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International Energy Agency launches World Energy Outlook 2009 in London

The International Energy Agency>International Energy Agency ("IEA") today launched its annual flagship publication in London. The World Energy Outlook 2009 (WEO 2009) looks at the impact of the economic downturn on energy use, CO2 emissions and energy investment and what will be required at the UN climate conference in Copenhagen to put together an agreement that stops global temperatures rising at a price that is affordable. The WEO 2009 also focuses on the natural gas resource base, current trends and the role gas will play in the future energy mix. Finally, the publication includes a review of energy in Southeast Asia, looking at that fast-growing region and its implications for global energy markets.

The IEA's Executive Director, Mr. Nobuo Tanaka declared that "World leaders gathering in Copenhagen next month for the UN Climate summit have a historic opportunity to avert the worst effects of climate change. The World Energy Outlook 2009 seeks to add momentum to their negotiations at this crucial stage by detailing the practical steps needed for a sustainable energy future as part of a global climate deal" and added that "WEO 2009 provides both a caution and grounds for optimism. Caution, because a continuation of current trends in energy use puts the world on track for a rise in temperature of up to 6°C and poses serious threats to global energy security. Optimism, because there are cost-effective solutions to avoid severe climate change while also enhancing energy security - and these are within reach as the new Outlook shows".

In conjunction with the WEO 2009, the IEA has also released an Executive Summary which provides an overview of the publication's key findings and topics, as well as a Fact Sheet, which provides data in a bullet-point format on the following questions and issues: (1) The sustainability of our current energy pathway; (2) The Impact of the financial crisis on Energy Investment (3) Natural gas' role in the global energy mix; (4) What a low-carbon energy future might look like; (5) The impact of the financial crisis on the outlook for CO2 emissions and global climate; (6) Assumptions on Energy Prices, volatility and the future of cheap energy.

Copies of the World Energy Outlook 2009 can be ordered from the IEA Bookshop.

Canada will face significant challenges in Copenhagen

Canada will face significant negotiating hurdles in Copenhagen as world leaders attempt to negotiate a successor to the Kyoto Protocol this December. While the world is begrudingly acknowledging that no treaty will be concluded in Copenhagen, the negotiations will give countries the opportunity to define their positions for climate change negotiations that will continue into 2011. Previews of Canada's positions have generally not been received well, particularly by developing nations.

As it stands, Canada will face four principal negotiating challenges in Copenhagen:

1) Canada's track record under Kyoto

Canada committed to reduce its greenhouse gas emissions by 6% from 1990 levels by 2012 under the Kyoto Protocol. Neither the current Conservative government nor its Liberal predecessor made any progress towards this goal. In fact, Canada's emissions are currently tracking about 26% above 1990 levels. These facts are well-known around the world. Canada therefore risks being perceived both as a climate villain (at least when emissions are measured on a per-capita basis) and as a country that has difficulty following through on its international commitments.

2) The state of Canada's domestic initiatives

Many countries are seeking to strengthen their negotiating position in Copenhagen by passing significant domestic climate change legislation before December (see e.g., India's recent announcements, which attempt to mandate emissions reductions indirectly through energy efficiency).

By contrast, the federal government's Turning the Corner plan, which was originally scheduled to take effect in 2011, continues to languish. Canada's Minister of the Environment Jim Prentice has suggested several times this year that the government intended to produce comprehensive climate change policies before Copenhagen. However, Le Devoir, a Quebec newspaper, reported two weeks ago that Mr. Prentice said the government no longer intends to do so. The continued failure of the federal government to advance the climate change file is likely related to the next two issues.

3) The US's lack of progress

Following the strategy of many countries, President Barack Obama has attempted to enact meaningful climate change legislation before Copenhagen. While the Waxman-Markey bill made its way through the House of Representatives (although by no means unscathed), it remains bogged down in the Senate. The US will not finalize its domestic strategy for managing climate change before December and will therefore not be in a position to agree to any definitive international agreement.

The only definitive position that Ottawa has adopted with regard to the file is that it will not do anything to jeopardize its trading relationship with the US - in other words, Canada will follow the lead of the US. Given the delays in Washington, Canada has been unable to finalize its own domestic lesgilation and will likely not be able to agree to anything substantive in Copenhagen.

4) The expected cost of climate change legislation

Surprisingly, the Canadian federal government has never undertaken a comprehensive study of the economic impact of proposed climate change legislation (or of failing to mitigate climate change). In a report sponsored by TD Bank Financial Group, the Pembina Institute and the David Suzuki Foundation commissioned the economic modelling firm M.K. Jaccard and Associates Inc. to conduct an in-depth study of federal and provincial government policies to allow Canada to meet a "2 degree Celsius target" by reducing emissions to 25 per cent below the 1990 level by 2020. The report concludes that Canada's national GDP growth would slow from about 2.4 percent annually to 2.1 percent annually as a result of policies required to achieve the country's stated climate change objectives. However, growth in Alberta and Saskatchewan would have to be curtailed significantly more than in other provinces, as the oil and gas sector and coal-fired electricity plants in these provinces contribute disproportionately to Canada's overall emissions.

