Lawyers in Canada: Davis LLP - Legal Advisors Since 1892

EU learns from cap-and-trade mistakes

Submitted by Andrew Lord.

The EU has been extensively criticized for doling out too many greenhouse gas emissions allowances during the first phase of the European Trading System (EU ETS). The EU Commission recently responded by announcing that it has adjusted the EU-wide cap for Phase II (2008-2012) to give Members an average of 10% fewer emissions allowances.

The 10% reduction was confirmed by Environment Commissioner Stavros Dimas on October 26, 2007. The remarks were included in the announcement that the EU Commission had finalized the Phase II allowances for Bulgaria, the last of the countries to have their national allocation plans approved.

Several countries received significantly fewer allowances than they had requested. Bulgaria's allowances, for example, fell 37% of expectations. According to one source, Hungary, Latvia, Malta and Lithuania, Poland and the Czech Republic all plan to challenge the decisions of the EU in court on the basis that their meager allotments will unduly harm their industries.

However, overall reaction to the tougher targets has been positive in the EU . Many members were eager to prevent a collapse in the price of carbon similar to that which occurred during the first phase. Assuming the new scarcity drives up the price of carbon in the EU, trading under the EU ETS may provide a more reliable source of funds and financing leverage in the next 5 years.

BC Builds Climate Action Partnerships Through ICAP

Submitted by Daniel Jarvis.

On October 29, 2007 Premier Gordon Campbell signed on to the International Carbon Action Partnership (ICAP) on behalf of British Columbia at a summit in Lisbon, Portugal. ICAP is a new international forum in which governments and public authorities that have established or are actively pursing mandatory greenhouse gas emissions cap and trade systems will share experiences and best practices on the design and functioning of emissions trading schemes. The other founding members of ICAP include the other members of the Western Climate Initiative (Arizona, California, Manitoba, New Mexico, Oregon, Washington), the Northeastern U.S. members of the Regional Greenhouse Gas Initiative (Maine, Massachusetts, New Jersey, New York), New Zealand, Norway, the European Commission and the following EU Member States: UK, Germany, Portugal, Ireland, Italy, France and the Netherlands.
ICAP’s role is to open the lines of communication in order to contribute to the establishment of a well-functioning global cap and trade carbon market. To that end, ICAP will serve as a forum for collaboration between its members in order to develop carbon markets and assist with future linking of emissions trading schemes. This role does not supplant the UN process, but rather works to support the UN Framework Convention on Climate Change (UNFCCC) climate change goals.
By signing on to ICAP, Premier Campbell is signalling that BC wants to play a pivotal role in the process of developing a functional regional carbon market, one which will integrate well within a global emissions trading system. As Campbell noted, such a global system “will boost demand for low-carbon products and services and drive innovation as the entire world looks for efficient, cost-effective ways to cut carbon emissions.”

BC's Climate Change - an Update and a Carbon Tax

British Columbia has been making leaps and strides in developing its greenhouse gas policy over the past nine months. In February the Province released the 2007 Energy Plan, which announced a policy goal of energy self sufficiency, and carbon neutral generation. This was followed up a couple of weeks later with the 2007 Throne Speech and then the 2007 Budget.

Over the intervening nine months the government has attempted to work on this issue with the other Premier's of Canada, directly with Alberta's Premier, joined the WRCI and has entered into side agreements with Washington, Oregon and California.

September 28, 2007, Gordon Campbell announced British Columbia's plan for tackling climate change. Some of those goals include:

• Legislation will also be introduced next spring to allow for the creation of market mechanisms and make B.C. the first province in Canada to legally require “hard caps” on GHG emissions. Those caps will be used as part of a “cap and trade system” that is scheduled to be developed by next August through the Western Climate Initiative.

• Sectoral symposiums will take place to discuss GHG emission reduction strategies with forestry (Prince George), mining (Terrace) energy (Fort St. John) waste and landfills (Nanaimo) and agriculture (Kamloops).

• Further legislation will be introduced this fall to require all Province of British Columbia entities, including Crown agencies, to be carbon neutral by 2010. All public sector organizations, including school boards and health authorities, will be required by law to produce annual public reports on their progress.

*All government travel will be required to be carbon neutral starting this year.

