Prairie Resilience Framework Feedback

In the winter of 2018 the Government of Saskatchewan hired consulting firm MNP to gather feedback on the Prairie Resilience Framework from Saskatchewan stakeholders. I offered my feedback in an engagement session in Regina and in a written submission. The final MNP (2018) Climate Change Engagement Report has just been released. I read through the report with interest and saw that some of the points I made were represented, while others were absent or subsumed within larger categories. In the interest of transparency and clarity here is the full written submission containing my feedback on the Prairie Resilience plan.

This submission was written with the goal of encouraging the Saskatchewan Government to fill in the gaps in their climate change plan. As I outline below I do not believe the plan as written offers a substitute for the federal government’s carbon pricing plan. To offer a substitute, Prairie Resilience would need to expand its policy coverage to the 50% of emissions in the province that are ‘unregulated’. This can be done with a suite of regulations and standards. It can be done most efficiently by putting a price on carbon.

Sincerely,

Brett Dolter, PhD

May 11, 2018

 

Prairie Resilience Framework Feedback

Brett Dolter, PhD

March 12, 2018

 

Prairie Resilience Framework Indicators

The Prairie Resilience framework contains a host of useful indicators. It is great to see a focus on riparian buffer zones and protection, encouraging pasture on marginal lands, and wetland preservation and restoration. Riparian buffer zones will contribute to enhanced recreation values for lakes and rivers. Grasslands and wetlands can be stores of carbon and habitat for wildlife. In general, this is a robust plan for preparing communities for climate change, and monitoring the state of natural systems.

 

I was glad to see measurement related to the transition to a zero-emissions economy appear under the ‘Transformative’ category heading. The following indicators stood out to me as particularly relevant:

 

  • GHG emissions intensity of electricity sector in terms of GHG emissions per MWh electricity (p. 17);
  • Annual total GHG emissions from industrial facilities captured and used (p. 17);
  • Quantity of methane and related associated gases flared and vented per cubic metre of produced crude oil (p. 18);
  • Total annual GHG emissions by government owned buildings (p. 18);
  • % of workforce employed in the low-carbon economy (p. 23).

 

I encourage the Ministry of Environment to keep these indicators and report each of them annually to the public. An index may also be useful, but in the interest of transparency it would be best to report the levels of individual indicators.

 

For the purposes of monitoring the transition to a zero-emissions economy and keeping an eye on industrial competitiveness I would like to suggest several other indicators:

 

  1. Energy per unit production: Similar to the indicator measuring “water used per tonne of potash produced” it would be useful to measure: energy (GJ) used per tonne of potash produced. Similar measures could be introduced for other industries such as oil and gas extraction (GJ/barrel and GJ/GJ), oil refining (GJ/barrel), uranium mining (GJ/tonne), agriculture (GJ/bushel). Measures like these will provide detailed information as to whether policies are improving the energy efficiency of production. They could be included as a reporting requirement for regulated emitters.

 

To make this indicator most useful, energy use (GJ) should be reported by type: natural gas, electricity, gasoline, diesel, other. This would allow easy conversion to calculate total production-related GHG emissions. It would then be possible to decompose changes to the GHG emissions intensity of production; for example it would be possible to determine whether fuel substitution or energy efficiency has lowered emissions. Whenever possible, gather disaggregated energy use data, which you can then aggregate as GHG emissions in public reporting.

 

As context, I am currently researching the impact of historic energy price changes on the competitiveness of the manufacturing sector. The goal of this research is to predict how carbon pricing might impact the future competitiveness of manufacturing. I am conducting the research using the ‘Annual Survey of Manufacturing’ at Statistics Canada. I have access to individual plant-level data on output and energy expenditures, but not energy in terms of a physical measure like gigajoules (GJ). This means a change in energy expenditures could be due to energy price changes or from changes in the quantity of energy used. The ambiguity makes analysis difficult. If energy expenditures fall we cannot tell if an industrial facility negotiated a better energy price from a supplier or whether the facility became more energy efficient. To avoid ambiguity it would be useful to track: energy use (GJ), greenhouse gas emissions (tonnes), energy intensity of production (GJ/units of output), and GHG intensity of production (GHG tonnes/units of output). It would also be useful to collect data on the prices that industrial facilities pay for electricity and delivered natural gas.

 

  1. Competitiveness indicators: Saskatchewan will want to monitor and analyze how their regulatory policies have impacted the competitiveness of industries within the province. Ideally you would measure how the regulatory policies lead to changes in indicators of competitiveness such as employment, employment/unit of output, exports, and value-added. By anticipating the questions you would like to ask about the regulatory policies in the future, you can design the data collection process to provide the data that can answer those questions.