The report has triggered tremendous backlash both from these provinces, who invoked the spectre of a wealth transfer worse than under the much hated National Energy Plan, and from the federal Conservative government, whose power is anchored in the West. Alberta Minister of the Environment Rob Renner called the report "divisive". Minister Prentice called its conclusions "irresponsible and divisive and the economic costs unacceptable". TD Bank his since distanced itself from the report, saying that it does not endorse the conclusions.

The report nevertheless highlighted two issues. First, addressing climate change will not be cheap. Second, it will require the federal government to reconcile strongly divergent positions in the provinces (for further evidence of the heightened emotions that only Canadians can bring to questions of federalism, see this editorial in today's Toronto Star, which questions "how the oilsands is a Canadian problem when it comes to emissions, but an Albertan birthright when it comes to talk about the wealth it creates"). Having addressed neither issue domestically, Canada will be unable to deal with analogous issues under a multilateral international treaty.

Implications for Copenhagen

So what will Canada do in Copenhagen? Canada's historical role in such negotiations has been to act as a middle power that can help mediate negotiations between some of the bigger players. In Copenhagen, it appears that Canada will adopt a firm position characterized by:

• a desire to follow the US;
• a need to protect its resource driven economy; and
• an unwillingness to make emissions reduction commitments that are not also undertaken by developing economies like China, Brazil and India.

This approach has already been received poorly by many, as evidenced in part by reports earlier this fall that developing nations walked out on Canada during discussions regarding the basic form of the post-Kyoto agreement. Minister Prentice appears to be girding himself for similar reactions in the coming months. In a recent interview with the Montreal Gazette, Minister Prentice said "if the price of having strong, capable, tough negotiators at the table is being singled out and given 'fossil of the year' awards, then so be it. Bring it on."

U.S. - Canada Clean Energy Dialogue - First Report

Yesterday Canadian Environment Minister Jim Prentice and U.S. Energy Secretary Steven Chu delivered an update on the two nations' clean energy dialogue (CED), which was first announced when President Obama met with Prime Minister Stephen Harper in Ottawa this past February. The release of the report coincided with Prime Minister Harper's meeting in Washington D.C. with President Obama at which energy was on the agenda and after which Harper reminded the U.S. at a press briefing that: "[...] Canada is by far the largest supplier of energy to the United States. And [it is] determined to be a continental partner in dealing with the [...] linked problems of climate change and energy security [...]".

The three key areas on which Harper and Obama had asked their respective delegates to work together on under the auspices of the CED were: (1) The development and deployment of clean energy technology; (2) the building of a more efficient energy grid, based on clean and renewable generation; and (3) expanding R&D into clean energy.

As part of the countries' collaboration on carbon capture and sequestration (CCS), the report states that the countries will expand on existing collaboration in CO2 injection and storage testing, share information from large-scale CCS demonstration projects such as the Weyburn-Midale project in Saskatchewan, in which carbon dioxide is piped from the Great Plains Synfuels plant in North Dakota to an oilfield operated by EnCana and injected for use in enhanced oil recovery. The report goes on to insist on working towards a consistent regulatory framework between the countries, which would include compatible CCS project rules, standards, and monitoring, as well as verification and accounting principles. Bilateral meetings between Canadian and American CCS experts are planned in mid-2010 and 2011 to share best practices and provide updates on joint activities. The two nations intend to form the "Canada-U.S. CCS Collaboration" under the existing Trilateral Energy Science and Technology Agreement, which also includes Mexico and hope to formalize the arrangement through an implementation agreement by the end of 2009.

As a result of the continued growth in electricity demand, collaboration between the two nations regarding the North American power grid will focus on the open exchange of information and electricity research, development and deployment (RD&D), reliability standards, cyber security and interoperability guidelines. Upgrades to the electric power grid will aim to increase its efficiency and promote connection to clean energy sources, as well as the use of clean energy technologies.

Joint commitments regarding Clean Energy RD&D are meant to boost economic opportunities for the CED partners and the two are to develop a "Clean Energy RD&D Collaboration Framework" and a technology roadmap which would allow both nations to meet their respective 2050 greenhouse gas reduction targets. The Framework and Roadmap would notably foster a unique North American market through common codes, standards and incentives, along with collaborative research and development, sharing of information , facilities and scientific infrastructure.

The Canadian Environment Minister and U.S. Energy Secretary are expected to release the next CED report in the spring of 2010, ahead of the next bilateral meetings.

