenhouse gas emissions. The real emissions action, almost half of the total, is happening at just a few hundred coal-fired power stations and other heavy-industry plants.

The most recent numbers have Canada behind Kyoto targets by 33 per cent (or 195 Mt). A rational person would not cherry-pick a few relatively insignificant crumbs to bear the entire burden, but rather would focus on cranking out 33 per cent emissions savings across the economy, starting with the biggest sources first.

A rational person might also ask, "What's the rush? Why Canada?" Why Canada, indeed. A one-third reduction is a big chunk to make up in four or five years, and at just two per cent of global greenhouse gas emissions, Canada is not going to make or break the fight against global warming. Aside from honouring our Kyoto commitment and complying with international law, there are two reasons why the world needs Canada to step up to the plate now. Canada is the only country with the wealth, bulging emissions profile, and geological storage capacity to slay the carbon beast. The emissions-intensive oil sands are firing forward on a path that will triple production in the next ten years to over 3 million barrels per day. One hundred billion dollars is set to be invested in this energy-hungry sector alone in the next ten years.

This is a building binge. And it is always far cheaper to implement technology while something is being built rather than as a retrofit later, whether it's carbon capture and storage or geothermal steam generation. If Canada's energy-intensive and burgeoning resource-based economy can put the big squeeze on greenhouse gas emissions, it will be a powerful demonstration to the rest of the world.

Show-and-tell is still probably the most effective tool in international diplomacy. On a practical aspect, such a concerted effort by Canada will likely leapfrog the evolution of a range of emissions reductions technologies, including carbon capture and storage, bringing their costs down by a quarter to a half through the focus of our world-class intellectual resources on the oil patch. This advance will have stark implications beyond our borders, especially on battlegrounds where the war against global warming will be won or lost, such as China, where a 600 MW coal-fired power plant is built every two weeks.

"Climate change is the business issue of the 21st century."—Consensus at the 2006 World Economic Forum in Davos

If you believe that we are entering a carbon-constrained world—and there is strong consensus that we are—it doesn't take an entrepreneur to recognize the sheer opportunity for firms and countries that can deliver carbon-reducing solutions. In global commerce, being first on the scene is half the battle.

Trimming one-third off of Canada's greenhouse gas emissions in half a decade is a monumental task. The only modern precedent is Russia, whose post-Communist economic implosion reduced their carbon footprint by 37 per cent, or 1,136 Mt, only ten years after Ronald Reagan's famous Tear down this wall! speech at the Brandenburg Gates in West Germany on July 12, 1987 (inadvertently, the Gipper was responsible for reducing more greenhouse gases than any US president to date).

Economic implosion would not be most people's first choice for achieving dramatic greenhouse gas emissions reductions. The better way is to decouple growing greenhouse gas emissions from economic progress. That way, people get to keep or improve their standard of living.

The recipe for achieving this type of low-carbon economy includes three key ingredients: efficiency, technology, and conservation. The trick is where to find a sufficient supply of those ingredients, which, in our case, should be enough for 195 Mt worth of reductions by 2012. The easy, and optimal, answer is to put a price on carbon, and let the economy squeeze out the bad gas through the decentralized magic of the invisible hand.

Alternatively, there is always the old top-down, five-year-plan, central committee way of issuing diktats on targets, dishing out incentives for mixing corn with gasoline, creating umpteen technology funds, and a whole grab bag of other polices aimed at micromanaging the various sectors of the economy. And, oh, by the way, if this approach doesn't work, under the Kyoto Protocol, there is always the make-good option of purchasing billions of dollars worth of hot air from Russia, which seems to undermine President Reagan's legacy in more ways than one.

As far as I can tell, there seems to be a bi-partisan consensus on the top-down approach, minus the Russian hot air, between the former Liberal plan and what the Conservatives are cooking up. While the Harper Government is a late convert to the struggle against global warming, they do seem quite earnest. One of Harper's point people on the climate file told me that there are so many reports coming out on the topic that he has "to keep the friggin' lights on all night just to keep up with them all." As we sat around a cabinet table in Parliament's centre block discussing the Conservative government's profoundly interventionist central plan of sector targets, a technology fund for this, a technology fund for that, and $5 billion a year to be directed towards emissions reductions, I felt like I was in a Stanley Kubrick movie. I half expected Harper to poke his head in the room, donning a bearskin hat with a hammer and sickle.

Rick Smith from Environmental Defence talks about how Harper, with his strong western base, could pull off a "Nixon in China" by going to Kyoto. Try Moscow, circa 1975 at the politburo central planning committee.

There is a good reason why politicians try to avoid putting a clear substantial price on global warming substances like carbon. It's because carbon pervades our economy like no other substance, and putting a price on it would affect every aspect of our lives, initially by making them more expensive. Anyone who has seen a lineup of cars around the block from a gas station just because gas is one cent cheaper knows how sensitive people are to energy prices.

Is Canada ready for the sacrifice? People with hair growing in their ears say "no," pointing self-assuredly to the short-lived Joe Clark government that went down in defeat trying to implement an increased gas tax, or to the recent Ottawa Mayoral election in which the tax-cutting candidate defeated the one advocating increased investment in public transit.

I think the answer is yes, for three reasons.

Reason one: There is visceral awareness of climate change today. Regardless of scientific analysis, people know something is up when they can go for a jog in their shorts on New Year's Day in Toronto, when the French are frying (to death), and when the Inuit are importing air conditioners to Nunavut.

