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Canadian climate change policies off in every direction

It has been a little over a year since climate change suddenly leapt from being an important issue with occasional press, to one where you can always find at least one good story in your local paper, if not a cover page or a slew of articles scattered throughout the local, business and national sections.

Of course, this has been an issue that has been on the federal governments agenda for almost twenty years. Various provinces have been looking into the impacts of climate change, and various policy tools for reducing the human contributions to this problem for ten or fifteen. Indeed, BC even conducted studies on market mechanisms to curb certain greenhouse gases back in the 1990's. But still Canada continues on a path that is, for the most part, business as usual.

Over the last few years we have seen a number of national plans emerge from minority governments or opposition parties. It would appear that the current federal government has a plan, although the targets it contains are much criticized. The provinces have all begun forming policies, see for example Alberta, BC and Ontario.

In addition, several provinces have joined, or stated an intent to join the Western Regional Climate Action Initiative, the Climate Registry or the Regional Greenhouse Gas Initiative.

Now the question is, what policy and, what standards and market mechanisms will apply in any given province? Do businesses have to comply to two standards in each province, and potentially several if they operate across the country? With the Premier’s conference next week in Vancouver, Premier Campbell is hoping to pull the provinces together and to blow past the federal government on this issue. Alberta however appears to be pulling in the opposite direction and has announced a plan which falls short of the national plan. Indeed, 'real' reductions for 2050 are expected to be above the 1990 levels which the vast majority of the world uses as a bench mark for reductions. So where are we headed? It is still too early to say where the firm target will be, or how we will get there, but it is clear that every level of government is ready to address the issue. There is one thing for sure, and that is the fact that new laws, incentives and penalties will be emerging to push greenhouse gas emissions downward in Canada.

UN adopts new Forest Accord

The UN General Assembly has adopted a new forest accord aimed at protecting forests in large part to support the communities that rely upon them for fuel, food, medicine and income. Although lauded by its sponsors as a major step towards controlling deforestation, the accord is non-binding on nations. However, it does provide forest management standards aimed at preserving forests for forest users.

Other ongoing international efforts to curb deforestation include the Reduced Emissions from Deforestation and Degradation program, arising out of the December UN climate conference in Bali, which pays local communities to refrain from clearing forests.

Oil Sands Not Up to U.S. Snuff?

Submitted by Dan Jarvis and Adam Nott

A new fuel requirement in section 526 the Energy Independence and Security Act of 2007, signed by President Bush in December 2007 will prevent U.S. federal agencies from buying vehicle fuel derived from non-conventional sources, unless the life cycle of its greenhouse-gas emissions is the same or less than that of conventional petroleum. In particular, section 526 states:

"“No Federal agency shall enter into a contract for procurement of an alternative or synthetic fuel, including a fuel produced from nonconventional petroleum sources, for any mobility-related use, other than for research or testing, unless the contract specifies that the lifecycle greenhouse gas emissions associated with the production and combustion of the fuel supplied under the contract must, on an ongoing basis, be less than or equal to such emissions from the equivalent conventional fuel produced from conventional petroleum sources.”"

This legislation would have an impact on the Alberta's Oil Sands, which are deposits of bitumen, a molasses-like viscous oil that will not flow unless heated or diluted with lighter hydrocarbons and underlie 140, 200 square kilometers (54,132 square miles) of primarily northern Alberta; an area larger than the state of Florida.

The legislative action is viewed as a part of a growing move to take into account all greenhouse gases caused by the production and use of gasoline and other fuels. It puts unconventional petroleum, such as the synthetic crude from Canada's oil sands at a disadvantage compared to easy-to-harvest oil from the wellhead.

The Administrator of the EPA has the ability to determine the “lifecycle greenhouse gas emissions” related to the full fuel lifecycle. This will include all stages of fuel and feedstock production and distribution, from feedstock generation or extraction through the distribution and delivery and use of the finished fuel to the ultimate consumer. It will also include all direct and significant indirect sources of greenhouse gases, including specifically the impact from a change in land use.

The focus on the lifecycle as a whole means there are opportunities for reducing emissions in certain parts of the chain to help reduce higher emissions in other parts of the lifecycle. Finally, the legislation does not appear to preclude the use of offsets within the lifecycle to decrease the greenhouse gas intensity of the project.

