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ECC – Interim Report – Section 3

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3 Initial Findings – Greenhouse Gas Emissions

In the absence of government interventions, substantial increases in Canada’s GHG emissions can be expected through 2050, primarily as a result of natural resource development and economic growth. GHG emissions in 2020 could be in the order of 65% greater than 1990 levels and will be more than double 1990 levels by 2050, according to some estimates (Figure 1). While there are slight differences between the forecast the NRTEE used and other established forecasts, the overall magnitude of each forecast is quite comparable, suggesting that the conclusions, relating to GHG growth in the “business as usual” (BAU) scenario, are sound. Figure 1: Comparison of “business as usual” forecasts for Canadian GHG emissions Notes: ICF forecast comes from NRTEE, 2006, “Advice on a Long-term Strategy on Energy and Climate Change”, Ottawa: NRTEE. Informetrica forecast comes from Informetrica, 2007, “Projection of Total GDP for the Long-term”. CEOU forecast comes from Analysis and Modelling Division, 2006, “Canada’s Energy Outlook: The Reference Case 2006”, Ottawa: Natural Resources Canada. 3.1 Long-term GHG emissions reductions of 45% to 65% (below 2003 levels) by 2050 are achievable. The NRTEE has examined the implications of long-term GHG emissions reductions of 45% to 65% (below 2003 levels) by 2050. Our estimates of the cost implications of these targets tests the trade-off between environmental objectives and economic impacts, in order to help Canadians make informed decisions. The primary finding from the NRTEE’s research undertaken to date is that reducing GHG emissions by 45 to 65% below 2003 levels by 2050 is achievable. Such reductions would require significant use of energy efficiency, fuel switching, renewables, and CCS. This finding is consistent with many other studies (including a recent study by the NRTEE13). Four GHG reduction scenarios were evaluated with two different targets (45% and 65%), and two different GHG price path scenarios (Table 1). Alternative GHG emissions price trajectories were simulated in order to stimulate GHG reductions corresponding to these targets. Figure 2 and Table 2 show the GHG emissions price trajectories used to reach the targets identified in each scenario.14 Table 1: Scenarios modelled for GHG emissions reductions

Scenario	Long-term goal (2050)	Medium-term (2020 – 2025 goal)
Shallow GHG reductions; slow start	-45%GHG	Stabilize Emissions
Deep GHG reductions; slow start	-65%GHG	Stabilize Emissions
Shallow GHG reductions; fast start	-45%GHG	Reduce Emissions
Deep GHG reductions; fast start	-65%GHG	Reduce Emissions

Regardless of pathway, the analysis firmly concludes that a very strong price signal is required to stimulate deep GHG reductions by 2050. To reiterate, in the cases modeled here, this is a price that applies throughout the economy and begins immediately. Figure 2: GHG emission price trajectories for each policy scenario Table 2: GHG Emission Prices for each GHG Emission Reduction Scenario(2003$/tonne CO2)

Scenario	2010	2015	2020	2030	2040	2050
Slow (-45%) and Shallow	$10	$15	$25	$75	$200	$200
Fast (-45%) and Shallow	$10	$15	$75	$160	$160	$160
Slow (-65%)  and Deep	$10	$15	$25	$100	$300	$350
Fast (-65%) and Deep	$10	$15	$75	$225	$270	$270

Using the trajectories shown in Figure 2, the modeling projects the impact on GHG emissions in Figure 3. As illustrated, it is possible to attain long-term targets with either a “fast” or “slow” start. However, the “slow” start requires a significantly higher emissions price in the latter years to compensate for the low emissions price in the beginning years, which allow emissions to grow more. Regardless, however, the modeling shows that the emission reductions targets are achievable. Figure 3: GHG emissions forecasts in business-as-usual and the alternative prices scenarios Estimated Effects on GDP The modeling done for this analysis provides estimates of lost GDP associated with each scenario, which must be compared against a baseline forecast for context. We have compared these estimates against the NRCan CEO/Informetrica Ltd. forecast used to provide the primary drivers for the modeling (Table 3). BAU GDP in 2011 is estimated to be 1.27 trillion, and is expected to grow by 1.83% per year (cumulative) to 2.61 trillion in 2050. In our GHG reduction scenarios, GDP grows by rates ranging from 1.79% to 1.82%, leading to GDPs in 2050 ranging from 2.58 trillion to 2.60 trillion. This translates into lost growth from 2011 to 2050 of 0.9% to 2.9% as a percentage of growth in the BAU forecast. Put another way, it takes Canada between 0.5 and 1.6 years longer to get to the same GDP level as it would have had in BAU in 2050. These results indicate small reductions in the size of the economy under all four scenarios. Fast and Shallow causes the least lost growth (0.9%, or 0.5 years), while Slow and Deep causes the most (2.9%, or 1.6 years). Comparing the deep reduction runs, Fast and Deep costs roughly half as much as Slow and Deep to get to the same reduction target (1.6% vs. 2.9%, or 0.9 years vs. 1.6 years). Table 3: Comparison of changes in total GDP from 2010- to 2050 ($1997)

