Carbon trading is a very popular cause. It matches the environmental concern of the left with the market solutions of the right. Canadians tend to like it because certain types of Americans don’t. It could be very bad news for Canada both as an exporter and as a consumer.
Many investors are treating Canada as an emerging oil superpower. Although Canadian reserves are in expensive tar sands they are massive. They are also secure compared to much of the rest of the world, being across a very secure land border over which there has not been a war since 1812 (strictly speaking the 1812 war did not involve the Western part of Canada where most of the oil is, but let’s not worry too much about that). This we are told is a great thing which can only mean prosperity for Canada.
And we agree. Our quibble is not that lots of oil will leave Canada poorer, but that it has already been priced in through a hundred and one different ways and any readjustment will be a de facto loss of national output as the present adjusts to lower returns in the future.
And this is where carbon trading comes in. Essentially the idea is to make us consume less energy by making us pay more for it. This has an obvious effect on energy producers, such as tar sands oil producers. It is important to realise that not all oil producers are treated equally. Essentially rising costs will affect more expensive oil producers more than it affects cheaper producers.
This is because like most businesses oil is drilled in order to produce a profit. If oil costs $8 a barrel to produce as it does in some parts of the Middle East then it will be profitable to produce it when the oil price is $10, $20 or $40 per barrel. If it costs $35 a barrel to produce then it is profitable at $40 but it stops being profitable if the oil price falls to $30. Essentially the oil industry will shut down in areas where there are high costs of extraction as it has done in the North Sea off Britain a number of times.
Carbon trading can be seen as a way of either adding costs or lowering the price realised by the buyer. It doesn’t really matter. It simply makes marginal oil fields uneconomic. And many of Canada’s oil fields are marginal.
Canada is not simply a future producer of oil; it also exports the incredibly unfashionable energy source of coal. Carbon trading is designed to make coal less attractive as an energy source.
Canadians aren’t just big producers of energy; they are also some of the highest per capita consumers of energy as well. This is not because they are sick of environmentalists but because they live in a big country with long distances and a cold country with high heating bills. If there are high heating and transport bills this will mean less spending.
Carbon trading may be a necessary measure to combat global warming, but Canada will bear much of the cost.
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