CO₂ emissions and energy prices in the Asia-Pacific region

In conclusion, it appears as if the combination of using a pooled model with dummy variables and using the price of oil in the manufacturing sector as a proxy for an economy-wide energy price index leads to relatively low price elasticities for CO₂ emissions. Nevertheless, the inclusion of dummy variables is an important element of the model specification, and the proxy energy price index is necessary because of unavailable data.

Implications for the Canadian Economy

Reducing CO₂ emissions is difficult. The last section demonstrated that most of the variation in CO₂ emissions per capita can be explained by real GDP per capita and real energy prices. Therefore, to reduce CO₂ emissions per capita one must either reduce real GDP per capita or increase real energy prices, assuming no change in technology. The relative magnitude of the elasticities in the various models means it is much easier to reduce CO₂ emissions by lowering real GDP per capita than by increasing energy prices. Of course, any government policy that proposed to meet the Kyoto target for reducing greenhouse gas emissions by reducing real GDP per capita would likely not be endorsed by the population.

If the government chose to reduce CO₂ emissions by increasing the real price of energy then it would have to impose some sort of energy-specific tax. Governments in Canada had been involved in setting domestic prices for oil and natural gas from 1973 until about 1985. Since 1986, energy markets (not governments) have determined oil and natural gas prices in Canada. The federal government has repeatedly stated recently that it would not impose any sort of energy-specific carbon tax.

The government of Canada expects to be able to meet its Kyoto target for reducing greenhouse gases through technological improvements that reduce energy intensity in economic activity. Therefore, the government is primarily focusing on the energy intensity component. Overall energy intensity has been generally declining in Canada since about 1973. Canadian energy consumers have already made significant shifts away from oil into natural gas and electricity. Unless government gets involved in setting fuel prices there is no obvious method to direct energy consumers to shift away from carbon-intensive fuels.

If the Canadian government were to use energy-specific taxes to induce consumers to reduce CO₂ emissions then what impact would it have on the economy? To fully assess the impact it is necessary to use an econometric model that integrates the energy sector and the macro-economy. Such a model shows that relatively large changes in oil prices would probably not lead to huge changes in key variables of the macro-economy. Consequently, the government could probably impose an energy-specific carbon tax without severely impacting performance of the macro-economy.

Canada’s CO₂ Emission Record from 1990 to 1996

CO₂ emissions in Canada and all other industrialized Annex I countries of the Asia-Pacific region (Australia, Japan, New Zealand and USA) have increased significantly between 1990 and 1996. Compared to 1990 levels, the countries agreed to reduce their greenhouse gas emission levels by 2008 to 2012 by 6% for Canada and Japan, 8% for New Zealand, and 7% for the USA; and Australia agreed to an 8% increase (Kyoto target). None of the countries are close to meeting the target.

The growth of CO₂ emissions from China, India, Indonesia and South Korea is much larger than it is for the industrialized Annex I countries. The growth of CO₂ emissions range from a low of 33% in China to an astounding 75% for South Korea. It appears as if none of the countries in the Asia-Pacific region will meet the Kyoto target.

Future Levels of CO₂ Emissions from Canada?

Several organizations have provided a forecast of future levels of Canadian CO₂ emissions in 2010, the approximate year by which countries have committed to meet the Kyoto targets. The forecasts do not allow for unknown policies that might be introduced in the future to encourage consumers to reduce CO₂ emissions. The main sectors to contribute greenhouse gases are transportation (the largest), fossil fuel production, electricity generation, and industrial (each with roughly equal shares).

The US Energy Information Administration predicts that Canadian CO₂ emissions from all energy fuels will grow by about 1 percent per year from 1996 to 2010 with most of the incremental emissions arising from oil and natural gas and none from coal. On the other hand, APERC predicts that CO₂ emissions from Canada will increase by about 2 percent per year from 1995 to 2010, with substantial incremental emissions coming from the use of coal to produce electric power.

None of these organizations are predicting a decline in CO₂ emissions for Canada, which is necessary if Canada is to meet its Kyoto target.

Summary

The levels of CO₂ emissions from Canada are viewed from the context of other countries in the Asia-Pacific region. A simple econometric model identified energy prices and especially real GDP per capita as the primary explanatory variables for CO₂ emissions. The potentially small value for the price elasticity and the declaration by the Canadian government that carbon taxes would not be used to encourage consumers to reduce CO₂ emissions leaves the policy-makers with limited options in attempting to meet the Kyoto target levels of emissions. Judging by the growth of CO₂ emissions from 1990 to 1996 in other Asia-Pacific countries, policy-makers everywhere in the region are having difficulty creating an environment that would convince consumers to change their consumption habits.