 

  1. Transportation indicators: The Prairie Resilience plan speaks only to the government vehicle fleet and not vehicles owned by individuals and businesses in Saskatchewan (aside from a mention of a fuel efficiency strategy for freight vehicles). I propose that SGI and the Ministry of Environment monitor and report vehicle registrations by fuel-efficiency and vehicle type. A complete suite of indicators in the transportation realm would include:

 

  • The average fuel efficiency of cars, trucks, and cross-over SUVs registered in Saskatchewan;
  • The number of plug-in hybrid, and battery-electric vehicles registered in Saskatchewan;
  • Number and location of publicly accessible electric vehicle charging stations in Saskatchewan (level 2 or level 3) (tracked in partnership with SaskPower);
  • The number of trips taken on transit (tracked in partnership with municipalities).

 

These indicators would set a baseline for the fuel efficiency and emissions intensity of the Saskatchewan vehicle fleet, and would measure the uptake of zero-emissions vehicles, the accessibility of electric vehicle charging stations, and transit ridership.

 

Improving these indicators will require complementary policy to the existing Prairie Resilience regulatory approach. One promising policy is a zero-emissions vehicle (ZEV) mandate. Quebec became the first province to implement this policy effective January 2018. It requires automakers to earn a certain number of credits for selling zero emission vehicles within the province. If they do not earn enough credits, automakers can purchase credits from other automakers who have surplus credits (i.e. those that have sold more zero emissions vehicle than is required). Quebec’s ZEV mandate stringency tightens over time to require an increasing share of zero emissions vehicles sales. It offers a partial substitute to carbon pricing on gasoline and diesel by encouraging sales of zero emissions vehicles. (Note: the offset is only partial because it does not encourage mode switching to non-vehicle modes of transportation and does not encourage individuals or businesses to lower the number of kilometers travelled).

  1. Net-zero homes and buildings in Saskatchewan: The adoption of the 2015 National Energy Code for Buildings ensures that investments will be made in new energy efficient homes and commercial buildings. It would be useful to track the impact that this regulation has on transforming the building stock. I suggest additional indicators to monitor progress in improving the building stock:

 

  • Energy performance of homes and buildings in terms of energy (GJ) per m2;
  • Number and percentage of net-zero ready and net-zero homes built in Saskatchewan;
  • Number and percentage of net-zero ready and net-zero commercial buildings in Saskatchewan.

 

Moving forward, it will be necessary to strengthen the building code. In the residential sector, this may be accomplished by working with the Saskatchewan Research Council (SRC) and the Home Builders Associations to demonstrate and incentivize the next generation of energy-efficient homes. Ten years ago, the Ministry of Environment provided $1000 incentives for homes built to R-2000, Energy Star for Homes, and EnerGuide 80 standards as part of its ‘Go Green’ funding. That level of energy efficiency is now made standard with the National Energy Code for Buildings. Incentives can now be offered for next generation net-zero, net-zero ready, and ‘Passive House’ standard homes in Saskatchewan. Following five to ten years of incentives the homebuilders should be prepared for a step-wise improvement in the regulations. By 2030 all new homes built in Saskatchewan should be net-zero or net-zero ready.

 

A similar incent-and-then-regulate approach can be taken in the commercial building sector.

 

  1. Energy Efficiency Retrofits for Existing Homes and Buildings: Most of the existing homes and buildings in Saskatchewan will still be in use in 2050. To make progress on reducing GHG emissions in the buildings sector it will be necessary to improve the energy efficiency of existing buildings. A focus on the energy efficiency of government owned buildings should be extended to the Saskatchewan Housing Corporation (SHC). Energy efficiency retrofits to SHC housing can reduce energy bills and improve comfort and health. Indicators related to progress in this area would include:

 

  • Number of SHC owned homes for which retrofits have been conducted;
  • Energy intensity of SHC owned homes (both in terms of natural gas and electricity use).

 

For the province as a whole, the Government of Saskatchewan could work to ensure that programs offered by SaskEnergy can be accessed by low-income households. Often, the homes most in need of energy efficiency retrofits are owned by households lacking access to capital to carry out the retrofits. Related to this, the province could track:

 

  • Number of homes owned by low-income households that have carried out energy efficiency retrofits;
  • Annual energy savings from the retrofits;
  • Annual GHG emissions reduced by the retrofits.

 

I carried out research on this topic ten years ago and could provide a summary report upon request.