NTREE challenges Canada to set a nation-wide price signal for carbon

Submitted by Andrew Lord.

"Carbon tax in the cards to help cut emissions," announced the Globe and Mail on January 7, 2008. The headline was referring to the recommendations of the National Round Table on the Environment and the Economy ("NTREE") in its new report, "Getting to 2050: Canada's Transition to a Low-emission Future," released the same day. However, the report does not exclusively recommend a carbon tax. Rather, it calls upon the government to "implement a strong, clear, consistent and certain GHG price signal across the entire Canadian economy as soon as possible." That price signal may be in the form of a carbon tax, a cap-and-trade emissions market, or both. The report recognizes that some industrial sectors may not respond effectively to such a price signal. NTREE therefore recommends that the government deploy complementary regulatory policies to ensure that these sectors reduce their emissions.

The report also emphasizes that an integrated approach will be required. NTREE therefore calls on Canada to establish a Canada-wide plan "that leads to better coordination of complementary federal, provincial and territorial GHG emission reduction policies." It also notes that Canada must work in concert with the rest of the world to achieve its goals.

In a not-so-subtle jab at political posturing, NTREE made it clear that the government must not just develop a policy framework, but must also ensure that the policy is actually implemented promptly by government, industry, capital markets and at the consumer level. This call to action is consistent with the recent Deloitte report (discussed in a separate posting) that concludes that regulatory uncertainty is the primary barrier to the development of corporate greenhouse gas management programs.

David McLaughlin, CEO of NTREE, is optimistic that a strong price signal and predictable regulatory regime would Canada to reach its stated goal of reducing emissions by 65% from 2006 levels by 2050. Furthermore, he believes that the economic impact of the transition to a lower-carbon economy would be minimal. However Glen Murray, Chair of the NTREE, noted that the proposed price signal could be most "significant" to Alberta's oil producers and to Ontario's manufacturing sector. The government will have to craft its policies to ensure that all regions in Canada are treated fairly. He also acknowledges that Canada must take care not to put its industry on an "unlevel playing field" with the rest of the world. (The concern that emissions regulations could distort global competitiveness is not a new one. As noted in a separate posting, trade wars may be looming as Europe considers imposing duties on countries outside of the EU who fail to regulate GHG emissions.)

Canada's Environment Minister John Baird released a statement saying that Canada would "consider the roundtable's recommendations" and agreeing that "we must work in concert with the world, that policy certainty beyond the short-term is central, that technology deployment is imperative, and that an integrated approach to climate change and air pollution should be pursued." However, the CBC reports that Mr. Baird remains steadfastly opposed to the idea of a carbon tax. As Mr. Baird is keen to point out, the Conservatives have remained consistent on this point (for example, see this story from almost a year ago). In contrast, the Liberals appear to have softened their objection to a carbon tax, although they would prefer a cap-and-trade system.

Recent Canadian climate change developments

Submitted by Andrew Lord.

Deloitte released a survey entitled "Managing greenhouse gas emissions: Mitigating risks and uncovering opportunities" (PDF) which considers how Canadian companies perceive and are reacting to the climate change issue in Canada. The report notes that climate change issues are "no longer just for the activists" and are "quickly becoming critical factors for corporate strategy and business competition." Shareholders, both individual and institutional, are increasingly pushing their boards to act on climate change issues. However, the survey found that greenhouse gas management continues to be treated by most corporations as an environmental compliance problem and not as a strategic business opportunity. Respondents cited regulatory uncertainty as the primary barrier to the development of integrated greenhouse gas management programs. The more quickly governments, both domestic and foreign, can eliminate that uncertainty, the more quickly corporate leaders will be able to make climate change a strategic priority rather than a regulatory headache.

Canadian Environment Minister John Baird announced during the UN Climate Change Conference in Bali that Canadian companies must submit their 2006 greenhouse gas emissions data to Environment Canada by May 31, 2008. The data will be used to help implement the Conservatives' climate change plan which aims to reduce emissions by 20% by 2020. Establishing a reliable and complete greenhouse gas inventory is a necessary first step in tracking the effectiveness of Canada's climate change plan. However the plan, which Baird touted as "the toughest plan in Canadian history to clean up our air, tackle climate change, and protect our environment," has been heavily criticized by the opposition parties, NGOs and other world leaders. The 20% figure is measured against 2006 emissions levels, whereas the global standard benchmark is 1990 emissions. Canada's target is therefore much less than the 25-40% reduction that the IPCC recently identified as the minimum level of reductions needed to avoid global warming in excess of 2 degree Celsius. Furthermore, the government proposes to advance its goals in the near term by setting emissions intensity targets. Intensity targets, which cap the level of emissions permitted per unit of industrial production, will not necessarily reduce overall reductions if industrial production continues to growth.

