Wednesday, November 12, 2014

Keystone question: if US were to meet China accord goals, would Keystone be economically viable?

To widespread surprise, the US and China reached an agreement on carbon emissions:

U.S. and China Reach Climate Accord After Months of Talks -

… United States would emit 26 percent to 28 percent less carbon in 2025 than it did in 2005 …

Which brings up a question that seems obvious, but also goes unasked.

If the US were to meet this accord, we’d have reduced carbon emissions by some combination of Pigovian taxation, regulation and technological innovations. However we achieve that end, wouldn’t this reduction make Keystone and similar projects economically unviable?

If so, then the Keystone project is a bet that the US will fail to meet this goal. Further, it will be a powerful sunk cost incentive to ensure that we fail.

If Keystone’s business case makes sense in a world where we reduce carbon emissions by 28% relative to our 2005 baseline then build it.

Otherwise, don’t.

I don’t think this is very complicated.

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