  1. Revising Existing Indicators – There are a few indicators that I believe could be revised to better capture progress towards the resilience goals:
    • Area of wetlands created/restored – This would be better measured as total wetlands area, and could separate out i) wetlands lost, ii) wetlands restored, iii) wetlands preserved;
    • # of customers with Advanced Metering Infrastructure (AMI) – This indicator is listed as ‘Absorptive’. It could also be classified as ‘Transformative’.
    • # of new subdivisions and sites approved that meet flood protection standards – This indicator could be considered in context. What is the percentage of all subdivisions or sites that meet flood protection standards? That would cover existing areas.
    • # of swimming advisories in high-risk recreational areas – Evaluating this indicator poses a challenge. We would want reporting of unsafe conditions to be high (more advisories), but incidence to be low (fewer advisories), making it difficult to know which direction we would want this indicator to go.

 

Two Questions Related to Methane Monitoring

I was glad to see an indicator focused on methane emissions: “Quantity of methane and related associated gases flared and vented per cubic metre of produced crude oil.” I have questions regarding how the methane emissions will be measured and monitored.

 

Recent research has indicated that venting, flaring, and fugitive methane emissions are much higher than is reported in annual emissions inventories. For example, using mobile surveys, Atherton et al. (2017) calculated methane emissions of 111.8 kilotonnes (kt) per year in the Montney basin of British Columbia (BC) compared to reported methane emissions of 78 kt for the entire province of BC.[1]

 

  • What method will the Government of Saskatchewan use to monitor and measure methane emissions?

 

  • Will the Province invest in mobile monitoring survey equipment and hire inspectors to conduct audits to ensure reported methane emissions reflect real-world methane emissions?

 

Improvements in methane management and methane emissions regulation must be accompanied by sufficient methane emissions monitoring and auditing capacity. The Province of Saskatchewan should invest in mobile methane monitoring units and new full-time methane emissions auditor positions to ensure effective methane emissions monitoring.

 

Performance Standards Equivalency with Federal Plan

The Prairie Resilience plan commits Saskatchewan to implement performance standards for regulated emitters with GHG emissions greater than 25 kt. In terms of compliance options, it is clear that to be in compliance with the federal government’s carbon pricing requirement the price of the provincial technology fund levy should be $10/tonne in 2018, increasing by $10/tonne per year to reach $50/tonne in 2022.

 

I support the exchange and trade of performance intensity credits, allowing facilities that exceed their target to sell credits to those facilities that have failed to meet their performance-intensity standard. The cost of credits would be set via negotiation between firms. This is a way to ensure cost-effective emissions reductions in the industrial sector and follows the logic of a cap-and-trade system. (See Appendix A for further explanation)

 

I would strongly discourage the use of offsets and internationally transferred mitigation outcomes as an alternative to paying the technology fund levy or purchasing performance standard credits generated by other regulated firms. Carbon offsets often do not meet the test of additionality. The key question to assess additionality is: would the person or business have taken the emission reduction action without receiving a carbon offset payment? If the answer is yes, the carbon offset has not led to an additional reduction in GHG emissions. This is particularly true in regard to the move to zero-tillage agriculture, which is carried out not to reduce GHG emissions, but instead to optimize soil moisture conditions and the use of fertilizer and chemical inputs. No offset credits should be given for zero-tillage farming practices initiated before the introduction of the Prairie Resilience framework.

 

If the Government of Saskatchewan does plan to credit agricultural producers with carbon offsets for adopting zero-tillage practices, it should take a whole systems approach to carbon offsets accounting. This means that account should be taken not just of acres in zero-tillage (which would count as a carbon credit), but also acres converted from pasture to cultivation and acres of drained and seeded wetlands (which should count as carbon debits because soil carbon is lost). To be credible, an agricultural offset system needs to have consistent rules applied across land use types.

 

In summary, to claim compliance with the Pan-Canadian Climate Change framework the performance standards should adopt the federal carbon price schedule for the technology fund levy; allow performance standard credit trading; and forego allowing carbon offsets as an alternative to paying the technology fund levy. If purchasing agricultural carbon offsets is included as a form of compliance, then the carbon offset accounting should also consider agricultural carbon debits – lost soil carbon due to land-use change – and should deduct carbon credits from landowners accordingly.

 

Greenhouse Gas Emissions Reporting for Regulated Emitters

To ensure consistency with federal government reporting, facilities emitting 10 kt or more should be required to report GHG emissions to the provincial government. If these facilities are reporting to the federal government anyways, there is no reason to make reporting to the province voluntary.

 

Equivalency for Unregulated Emitters

In 2015, there were 44 facilities emitting more than 50 kt of GHG emissions in Saskatchewan, and these facilities were owned/managed by 26 companies or institutions. Meanwhile, there were 40,453 small businesses (1-99 employees), 644 medium-sized businesses (100-499 employees), and 88 large businesses (500+ employees) in the province. Extending regulation to those emitting more than 25 kt of GHG emissions will increase the number of regulated facilities and companies, but regulated emitters will still be a fraction of the businesses registered in the province. For the Prairie Resilience plan to offer a true substitute for carbon pricing, policy must be put in place to encourage “unregulated emitters” to reduce GHG emissions. A carbon price would be the simplest method of providing this encouragement and ensuring compliance with the federal plan. Without a carbon price more effort must be made to ‘fill the gaps’ in the Prairie Resilience plan. What measures will be put in place to encourage GHG emissions reduction in facilities releasing less than 25 kt of GHG emissions?

