Apr 10,
2019
Feeling good without actually doing good
I join with most Canadians who have come to accept the reality of climate change and with those who agree that the emissions from burning fossil fuels–mainly coal, oil, and natural gas−are a major cause of such change. I also join with most Canadian by asking: What can we do to keep our climate from harming us all with its undesirable changes?
A conversation with my grandson
The other day I discussed these issues with my grandson, who has real fears about what his world will be like when he is my age—a long time past my time, but well within his, and his soon-to-be-born children. He suggested: “We Canadians should drastically curtail our production of fossil fuels, especially petroleum. We could stop building oil pipelines and maybe retire the oil sands.”
“An interesting idea,” I replied. “Let’s think about what would happen if we did this. If we only stopped building pipelines, more oil would be shipped by rail, and since spills of oil from rail cars are much more frequent than spills from pipelines, that may not be such a good idea. Of course, there may be other good reasons for opposing particular pipelines, such as the Trans Mountain expansion, but reducing the world’s production of oil is not one of them.”
Heaving a sigh, he replied: “Yes, as you keep telling me. Bringing in only a part of what would be an effective package might do more harm than good. So let’s cut the production of oil as well as the pipelines, making that a package deal.”
Canada’s actions
“There is one big problem with your plan,” said I. “The world is awash with oil producers—Russia, Saudi Arabia, Iran, Iraq, United Arab Emirates, Kuwait, and China, to name but a few—many of whom would love to sell even more oil than they are now producing. So, if Canada cuts its production and sales, all that will probably happen is that other countries will fill the gap by producing more. This Canadian action will influence how much oil the rest of the world produces; not the total world production of oil.” (Although some have argued that other countries would not completely fill the gap, I am skeptical about their arguments and am sure that the gap would be mainly, even if not fully, filled by others.)
So, if we follow that plan, we will earn fewer royalties and employ fewer people in the oil industry while other countries earn more royalties and employ more people in that industry. The result is that we may feel good about our actions, but these will have done no good with respect to curbing the emissions that are causing climate change.
My grandson’s eyes lit up and he said, remembering one of the economics lessons I had taught him: “I get it, we can do little or nothing by acting on the supply side but surely we can do something on the demand side.”
Feeling good, doing good
We thought about this for a while and agreed that if we Canadians cut our consumption of greenhouse-gas-emitting fuels, there is nothing that would cause those in other countries to fill up the gap by consuming more, leaving total demand unchanged. So, unlike cutting supply where others fill the gap that we create, cutting demand has real, worldwide effects. We could accept carbon pricing, make our cars and buildings more fuel efficient, encourage new green energy technologies, and do other things to curtail our consumption of fossil fuels and the resulting greenhouse gas emissions. Those things would make a real reduction in the world’s total consumption and emissions—to say nothing of providing a lead to others to do the same.
Now we both agreed we had found a way of feeling good by actually doing good.
About the Author
Richard Lipsey is a Professor Emeritus at Simon Fraser University in the Department of Economics, as well as a Commissioner of Canada’s Ecofiscal Commission.
10 comments
I hope you told your grandson as well that the fastest rising source of emissions is our increasing contribution to global supply of oil and gas and that every time we approve a new project we commit to locking in those emissions for years or decades and making a larger pool of supply that helps keep the costs of fuel low.
What about this article which seems to suggest we need supply reductions as well as demand-side reductions.
https://www.vox.com/energy-and-environment/2018/4/3/17187606/fossil-fuel-supply?platform=hootsuite
A theory of protest: unpriced externalities. Hypothesis: protesters get their social license and motivation from unpriced externalities. For pipelines, those along the route have negotiated deals, and therefore impacts on them have been internalized by the project. Protesters don’t protest on their behalf. Rather they protest downstream emissions, and ship impacts on whale pods. What they may see as unpriced externalities. However shipping oil to a signatory to the Paris Agreement should mean the downstream emissions are appropriately priced, unless that country defaults on their NDC nationally determined contribution, in which case emissions pricing could be added before shipping to internalize the costs here. For whales and pods – putting some price on a whale -for example $5M for a whale hit, and $350M for pod extinction would put some kind of a price, and internalize those costs.
Thinking back to the debate over mining asbestos in Canada. Some of it was shipped to India where (TV news clip showed) workers handling it with pitchforks and no breathing mask. Instead of a yes/no decision on allowing asbestos exports, Canadian government could have attempted to determine unpriced externalities abroad -such as worker health- and put an appropriate price here before shipping -perhaps $1000/ton or $10k/tonne- so miners here were internalizing those costs, and have motivation to see downstream unpriced externalities fixed.
You fail to acknowledge that oil production from the oil sands currently produce 25% of Canada’s carbon emissions and expansion of them, made possible by building more pipelines effected will make if all but impossible for Canada to significantly reduce its GHG emissions and get anywhere near meeting this Paris commitments. Building any new fossils fuel infrastructure makes no sense if Canada is to meet these commitments.
This piece is condescending and demonstrates a shocking ignorance of how markets actually work, considering EcoFiscal as the source.
