Thread by @bcshaffer

1/ The report cited below is flawed. It is akin to a report finding the UCP cutting spending by 50% would have a devastating effect on public services--regardless of whether that is actual policy.

In short, the report does NOT analyze actual Fed carbon policy.

Let me explain..

2/ The report assesses the cost impact of a $50 carbon tax and assesses the competitiveness effect on energy-intensive trade-exposed industries. It mentions Fed policy includes an “output-based pricing system” to mitigate these concerns, but *excludes* it from the analysis.

3/ Report: “firms make decisions based on marginal costs whereas the OBPS rebate will be a lump-sum transfer and thus will not have much effect at the margin”.

This is wrong. Output-based allocations depend on… output! By their very nature they affect decisions at the margin.

4/ For more on this, see my blog post here: ecofiscal.ca/2016/04/05/cas…

Or chapter 6 of this report here: ecofiscal.ca/wp-content/upl…

5/ The report attempts to value the OBPS, but only in an App'x, not in the main text.

Appx B correctly includes OBAs in the marginal decision (contradicting the earlier description as lump-sum) but the analysis relies heavily on a subtle assumption: increasing marginal emissions

6/ What does this mean? As you produce more, you emit more to produce 1 more widget than the last 1. This would be true for a coal plant going from 90->100%, but not likely when going 60->70%. Also not likely true for SAGD oil sands, where scale can lower marginal emissions.

7/ The numerical analysis relies on a specific functional form of the emissions curve: E=a*Y^b. When b>1, this is increasing marginal emissions (think of a curve starting flat and bending higher). When b<1, the opposite is true: more output means decreasing marginal emissions.

8/ To make the arg against OBPS, the report uses 7 b’s that are ALL>1. In other words, the marginal emissions are always increasing.

To be fair, this is a ripe area to look at, but it’s a *very strong* assumption that ALL industries, ALL firms are increasing marginal emissions

9/ Without this assumption OBPS would dampen most of the cost increase from the carbon price, fully obviating the headline findings of this report.

Ignoring OBPS and using a skewed example does a disservice to those wanting to better understand the real effects of carbon pricing

10/ One thing I will say is the report notes many caveats:

- carbon pricing would be less costly than alternative actions
- behavioral changes in response to higher energy prices such as input substitutions, technology adoption, or production process changes are excluded

11/ Yet, sadly, these nuanced caveats don’t make it to headlines, nor the politically motivated retweets.

In sum: This report ignores the core policy to deal with competitiveness concerns, leading to conclusions that grossly exaggerate those of actual policy.

/end.