Appendix A – Performance Standards and Strategic Negotiation

For an economically efficient outcome, performance standards should be set so that firms reduce emissions to the point where the marginal cost of reducing emissions for firm 1 equals the marginal cost of reducing emissions for firm 2.

 

I’ve illustrated a two-firm carbon market in the graphic below, which shows the marginal cost of emissions reduction for two facilities. Facility 1 reduces emissions as you travel from left to right on the x-axis. Facility 2 reduces emissions as you travel from right to left on the x-axis. In this example, the total cap on emissions is 25 units. Without a cap, each facility would emit 25 units of emissions for a total emissions level of 50 units. The firms have different cost structures. Facility 1 can reduce emissions at a lower cost than Facility 2. The efficient outcome is for Facility 1 to reduce emissions by 18 units and Facility 2 to reduce emission by 7 units (the gold star where the curves intersect). At this point the marginal abatement cost is equalized across the two facilities.

Cost effective pollution reduction

If instead, a performance standard was established that required Facility 1 to reduce emissions by 15 units and Facility 2 to reduce emissions by 10 units, then the marginal abatement costs between facilities would be quite different; the marginal cost of facility 2 (MC2) would be much higher than the marginal cost of facility 1 (MC1). This is where credits for exceeding a performance standard become important. Facility 1 could exceed its standard and reduce emissions by 18 units, and then sell 3 credits to Facility 2. Through negotiation you would expect the firms to agree to a credit price at a point near the equilibrium where MC1 = MC2. Facility 2 would save costs equal to area ‘a’ while Facility 1 would earn additional profit equal to area ‘b’. There would be a net gain from trade in the credit market. This flexibility is important to allow climate policy to achieve economic efficiency and provides the greatest ‘bang for the buck’ in terms of emissions reductions.

 

My understanding is that performance standards will be set following one-on-one meetings with industrial regulated emitters. One challenge is that the Government of Saskatchewan will not know how expensive it is for any given industry to reduce its GHG emissions. Government officials will rely on the statements made by the industrial emitters, but these emitters will have an incentive to overstate the cost of compliance. I’ve illustrated this issue in the graphic below, which shows Facility 2 claiming a higher marginal cost of abatement profile (curve MCclaim) than its true cost structure (curve MCtrue). By claiming a high marginal cost of abatement profile Facility 2 would be granted a less stringent performance standard target (in this case equivalent to a reduction of 7 units of emissions). Facility 2 could then capitalize on its superior negotiating tactics by exceeding the performance intensity standard and selling credits to Facility 1. We would again expect the two firms to negotiate a performance credit price at the level where MCtrue = MC1 (shown intersecting the blue star). Facility 2 would make a profit equal to area ‘b’ and Facility 1 would save on emissions reduction expenditures by an amount equal to area ‘a’. The result would still be economically efficient, but through deception in the negotiation process Facility 2 would receive windfall profits. This means that facilities will generally have an incentive to overstate abatement costs during the consultation process.

Strategic negotiation when setting performance standards

In a cap-and-trade system, an efficient, equalized marginal cost can be achieved through a permit auction. In an auction firms make bids that reveal their willingness to pay and their marginal cost structure. High cost firms will bid higher prices for permits. If permit prices are high, low cost firms can act to reduce emissions internally and avoid buying permits. The clearing price in the permit market is the carbon price that equalizes marginal abatement costs.

 

The difference between a cap-and-trade system and a performance based standard is a question of property rights. A cap-and-trade system is built on the assumption that the public, represented by government, have property rights over the atmosphere. The government then sells those property rights in a permit auction. A performance standard assigns the right to pollute to private firms up to the point where emissions reductions are required (i.e. the point where the performance standard is binding). While this can be an important method of protecting ‘energy-intensive trade-exposed’ (EITE) firms, not all regulated emitters will be in this category. The Government of Saskatchewan should think carefully about allocating the right to pollute for free to regulated emitters, and consider moving to a permit auction system for those firms that are not trade-exposed.

[1] Atherton, Emmaline, David Risk, Chelsea Fougere, Martin Lavoie, Alex Marshall, John Werring, James P. Williams, and Christina Minions (2017) “Mobile measurement of methane emissions from natural gas developments in northeastern British Columbia, Canada.” Atmos. Chem. Phys., 17, 12405–12420, https://doi.org/10.5194/acp-17-12405-2017.

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