India announces energy efficiency "cap-and-trade" initiative

India's Prime Minister, Dr. Manmohan Singh, announced an ambitious new energy efficiency initiative for his country. The "National Mission on Enhanced Energy Efficiency" is intended to cut energy consumption by 5% and greenhouse gas emissions by 100 megatonnes by 2015.

The Mission comprises several complementary initiatives:

• a cap-and-trade system for energy efficiency allowances;
• expanded use of the global carbon markets, particularly the Kyoto Clean Development Mechanism, to fund energy efficiency projects;
• the creation of two new funds, one to provide guarantees to banks for loans to energy-efficiency projects and the other to support investment in the manufacturing of energy-efficient products and provision of energy-efficiency services; and
• the promotion of Energy Service Company ("ESCO") based upgrades to energy systems in buildings, municipalities and agricultural operations.

Of these initiatives, the proposed cap-and-trade system has attracted the most media attention (see Environmental Finance and Reuters). The Prime Minister's announcement describes it as a "Perform, Achieve and Trade" scheme whereby the government will assign energy efficiency improvement targets to businesses in energy-intensive sectors (the cap). Businesses that beat their targets will generate Energy Savings Certificates that can be sold to businesses that miss their targets (the trade).

The Prime Minister anticipates that the Mission will result in $15 billion of energy efficiency transactions, although it is unclear if these comprise only trades of Energy Savings Certificates or also other economic activity under the Mission.

The proposed system is squarely aimed at energy efficiency and does not provide for any direct regulation of greenhouse gas emissions. Nevertheless, it is suspected that the announcement was purposefully made in the run-up to the Copenhagen negotiations. India has steadfastly refused to agree to binding emissions reduction targets under the successor to Kyoto. The proposed energy efficiency scheme, which has the potential to reduce the country's emissions, will likely be held up at Copenhagen as evidence that India is willing to address climate change - but on its own terms.

Global carbon market to soften according to Point Carbon

As reported by Carbon Finance, Point Carbon, a leading provider of news and analysis about the carbon market, predicts that the value of the global market will shrink by a third in 2009. They expect the aggregate value of carbon credits to drop to EUR62.6 billion, compared with EUR92 billion in 2008. This is despite a 20% increase in the volume of transactions, an increase which is not nearly as pronounced as the 80% and 200% growth levels seen in the two previous years.

Point Carbon summarizes their findings as follows: "2009 will see a levelling off from the massive growth seen in the carbon market so far. How long this 'breather' will last is, for the most part, a question of how long, and how deep, the recession will play out."

The EU ETS will continue to be the dominant market, with an expected 3.8 billion tonnes to be traded.

2009 will be a leaner year for CDM and JI projects. Primary market transactions are expected to plummet 45% to 300 million tonnes. Combined with a weak CER price, uncertainty about the post-Kyoto framework, and the dry credit markets, this decline may put many projects at risk. Secondary market CER trades are, however, expected to climb 12% to 1.4 billion tonnes.

The Regional Greenhouse Gas Initiative in the northeastern United States will expand to occupy just under 6% of the global market, with an expected trading volume of 339 million tonnes in 2009.

Who is the New US Envoy?

Todd Stern, the newly anointed Special Envoy for Climate Change, was former President Bill Clinton's senior representative at the U.N. climate change negotiations in Kyoto. He is, like President Obama, a graduate of Harvard Law who has also authored a number of articles relating to climate change. He argues that climate change needs to be addressed, not only as an environmental issue, but as one that is inextricably linked to U.S. economic and national security interests. He is an advocate of a cap and trade system and contends that containing climate change will require nothing less than transforming the global economy from a high-carbon to a low-carbon energy base.

In his remarks following the announcement, Todd Stern referred to John Podesta as his mentor and expressed his gratitude. John Podesta, also a lawyer, is from Chicago and knows President Obama from his time there. He served as Bill Clinton's chief of staff in the second Clinton administration. He is one of three co-chairs on the Obama transition team and appears to play a very influential role in the administration as an advocate of cap and trade.

It is not likely a coincidence that Mr. Stern was named as special envoy on the same day that the new President directed the Department of Transportation to issue guidelines to require new cars and trucks to meet a standard of 6.7L/100km (35 miles per gallon) by 2020. In one of Mr. Stern's articles he stresses the importance of fighting climate change by requiring that vehicles be more fuel efficient. He wrote in 2007:

"Ours is a vision of an economy in which highly efficient vehicles dominate the roadways, service stations pump large quantities of low-carbon alter- native fuels, incandescent light bulbs are entirely replaced by compact fluorescents, and all buildings employ day lighting, solar heating and cooling, as well as highly efficient appliances and air conditioning."

(See the Centre for American Progress for the entire article).