	GDP  - 2011 (trillion)	2011-50  Compound Growth rate	GDP  - 2050 (trillion)	Lost growth 2011-2050, as a percent of BAU	“Years  of lost growth”	Average annual losses as % of BAU
BAU	1.267	1.83%	2.613
Slow and Shallow		1.81%	2.591	1.6%	0.9	-0.90%
Fast and Shallow		1.82%	2.600	0.9%	0.5	-1.05%
Slow and Deep		1.79%	2.574	2.9%	1.6	-1.31%
Fast and Deep		1.81%	2.591	1.6%	0.9	-1.44%

The annual reductions in GDP are not even between 2011 and 2050; the most adjustment occurs from 2030 to 2045, with the economy re-stabilizing on its new less GHG intense path by 2050. While the annual reduction in GDP for the four scenarios lies between 0.90% and 1.44% of BAU GDP per year, when averaged over the forty year period, the individual yearly costs over the period varying from 0.1% to 2.3% per year (Table 4). The reader should note these costs are NOT cumulative – they are subtracted from potential GDP in the year in question, while the underlying potential GDP continues to grow at an average of 1.83% per year from 2011 to 2050 (which results in GDP growing in BAU from 1.27 trillion in 2011 to 2.61 trillion in 2050). Table 4: Reduced Size of the Economy under the Four Scenarios

Reduction in GDP in a given year as a % of forecasted BAU GDP
	2015	2020	2025	2030	2035	2040	2045	2050
Slow and Shallow	-0.1%	-0.6%	-0.8%	-0.9%	-1.1%	-1.6%	-1.4%	-0.8%
Fast and Shallow	-0.5%	-1.2%	-1.6%	-1.5%	-1.3%	-1.1%	-0.7%	-0.5%
Slow and Deep	-0.3%	-0.5%	-0.7%	-1.1%	-1.9%	-2.3%	-2.2%	-1.5%
Fast and Deep	-0.5%	-1.1%	-2.1%	-1.7%	-2.2%	-1.7%	-1.3%	-0.8%

A caveat must be made that the GDP forecast upon which this analysis is based, and to which our GDP costs are compared, is fundamentally driven by population, labour force participation, labour productivity, savings rates, the relative attractiveness of Canadian investment and capital productivity. This analysis was not set up to automatically adjust these key parameters within the GDP forecast in response to climate policy costs, mainly because they are more sensitive to a broader spectrum of drivers, especially long term political decisions regarding immigration, education and labour and capital taxation. These variables were taken as being unchanging between BAU and the scenarios in this analysis. Finally, it should be noted that these preliminary estimates of GDP effects should be treated with care. Although GDP is used as a measure of the change in economic activity, it is not direct measure of the change in human welfare. GDP is roughly analogous to the sum product of the price of all goods and services consumed multiplied by the physical output of these goods and services. In the results of the modeling undertaken for the NRTEE, the price of many of these goods and services has increased to pay for the cost of reducing their GHG intensity, and overall physical consumption of these goods and services has fallen in response to the price increase. This implies some welfare loss associated with reduced consumption. However, GDP does not fall significantly, because the remaining consumption is multiplied by a higher price. 3.2 Clear, consistent, and long-term communication by the government of GHG prices is critical if the targets are to be achieved. When businesses and individuals make investments with a long lifetime, they implicitly or explicitly consider the financial performance of those investments over the expected life of the investment. The analysis conducted for the NRTEE assumes that the government clearly communicates to businesses and individuals a schedule for GHG prices well in advance and inspires confidence in firms and consumers that the policy will be enduring. As a result, businesses and individuals have some expectation of a future GHG price, and use this knowledge to make decisions about carbon-reducing technology investments. This type of clear communication can dramatically improve the effectiveness of a policy. Conversely, if the government neglects to clearly communicate the GHG price schedule well in advance, it risks causing serious economic dislocation when it actually implements each increase in the price, because society’s capital stocks will not be well prepared for the abatement effort required. GHG reductions would then be smaller for the same GHG price. In essence, inadequate and delayed communication by the Government of a GHG “price” could lead to substantial long-term economic costs. Notably, the recent Stern review15 concluded that“the costs of climate change for developed countries could reach several percent of GDP”, and that delay of action would result in higher costs. 3.3 Establishing and reaching medium-term targets is critical if the long-term targets of 45% and 65% reductions by 2050 are to be achieved. Any delay in the implementation of the GHG price may put some long-term GHG targets beyond Canada’s reach and will mean that future emission prices will need to rise significantly. The 45% reduction target is likely achievable if emissions are at least stabilized at 2003 levels in 2025. However, the 65% target may not be achievable if emissions are only stabilized at 2003 levels in the 2020 to 2025 period. This “non-attainment” risk exists since there is a high rate of capital stock turn-over in the 2020 to 2025 period and therefore an opportunity to shift the economy onto a lower emissions path. If this opportunity is missed and investment decisions do not result in the deployment of lower emitting technologies, the economy will become locked into a future emissions path from which reductions to the 65% level will either be too costly or simply unattainable. To attain the 65% target by 2050, reductions below 2003 levels on the order of 10% to 30% are necessary by 2025. Table 5 summarizes the medium–term GHG targets that can be attained. Table 5. Medium-term targets for GHG emission reductions