Markets are the intersection of supply and demand. Working only to reduce demand causes rebound effect for supply. This is econ 101. The most effective and efficient way to reduce climate pollution is working to reduce both supply and demand at the same time, to reduce leakage on either side. For political reasons as well, supply-side mitigation tools have entered the mainstream as essential climate policy: https://link.springer.com/article/10.1007/s10584-018-2162-x
Norway, a major historical oil producer, has just decided to forgo the development of new offshore arctic oil & gas drilling due the climate and environmental risks, a policy that aligns with its domestic policies to reduce fossil fuel demand at home. 60% of all new vehicle purchases were electric vehicles in the last quarter. https://www.bloomberg.com/news/articles/2019-04-06/big-oil-loses-norway-labor-party-ally-on-exploring-off-lofoten
Furthermore, pipelines and rail are not comparable alternatives. Only oil pipelines offer a low enough cost, requisite scale, and logistical simplicity to be profitable for producers long-term. As we have seen, investors will not make new long-term investments in oil production projects based only on rail as transportation option. Pipelines are directly linked to long-term production forecasts in Canada’s oil patch, and are therefore directly linked to climate pollution from Canada’s largest single emitting sector. We cannot lock in new infrastructure designed to last for 50+ years in 2019 as once built, economic forces will work to maximize the utility of sunk capital and keep them running and full.
Canada’s largest single emitting sector (and fastest growing source of GHG pollution) is its oil & gas production industry. Canada’s consumption of fossil fuels for transportation trails far behind. Cutting domestic supply for fossil fuels, while continuing to grow our carbon exports (and associated pollution) is deeply unethical and hypocritical.
Your grandson is right to be concerned for his future. He was was correct in his ideas of what is needed to tackle the climate emergency in Canada in 2019. Canada’s emissions are still rising. It’s time for older generations to recognize what we are doing isn’t working and listen to young people about what is required.
Oil is not a homogeneous good. Hence there is no single world demand and supply curves for crude oil. The bulk of Canadian oil that is exported to the US is heavy oil, most of which does not compete with lighter oils like WTI. Refineries in the US are explicitly geared to process one type of oil and it is not possible for them to switch input type in the short run. So in the short run changes in Canadian supply would mainly cause changes in the Canadian benchmark price of Western Crude Select (WCS) or more accurately the spread between WCS and WTI. So a cut by some Canadian oil sands producers ceteris paribus would bid up the WCS price but might have very little effect on the WTI price.
The longer run impact of a permanent fall in Canadian supply is of more interest. As I said in my blog, there are many producers ready to fill in any gap created by a fall in Canadian supply. However, the most important supplier in this case is the US fracking industry. The supply curve of fracked oil is extremely, probably perfectly, elastic with little currently in the way of geological resource constraints. Fracking is highly competitive and is the marginal supplier in the US and getting larger every day. Assuming an autonomous change in Canadian heavy oil supply, US refineries using that input will almost certainly refit to other types of oil—probably mainly fracked condensates–and crude prices in the North American market will approximate marginal and average cost of the fracking sector in the US.
Note, however, that some experts, probably only a minority, think that the fracking boom will soon end, causing rising marginal costs and reduced output from this sector. If these observers turn out to be correct, the fracking supply curve would become both upward sloping and shifting to the left. One would then get a more conventional prediction of a fall in Canadian heavy crude supply causing overall price to rise and output to fall.
Post NDP in Alberta and pending Ontario carbon tax judicial results, this is pretty much dated.
When you bequeath to your grandson your shares in Suncor Energy he will read in their annual report the GHG intensity of oil sands production and compare this to that of the foreign oil mentioned in your blog. Then when he visits your grave to present flowers he will say « grandpa: I did a favour for the climate. I put Saudi oil in my tank ro get here rather than that gunk from Fort Mac »
Several commenters made the same point to which I reply here to all of them: I did not note, but should have, that if the same total amount of world oil is produced but the proportion that comes from Canadian heavy crude falls, so will total greenhouse gas emissions. I still hold that total world supply would be only marginally affected, if at all, but total greenhouse gas emissions would fall by the difference between the greenhouse gas emissions per barrel produced in the different countries.
I also remind other who commented that although I concerned myself solely with the effect on world output of a fall in Canadian production, I agree, as I noted briefly in my blog, that there may be other good reasons for opposing the trans mountain pipe line.
Two points. Canadian crude is two to three times more GHG intensive to produce than crude from the lowest emissions producers (like Norway, Saudi Arabia) and about 70% over the world average (see Global Carbon Intensity of Crude Oil Production, Science, 31 August 2018). So technically, until we clean up our production process, leakage to top tier producers (or just about anywhere else) would be better for the planet.
Secondly, those same high intensity oilsands, which more pipelines will allow to continue to expand in both production and GHG emissions, are the biggest reason Canada won’t come close to meeting our 2030 emissions reduction target. We already emit more than our fair share–on our present course this will get worse. Imagine our obstinacy, rather than our initiative, becoming an example to the world.
We could do better, without shutting down oil and gas. But the hydrocarbon industry should no longer be exempt from making cuts, like the rest of us. Mandated cuts should be in overall emissions, not production, so that if we can produce oil more cleanly, production can still rise (while GHGs fall). We can simply no longer afford to allow crude emissions to keep on growing for another decade (business as usual, with more pipelines) and hope to meet our targets–and uphold our obligation to avoiding catastrophic climate change.
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