As Secretary Clinton confirms, the appointment "sends an unequivocal message that the United States will be energetic, focused, strategic and serious about addressing global climate change and the corollary issue of clean energy”. What are the implications for Canada? Stay tuned.

Canada back on track with its Kyoto registry

Canada appears to be on track to launch a Kyoto-compliant registry for tracking transactions of greenhosue gas emission reduction credits. Recall from a previous posting that the UNFCCC's Compliance Committee had concluded in April that Canada had not established a registry system as required by the Kyoto Protocol.

Canada subsequently provided additional information about the progress of the registry to the UNFCCC's Enforcement Branch. An independent assessment report deemed the registry to be "sufficiently compliant with the registry requirements." As a result the Enforcement Branch decided to halt its investigation and no longer plans to impose sanctions for non-compliance.

With Canada's registry again on track, regulated entities in Canada may eventually be able to purchase Certified Emissions Reductions ("CERs") from Clean Development Mechanism ("CDM") projects. The federal government's emissions reduction plan contemplates allowing companies to satisfy up to 10% of their reduction obilgations by purchasing CERs.

Carbon markets boom

Posted by Andrew Lord

The voluntary market for carbon credits more than tripled in 2007 to USD $331 million, while the much larger regulated market more than doubled to USD $64 billion. Those are the conclusions of two significant carbon reports released last week.

Ecosystem Marketplace and New Carbon Finance released State of the Voluntary Carbon Markets 2008 last week. The report notes that the volume of credits traded increased from 25 million tonnes CO2 equivalent (tCO2e) in 2006 to 65 million tCO2e in 2007. The average price of a tonne of CO2 jumped by $2 to $6.10. However the price remained very volatile in 2007, ranging from $1.62 per tCO2e to about $300 per tCO2e. That volatility is a reflection of the perceived problems with the quality of some credits, a perception that the market tried to address by introducing a number of voluntary credit standards during the year.

Also released last week was the World Bank's State and Trends of the Carbon Market 2008. This report focuses on the regulated carbon market, particularly the allowance market under the EU Emissions Trading Scheme and the project market under the Kyoto flexibility mechansms (Clean Development Mechanism and Joint Implementation). The value EU ETS trades, which comprised 78% of the overall regulated market, more than doubled to $50.4 billion, with the average price creeping up from just over $22 per tCO2e in 2006 to around $24.30 in 2007. In the project market, the big story in 2007 was the emergence of a strong secondary market for CERs. The value of trades in the secondary market increased by a factor of over 10 to $7.4 billion. The secondary market was largely occupied by aggregators who purchased a portfolio of CERs and sold guaranteed CERs backed by the portfolio and, in some case, credit-enhanced through the aggregators' banks. At about 28%, growth in the value of trades in the primary CDM market was strong, but not as vibrant as that in the secondary market.

Canada fails to establish Kyoto registry - CERs may cease to be a compliance option

Posted by Andrew Lord

Canada has failed to comply with its administrative obligations under the Kyoto Protocol. In a report release April 17, 2008, the UNFCCC Compliance Committee concluded that Canada had not established a registry system as required by the Protocol. The registry system is required to track Canada's Assigned Amount Units (i.e., allowances) under Kyoto system and to settle emissions trades under the Kyoto Flexibility Mechanisms (CDM, JI and trading of AAUs).

The report is not a final determination of Canada's compliance. However a "question of implementation" has been formally raised with the Compliance Committee's Enforcement Branch. Should the Enforcement Branch make a final decision that Canada is not complying, it can impose the following sanctions (which were recently imposed on Greece for its non-compliance):

• declare Canada to be in non-compliance;
• require Canada to submit a plan to address the non-compliance within 3 months; and
• prohibit Canada from participating in the Kyoto Flexibility Mechanisms.

This final sanction is the most severe. It would make it impossible for regulated entities in Canada to purchase Certified Emissions Reductions ("CERs") from CDM projects. According to its recently released document "Turning the Corner: An action plan to reduce greenhouse gases and air pollution", the government intends to allow regulated entities to purchase CERs to cover up to 10% of their compliance obligations. By failing to create a Kyoto registry, Canada has frustrated its own intentions in this regard.

Fortunately, the government signed a deal on February 14 with Perrin Quarles Associates to develop the registry this year. Perrin Quarles Associates developed New Zealand's registry and is working on a system for RGGI. Canada may therefore be able to pull itself back into administrative compliance and avoid the sanctions above.

Even if Canada is able to comply with its administrative obligations under Kyoto, it will still face a steep uphill struggle to comply with its substantive emissions reduction obligations. Statistics Canada released data this week showing that Canada's emissions increased by 25% from 1990 to 2005. Reuters UK reports that this increase was the highest of any G8 nation. It is also a leagues away from Canada's Kyoto obligations, which calls for a 6% reduction from 1990 levels by 2012.

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.