Scenario	GHG Emissions Reductions in 2020	GHG Emissions Reductionsin 2025
BAU	+21%	+28%
Slow & Shallow (-45% GHGs in 2050)	+8%	+2%
Slow & Deep (-65% GHGs in 2050)	+2%	-9%
Fast & Shallow (-45% GHGs in 2050)	-11%	-23%
Fast & Deep (-65% GHGs in 2050)	-17%	-31%

Regardless of the medium-term target chosen, if emissions reductions are pushed into future periods, the overall costs of achieving the reductions will rise. A later start implies that the GHG price signal eventually has to reach higher levels to produce the same level of GHG reductions, and that a very late start will jeopardize reaching any deep reduction target at all. The modeling undertaken for the NRTEE considered not only different long-term GHG targets for Canada, but also different trajectories (that is, different GHG prices pathways) that aimed to reach the long-term targets. The results of this modeling suggest that the earlier a strong GHG price is implemented, the lower the ultimate price needs to be to reach a given level of emissions reductions. Importantly, the modeling concluded that a delay in the implementation of a GHG price may mean that some long-term GHG targets will be beyond Canada’s reach. 3.4 Medium and long-term targets should be set in combination to account for reductions of cumulative emissions between now and 2050. While annual targets in the medium and long-term are important, it is critical to keep in mind that the cumulative emissions between now and 2050 will remain in the atmosphere for at least 100 years (hence the reference to GHGs as a “stock” pollutant). Figure 4 illustrates the cumulative GHG emissions from 2006 to 2050 in the BAU scenario and each of the four policy scenarios. (Note that in the table emissions are measured in “gigatonnes of CO2e”, a thousand-fold increase over the million tonnes CO2e unit of measure typically used in discussions of emissions.) In the most aggressive scenario – the “fast and deep” scenario – cumulative emissions are reduced by about 50% compared to BAU levels. GHG prices that increases quickly (“fast pathway”) reduce cumulative GHG emissions significantly more than the pathways where the start is delayed. As a result, even though the “fast” and “slow” pathways can be designed to reach the same target for annual GHG emissions in 2050, the overall environmental improvement from the “fast” pathways will be greater than for the “slow” pathways for the same target. However, the research also suggests that the “fast price” pathway combined with the shallow target results in about the same cumulative emissions reductions as the “slow” pathway with a deeper target. Figure 4: Cumulative emissions in BAU and the alternative GHG emissions prices     3.5 Canada’s contribution to the international effort to reduce GHG emissions has not yet been determined, but could end up calling for a “faster and deeper” reductions path than currently envisioned. Long-term objectives for global GHG emissions reductions are being set internationally, based on atmospheric stabilization goals that avoid dangerous climate change. International goals for GHG stabilization range between concentrations of about 450 and 650 ppmv CO2e16, based on differing interpretations of “dangerous” human interference with the climate system.17 Regardless of the level ultimately selected, it is clear that stabilization of atmospheric GHG concentrations during the 21st century at a level to minimize climate change impacts will require a significant departure from current emission trends. Global emissions will need to decline substantially compared to today, dropping below current emissions and declining to almost zero over time. The earlier the emissions peak and decline, the lower will be the stabilized concentration level, leading to a lower level of climate change impacts at a global level. The atmospheric GHG concentration at stabilization will be determined by the time taken to reduce emissions to near zero, and by the cumulative emissions released during the transition. The question of Canada’s contribution (burden) to this global GHG emissions reduction effort involves consideration of the following factors:

• the choice of stabilization level (between 450 and 550 ppmv);
• the choice of burden-sharing approach;
• the starting point of emissions in 2008-2012 which is used as a basis for emission allowances afterwards; and
• Canada’s national circumstances.

A singular focus on climate change prevention suggests that Canada’s emission reductions in 2050 may need to be in the order of 75% to 95% below 2003 levels in 2050, well beyond the government’s announced target of 60% to 70%. If such a long-term target is accepted, then this suggests that a “fast” start is critical, and the medium-term (2020) target will have to be greater than stabilization at 2003 levels. Further analysis is needed in order to identify a range of allowances that reflect Canada’s national circumstances. The NRTEE will further investigate what these national circumstances could involve, and will present its findings in the final report. 13 National Round Table on the Environment and the Economy, 2006, “Advice on a Long-term Strategy on Energy and Climate Change”, Ottawa: NRTEE. 14 The price trajectories that are shown here represent only four of many possible paths for reaching the desired medium and long-term targets. 15 The Economics of Change: The Stern Review. N. Stern, 2007. Cambridge University Press. 16 For comparison purposes, GHG emissions are reported in units of carbon dioxide equivalent (CO2e). CO2 equivalent is a unit used to standardize measurements and facilitate emissions trading. For example, tonne for tonne, methane is a greenhouse gas that is 21 times more powerful than carbon dioxide in causing the global greenhouse effect. Therefore one tonne of methane represents 21 tonnes of CO2 equivalent. 17 See IPCC (2001).