Quebec Environment Minister Line Beauchamp announced that Quebec will adopt California's vehicle emissions standards. BC and Manitoba have also committed to adopt the stringent California standards, which are also being implemented by about 16 U.S. states. Harper and Bush both reject calls for their respective federal governments to follow suit.

Greenhouse gases are the new dolphins: trade wars brew over GHG regulations

Submitted by Andrew Lord

Reuters News reports that the European Commission is debating whether to implement a carbon tariff on imports from countries that have taken insufficient steps to tackle their greenhouse gas emissions. Reminiscent of GATT/WTO disputes over US environmental policies in the 1990s, a carbon tariff would almost certainly trigger trade disputes on the basis that the EU was attempting to impose extraterritorial environmental laws.

Europe continues to lead the world by unilaterally setting mandatory emissions reductions targets for its Members. While other countries like Canada dither on a way to price carbon, the EU's ETS cap-and-trade system rolls into its second phase this year. As discussed in an earlier posting, the EU has adjusted the allocations in Phase II to ensure that the market for EUAs is strong from 2008-2012. Assuming that EU Members will continue to pay a meaningful price for their emissions, a carbon tariff on imports would help level the playing field with companies in countries that have yet to put a price on carbon. The tariff could take the form of a requirement that importers buy EUAs.

Previous environmental disputes under the GATT and WTO trade regimes have demonstrated that countries do not respond kindly to such measures. The "tuna-dolphin" and "shrimp-turtle" cases in the 1990s concerned efforts by the United States to impose its environmental standards for catching tuna and shrimp on foreign fisherman by restricting imports of products caught in ways that killed dolphin and sea turtles. The exporting nations objected on the basis that the US's trade measures were a disguised extraterritorial application of domestic environmental law. The trade panel decided against the US in both cases (although those decisions were never formally adopted). It is therefore likely that a nation subjected to an EU carbon tariff could mount a case before the WTO.

An article in IDEAcarbon on January 4, 2008 (available by subscription only) points out that tariffs are not the only means of addressing the competitive distortion produced by asymmetrical international emissions regulations. In setting allocations for Phase II of the EU ETS, some nations are doling out more allowances to industries that must compete globally than to those that focus on the domestic market. For example, the UK caps for the cement and steel sectors will be close to business-as-usual, while the cap for domestic power producers will be over 30% below business-as-usual.

Japan accepts targets and establishes $10 billion fund

Japan will agree to numerical targets to cut its greenhouse gas emissions, changing the stance it took at the Bali conference in December 2007.

Japan will also establish a $10 billion "finance mechanism", over a period of five years, to provide low interest loans to assist developing countries to reduce greenhouse gas emissions.

Japan has selected 41 "priority countries" for assistance under the finance mechanism. The 41 countries, which include China and India, are mainly in Asia, Africa, and Central and South America. Countries were selected taking into account their funding needs, their own undertakings to combat global warming, their international influence, and the degree of their understanding of and cooperation with Japan's initiatives.

Eleven of the 41 countries have been designated as "early implementation" countries; these are: are: Kenya, Ethiopia, Gabon, Burkina Faso, Ghana and Madagascar; Indonesia and Malaysia; Guyana and Mexico; and Micronesia.

The Japanese Prime Minister, Yasuo Fukuda, is expected to announce these measures at the World Economic Forum in Davos, Switzerland in January 2008.

Sources:
http://uk.reuters.com/article/environmentNews/idUKT29671520071230
http://search.japantimes.co.jp/cgi-bin/nn20080106a5.html

Environmental Financing and Regulationin Asia

As part of the continued effort to highlight development in emission trading, renewable energy and other environmental financing opportunities, Davis LLP will now be offering a regular update on developments in Japan and other areas in Asia. This series will build on Davis LLP's expertise in environmental financing, and the firms long history of working with Japanese clients investing in Canada and vice-versa.