• Starting this fiscal year, for every tonne of GHGs associated with official government travel, the Province will invest $25 in a new BC Carbon Trust.
• Greenhouse gas emissions reduction strategies and targets will be legally required in all official community plans and regional growth strategies.
• Municipalities will be given the power to waive development cost charges as a way to encourage green developments, small unit housing and small lot subdivisions.
• All new government buildings or facilities shall be built to a minimum LEED Gold or equivalent certification.
• Legislation will be introduced next spring to require the adoption of California tailpipe emission standards to be phased in from 2009 to 2016.
• B.C. will be the first province in Canada to legally adopt California’s low carbon fuel content standards, a requirement that will reduce carbon intensity of all passenger vehicles by a further 10 per cent by 2020.
• B.C. will implement a five per cent average renewable fuel standard for diesel by 2010 and support the federal government’s plan to increase the ethanol content of gasoline to five per cent by 2010.
• The Province will provide an additional $50 million this year for BC Transit to purchase new, clean buses and expand public transit service across B.C.

In the coming weeks, government will lay out a vision for transit. It will be on a scale and scope aimed at making B.C. a global leader in public transit.

Many of these were previously announced. Today however, Finance Minster Taylor gave us the first hint of the 2008 Budget. Carbon Taxes for British Columbians.
Details are very limited to date, with the prime example given being a tax on gas, or on the extraction or importation of oil.

As always, we'll keep you posted as we get more info on Canada's developing carbon regime.

Quebec's Carbon Tax - A Primer

Quebec has taken active steps towards a fight against climate change and to meet the 2012 Kyoto Protocol with its 2006 - 2012 action plan to reduce Quebec's greenhouse gas emissions. One of the main objectives of the action plan is to reduce Quebec's greenhouse gas emissions by 10 million tons annually and in order to achieve this objective Quebec introduced a new carbon tax. The carbon tax is implemented through a new fund, worth $1.2 billion, which will be established over a six year period and will be capitalized by yearly contributions to be made by certain energy distributors in 4 equal instalments. The intend of the fund is to grant financial assistance towards sustainable development.

The target group affected by the new carbon credit are the fuel distributors. The definition of fuel distributor has been defined broadly and included players such as the mining industry, steel industry, aluminium industry, cement manufacturing plants, forestry etc. As a result, some concerns and criticism have been raised. The criticism of the definition and hence the groups affected by the carbon tax is based on the argument that the annual contributions to be paid by fuel distributors to the fund will place significant financial burden on various sectors and corporations, resulting in some corporations not being able to overcome this burden. In addition, the petroleum sectors has stated that it will not assume the costs of the carbon tax resulting in a higher cost to consumers. Consequently, the target group for this new carbon tax is being examined and exemptions for certain groups are contemplated.

Insurers place a premium on climate change

Submitted by Andrew Lord.

With the risk of climate change threatening to swamp the global insurance industry, more and more insurers plan to stay afloat by developing new and innovative products.

Ceres, a coalition of investors and environmental groups, released a report on the insurance industry's response to climate change on October 18, 2007 (see "From Risk to Opportunity: Insurer Responses to Climate Change - 2007"). Authored by Dr. Evan Mills, scientist for the Intergovernmental Panel on Climate Change, the report finds that the insurance industry introduced hundreds of new products and services in 2007 to respond to the risks of climate change. Most of the innovation is occurring in Europe, with the U.S. lagging noticeably behind. While the pace of innovation increased sharply in 2007, only about 1 in 10 insurers are visibly developing climate change related products. Ceres is therefore calling on insurers, particularly in the U.S., to match the scale of their response to the scale of the problem.

The new products introduced in 2007 address the needs of both commercial and individual policy-owners. Around 19 insurers worldwide offer pay-as-you-drive car insurance which tends to reduce driving by 10-15 percent. AIG created a green homeowners property insurance policy. Swiss Re is selling weather-related insurance to small farmers in India. Several insurers are creating renewable energy products to allow policy-holders to participate in the fast-growing emissions credit market.

These innovative products are not the first sign that the insurance industry believes climate change is a real risk. In recent years, insurers have withdrawn policies from over one million U.S. coastal homeowners. However, the effects of climate change will not be restricted to coastal flooding. Some European insurers have even warned that climate change threatens the solvency of the insurance industry (which is the world's largest industry, generating $4 trillion in premium revenue in 2006). Insurers will therefore be forced to continue to innovate - and to put a price on the risk posed by climate change.