Reason two: There is mass awareness that we are causing global warming. The media deserves credit here. It's hard to find a magazine, newspaper, radio, or TV news program that isn't running something on global warming these days. And it's not on page 6. Thanks as well to Al Gore who, as my colleague Nicola Ross at Alternatives Magazine pointed out, is a modern-day Rachel Carson. Unlike Carson, who had to rely on typeface and the printed book (Silent Spring), Gore has delivered a mass-media bomb with his movie, An Inconvenient Truth, thanks to Hollywood and Canadian billionaire Jeff Skoll's financing.

Reason three: Great civilizations achieve their meaning through struggle. No civilization can be great unless it engages in a great struggle. The collapse of communism has left a void (Reagan left his fingerprints all over this file). Chasing down a Saudi sheikh on dialysis in some cave in Central Asia does not even come close to filling this vacuum. Taking down dictators of Middle Eastern states also seems to have its drawbacks. Defeating dangerous climate change and preventing ecological devastation like Hurricane Katrina's demolition of New Orleans is a legitimate ennobling cause that the public, scientists, and business community all support. That's why the environment is polling as the number one issue in Canada right now, above health care.

Nothing to fear but fear itself

So these three forces—wacky weather, awareness that we are the reason for it, and the thirst for a grand cause—have created a public that is culturally ready to enlist in the war on global warming. But this cultural readiness will lay dormant until it is ignited by an economic signal that puts a price on carbon. There is nothing like a little push in the pocketbook to focus the mind on making good.

When I ran the numbers to see how deep we would have to dig to put Canada on an accelerated low-carbon path to Kyoto and beyond, I was staggered at how much it will cost at an aggregate level, but pleasantly surprised to discover how doable it is at an individual and firm level. Putting a clear price on greenhouse gas emissions to achieve a 36 per cent reduction from 2012 BAU levels will involve investing $100 billion over four years, within the range that the Stern Review says will be necessary to avoid dangerous levels of global warming that could decrease GDP by 5 to 20 per cent.

But when you break it down for a company like Shell, a $30 per tonne price on CO2 equivalent emissions (CO2e) works out to $2 per barrel (see Powering Canada's Green Industrial Revolution on page 54), including all direct and indirect emissions, or less than one-tenth the $25 variation in oil prices over the past six months. For people dependent on coal-fired power plants for their electricity, a $30 per tonne price on CO2e emissions increases the electricity cost by 3 cents per kilowatt hour (kWh) for a single-cycle plant that uses inefficient coal, or 2 cents per kWh if the electricity comes from an efficient coal-integrated gasification combined cycle plant. A $30 per tonne price on CO2e emissions would increase the cost of electricity derived from natural gas by 1 to 1.5 cents per kWh. For drivers at the pump, a $50 per tonne price on CO2e would add an extra cost of 10 cents per litre of gasoline. A $50 per tonne price on CO2e for airplane fuel would boost the cost of a return ticket from Toronto to Vancouver by about $45.

In the following pages, you will see how much capital would be redeployed for emissions reductions across the economy by putting a clear price on CO2e emissions. Some of the emissions reductions targets are ambitious within the 2012 timeframe, according to conventional wisdom. However, tapping Canadians' pride and yearning to do something about global warming with a clear, meaningful price on carbon (CO2e) would set forces in play that would massively accelerate conventional wisdom's timetables, especially if cheap capital financing was made available to eliminate one of the key barriers (high up-front capital costs) to implementation of cost-effective emissions reductions measures. Once in place, these measures would bring numerous co-benefits for the environment, health, and bottom line.

Other regulatory measures and incentives—including mandatory fuel efficiency requirements for the auto industry, minimum efficiency standards, technology and implementation funds, ramped up building code requirements, renewable energy portfolio standards and/or feed-in tariffs, and revenue neutral feebates and rebates according to automobile and appliance emissions efficiency—would also add momentum to decarbonize the economy. But everybody who knows the fiscal elements of this issue intimately agrees that these measures would be like planting valuable seeds in a barren desert unless a meaningful price was first put on carbon (CO2e).

Putting a price on carbon (CO2e) would be the first step towards a new fiscal framework, referred to as ecological fiscal reform. This shift would internalize externalities by taxing or putting a fee on ‘bads' like pollution, while reducing the tax burden on ‘goods' such as individual and corporate income as well as payroll taxes.

Even if we did all this, it is possible that we may still fail to meet our 2012 Kyoto cap of reducing emissions by 6 per cent from 1990 levels, but we would have the wheels of the Canadian economy rolling quickly towards decarbonization and nobody could say that we didn't give it a good shot.

To keep our word on Kyoto, we could invest in international renewable energy projects to earn emissions credits (see Alcan solar cooker example on page 56 and http://www.cdmgoldstandard.org), and then take any remaining shortfall, plus 30 per cent, and add it to our post-2012 target, as is allowed under the Kyoto Protocol, assuming that the post-2012 framework stays with the national cap approach.

Kyoto's 2012 target is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. Regardless of whether we win the battle to 2012, we must win the war. Canada, with the potential to be a global superpower in clean energy, is well poised to lead the charge. Maybe in 2200, the Chinese head of state will visit Canada's parliament to deliver the message, "Never in the field of global warming was so much owed by so many to so few."

As Churchill might also have said, "Let us therefore brace ourselves for our global warming duties, and so bear ourselves that if Canada lasts for a thousand years, men will say, 'This was their finest hour.'"
[email this story] Posted by Editor on 03/02 at 01:51 PM

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