Risk and Advantage in a Changing Climate

Transcription

1 Risk and Advantage in a Changing Climate Business preferences for climate change policy instruments in Canada Kaija Belfry University of British Columbia

2 Nobody s expecting much from Canada at Copenhagen QuickTime and a decompressor are needed to see this picture. QuickTime and a decompressor are needed to see this picture. QuickTime and a decompressor are needed to see this picture.

3 QuickTime and a decompressor are needed to see this picture. A puzzling event: Canadian Council of Chief Executives and Canadian Council of Petroleum Producers support call for carbon price - January 2008

4 Why is this Surprising Table 1 - Theoretical costs to industry of climate policy instruments Increasing costs from top to bottom. Type of policy Cost to industry 1.Subsidies (theoretically Voluntary abatement cost Ğ subsidy (possibly no cost) lowest cost) 2. Voluntary Agreements Cost of voluntary abatement 3. Cap and Trade (when grandfathere d, i.e. no cost for initial allocation of credits). A) Cost of abatement or B) Cost of initial abatement Ğ price of extra credits sold (price of extra credits > marginal cost of abatement) or C) Cost of initial abatement + price of extra credits purchased (price of credits < marginal cost of abatement) 4. Traditional Regulation Cost of abatement to regulated standard 5. Revenue Neutral Carbon Tax 6. Auctioned cap and trade program 7. Non-neutral Taxation (theoretically highest cost) Cost of abatement (where marginal cost of abatement < tax) + cost of tax Ğ tax rebates in other areas. Cost of initial allocation + either A) Cost of abatement or B) Cost of initial abatement Ğ price of extra credits sold (price of extra credits > marginal cost of abatement) or C) Cost of initial abatement + price of extra credits purchased (price of credits < marginal cost of abatement) Cost of abatement + cost of tax on remaining emissions

5 Question: What causes variation in support for climate change policy instruments between groups and over time.

6 Challenges in answering this question: Lack of information/debate in the literature in Canada and the US. Lack of information on business preferences for climate change policy instruments in Canada.

7 Goals Provide survey of business preferences for climate policy instruments in Canada Provide clear theory on determinants of business preferences for government policy

8 Methodology Qualitative research methods - 60 semistructured interviews with business, government and NGO leaders. 13 associations and 18 firms participated. Firms primarily from 3 industries - cement, oil and gas and forestry. Supplemented by primary source research into past preferences.

9 Basic Findings All associations and firms, with only one exception, supported a price on carbon! Diversity in type of pricing instrument supported, although cap-and-trade is the most popular.

10 Table 2. Association Preferences Name Supports price on carbon? Official Preference Unofficial Preference Canadian Electricity Association No Delay, Money (through increase in electricity price where regulated) Mining Association of Canada Yes None Carbon Tax Canadian Vehicle ManufacturerÕs Yes Cap-and-trade Association Canadian Steel Producers Yes None None Association Canadian Gas Association Yes None Carbon Tax Canadian Petroleum Products Yes None Carbon Tax Institute (refiners and retailers) Canadian Council of Chief Yes None Carbon Tax Executives Canadian Chemical Producer s Yes Cap-and-Trade Association Railway Association of Canada Yes Cap-and-Trade Forest Products Association of Yes Cap-and-Trade Canada Aluminum Association of Canada Yes Cap-and-Trade Canadian Association of Petroleum Yes Carbon Tax Producers Cement Association of Canada No None

11 Table 3 Ğ Firm preferences by sector Sector Firm Accepts a price on carbon? Official Preference? Unofficial preference? Forestry Weyerhaeuser Yes Cap-and-trade Forestry Canfor Yes No Cap-and-trade Forestry Catalyst Paper Yes No Carbon Tax Forestry West Fraser Yes No No Forestry AbitibiBowater Yes Cap-and-trade Cement Essroc Yes Voluntary, then Carbon tax Cement St MaryÕs Cement Yes Cap-and-trade Cement Holcim Yes Cap-and-trade Cement Lehigh Yes No Cap-and-trade Natural gas EnCana Yes Carbon Tax Natural Gas Union Gas Yes Carbon Tax Natural Gas Gaz Metro Yes Cap-and-trade Petroleum ConocoPhillips Canada Yes Carbon tax in Canada (Cap-andtrade in US) Petroleum Suncor Yes Cap-and-trade Petroleum Nexen Yes Carbon tax Petroleum Petro-Canada Yes No (although support of CAPP position) Petroleum Shell Canada Yes Cap-and-trade Electricity Transalta Yes Cap-and-trade No

12 What does this mean? Preferences are far more complex than the literature suggests. With respect to climate change in Canada, it would be wrong to assume that business is the reason for our laggard status.

13 But, what explains the variation? Findings: A decision-making framework, overwhelmingly employed by business to judge the viability of investments, is also employed to analyze public policy. Risk management analysis acts as a heuristic device that helps business leaders interpret and understand policy instruments of which their level of knowledge and information may vary.

14 Heuristic? Lau and Redlawsk define heuristic as a "problem solving strategy (often employed automatically or unconsciously) which serve to 'keep the information processing demands of the task within bounds' "

15 How does this heuristic work? Policies are examined, first, for the risks that they pose to the firm both to its capacity to grow and to its overall survival. And, secondly, for any advantages they may provide to the firm vis a vis its competitors. This process can be conceived in the form of a set of scales in which the risks to the corporation are balanced against the advantages.

16 Risk - definition Contested term - means different things in different fields. Confusion amongst interview subjects. Quic k Tim e and a dec om pre s s or are needed to see this picture. QuickTime and a decompressor are needed to see this picture. QuickTime and a decompressor are needed to see this picture. QuickTime and a decompressor are needed to see this picture. Quic k Tim e and a dec om pre s s or are needed to see this picture.

17 Multiple definitions Risk = (probability) (consequence) Risk [is] a state of uncertainty where some of the possibilities involve a loss, injury, catastrophe, or other undesirable outcome (ie. Something bad could happen) - Hubbard (2009) Risk is uncertainty that an investment will earn its expected rate of return - Reilly and Brown

18 Investment risk and Government policy Internal - the risk that a firm s investment will not receive the respected return. This investment may have been mandated by the policy or; The government policy may cause the decreased return. External - the risk to the investments of a firm s shareholders/ investors The chance that investors will not receive the expected return.

19 Advantage Simpler term. Seeking economic / competitive / financial advantage over competitors. Other synonymous terms: return, opportunity.

20 Two types of advantage from government policy: Direct. Sales of credits from cap-and-trade, etc. Indirect: Increased revenue indirectly caused by the policy. Increased use of natural gas due to carbon tax, etc.

21 Two factors influence weighting of risk and advantage: Market factors (corporate circumstances) Type of product Competitive situation Economic strength Costs Ideas Personality of key managers Personal experience Corporate culture

22 Summary Everyone wants a price on carbon. Much Variation in type of carbon price supported. Business preferences are not based exclusively on cost they are a function of perceptions of risk and advantage.