The Carbon Disclosure Project: Progress despite government inaction

Submitted by Andrew Lord

Businesses and investors want to do something about climate change, but they need the government to make the market for change.

On Wednesday, October 10, the Conference Board of Canada hosted the Toronto launch of this year's reports of the Carbon Disclosure Project (the "CDP"). The CDP is an annual voluntary survey of FT500 and Canada 200 companies conducted on behalf of 315 institutional investors who manage over USD $41 trillion in assets. Survey respondents not only disclose their greenhouse gas emissions, but also report on their perception of and response to the risks and opportunities presented by climate change. A copy of the CDP Report on the Global FT500 is available here (the Canada 200 Report was not available online at the time of posting).

Jeffrey Simpson of the Globe and Mail was the master of ceremonies for the Conference Board of Trade event. The launch reviewed some of the key findings of the CDP and provided an opportunity for several luminaries to share their thoughts on the issues of carbon emissions disclosure and climate change. Presenters included the following:

• Jeffery Rubin, Chief Economist, CIBC World Markets
• Lynn Patterson, President and Head of Global Markets Canada, Merrill Lynch
• David McCann, Vice-President, Head of Relationship Investments, CPP Investment Board
• Alan MacGibbon, Managing Partner and Chief Executive, Deloitte & Touche LLP
• Paul Dickinson, Chief Executive, Carbon Disclosure Project
• David Greenall, Principal Research Associate, The Conference Board of Canada
• Matthew Kiernan, CEO, Innovest Strategic Value Advisors
• Robert M. Griffin, President and CEO, CSA Group

Several related themes emerged over the course of the launch and are reflected in the CDP reports. First, business leaders and investors are increasingly concerned about the implications of climate change for business. This conclusion resonates with the declaration on October 1 by the Canadian Council of Chief Executives that "climate change represents the most pressing and daunting issue" that the world faces today. Second, putting a price on carbon is the key to addressing climate change in the global economy. As Jeffrey Rubin put it, "price must ration demand." Third, the most effective way to put a price on carbon is for the government to impose a cap on emissions. Once the cap is in place, the market will dictate the price at which the scarce commodity of carbon emissions trades. Finally, in the face of uncertain future regulations, some companies are voluntarily reducing emissions - but most are doing nothing. Mr. Rubin therefore concluded that "what we need is for governments to mandate absolute reductions in emissions now."

Assuming that governments will respond to this call to action, forward-thinking companies must understand where they will stand in a carbon constrained world. One of the most striking conclusions of the CDP Report on the Global FT500 is that there is a huge variation in climate change risk both within and across industrial sectors. Matthew Kiernan therefore characterized climate change not as a peripheral concern, but as a globally transformational issue of competitive advantage. He sees initiatives like the CDP, as well as mandatory disclosure regulations and cap-and-trade systems, as ways of revealing the latent risks and opportunities presented by climate change. As the true competitive landscape is illuminated, investors will reallocate their money accordingly. Prudent companies therefore need to consider the implications of participating in voluntary disclosure initiatives today and the opportunities of preparing for mandatory requirements in the future.

Will the US be the only one left?

The Kyoto Protocol has been signed and ratified by every developed country in the world, with the exceptions of the US and Australia. Australia signed the treaty in 1997. Ironically, although it was the only country that had a cap on emissions that was above the countries 1990 levels, Australia still has not ratified the Protocol, and is thus not bound to its obligations under the treaty.

The only other developed nation which has refused to sign or ratify the treaty, is the US. In both countries however there is a strong local support for capping and reducing greenhouse gas emissions. Numerous provincial/state governments have begun working on climate change policies, many of which include a cap and trade system. The big questions is when will the federal governments in those countries begin moving on similar committements.

Perhaps a change of government is required? The next US elections will be in November of 2008, likely too late for any change in the US position regarding the 2008-2012 Kyoto compliance period, but Australia will probably have elections before the year end. Indeed, it appears that, if the pro-Kyoto Labour Party is elected in late November, Australia may ratify the protocol before the next convention of the parties in Bali on December 3.