The Canadian government’s follow-the-U.S. strategy on climate policy is still paying off, in petro-dollars. As I mentioned back in December, Canada gambled that the U.S. won’t make any environmental moves that hurt Canada’s oil industry. Of course that is a safe bet: America imports most of its oil, and Canada is its biggest foreign supplier. But with electricity, the game is different. And the Canadian government has signalled its first bad strategic move.
The Globe and Mail reports that the federal environment minister told a group of electricity producers to switch from coal to natural gas. This is more public relations than anything else; electricity in Canada is a provincial not federal matter. But the feds can tilt the game in favour of natural gas. How? By not supporting nuclear, gas’s only serious non-coal competitor in the baseload power market.
Why will switching to gas hurt Canada? Canada trades electricity with the U.S. America generates most of its power with coal. Historically coal has been much cheaper, kilowatt-hour for kilowatt-hour, than gas. Though there is a giant lobbying and advertising effort south of the border to spin natural gas as the answer to climate change, the U.S. system will remain coal-fired for a long time to come.
If and when a carbon price comes into effect, either through cap and trade or an outright tax, chances are it will be kept low—just so that it is politically palatable. This gives coal the advantage in carbon-constrained power markets.
Observers—including Canada’s government—shouldn’t confuse the U.S. federal government’s current inaction on climate change as an indicator that no meaningful climate policy will emerge from the U.S. Even though the latest incarnation of a senate climate bill hit a major snag Sunday when it lost the support of a key Republican, there is clearly interest in the senate in putting a bill forward. And if such a bill were to contain provisions for beginning a cap and trade scheme in the powerr generation sector—as the most recent bill apparently did—then there’s your carbon price. Plus, there are plenty of ways the U.S. federal government can act without Congress (see article).
You might wonder how coal could have an advantage over gas, when it emits twice as much CO2 as gas. The answer is found in something called the Dark Green Spread, which is the difference, in fuel cost, between coal- and gas-fired power in a carbon constrained market. Kilowatt-hour for kilowatt-hour, coal has been so much cheaper than gas that it would take a very high carbon cost to overcome this differential.
In the only functioning carbon market, the EU ETS, political collusion has kept the price of carbon low (see article). This has enabled coal-based power generators to underbid their gas-fired competitors in wholesale power markets. Yes, they emit more carbon, but carbon is so cheap that they can both underbid their competitors and still make a profit.
If the price spread between coal and gas remains as it has been for the past five years, then Canadian gas-based generators will be at a disadvantage when they compete with coal-based American generators. Sure, Canada will have a moral advantage. But try taking that to a bank.
Of course, high carbon prices would overcome the Dark Green Spread. But what’s more likely: a high carbon price, or a high gas price?
The Canadian government needs to support nuclear power.