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Oil sands a "trade exposed" industry that may warrant special treatment under cap-and-trade

The federal government may be contemplating special treatment for the oil sands under its yet-to-be-unveiled greenhouse gas regime (see e.g., here, here, and here). Cabinet documents obtained by the CBC suggest that the goals of the Conservative's Turning the Corner plan may be abandonned and that the oil sands will be subject to much less demanding reduction targets.

Environment Minister Jim Prentice responded that any such documents do not represent the government's current position. However, he acknowledged the need give careful thought to "trade exposed" industries, noting that such thought is being given in the U.S. "A key feature of the Waxman-Markey legislation is the treatment accorded to what are referred to in the United States as trade-exposed industries," he said. "And this is something that we will need to consider on the Canadian side of the border."

There is speculation that the special treatment could take the form of tax incentives outside of the planned cap-and-trade regime.

However, in a letter to the Toronto Star, Minister Prentice emphasized that the "government has not yet made any decisions with regard to trade-exposed sectors."

The notion of protecting "trade exposed" industries under cap-and-trade schemes is hardly a new one. Much of the debate about whether emissions allowances should be distributed for free or auctioned is informed by similar considerations. "Trade exposed" industries consistently argue that they need free allowances to avoid losing their international competitive advantage.

Certainly, any global or continental deal will have to strive to keep the playing field within specific industries as level as possible. If not, trade wars will no doubt ensue.

For Canada's federal government, an equally contentious issue will be keeping domestic competition fair between industries (and provinces). Alberta still smarts from the wealth transfer brought about by the old National Energy Program. Albertans will fiercely resist any cap-and-trade scheme that is seen to generate revenue in Alberta (either by way of credit auctions or alternative compliance payments) and distribute it to other provinces. In contrast, those outside of Alberta and Saskatchewan are very wary of any special treatment given to the tar sands. They would prefer to see all industries be subjected pay an equal price on carbon.

As discussed previously, provincial battle lines are already being drawn. Lurking in the background is an unanswered question as to whether the federal government can stretch its constitutional authority over criminal matters to enact market-based regulation of carbon emissions. If Prime Minister Harper and Minister Prentice find striking a deal in Copenhagen hard, just wait until they come home to a country that loves its constitutional battles.

US EPA finalizes finding that GHGs threaten the public health and welfare

The United States Environmental Protection Agency ("EPA") released its long-awaited finding that greenhouse gases endanger public health and welfare. Specifically, the EPA found that "current and projected concentrations of the six key well-mixed greenhouse gases - carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) - in the atmosphere threaten the public health and welfare of current and future generations." The decision does not impose immediate obligations on industry. However, it sets the stage for future EPA regulations and puts the pressure on Congress to finalize its climate change bill. It is also well-timed for the kick off of negotiations in Copenhagen.

The endangerment finding has been in the works for years. The EPA's finding was prompted by the US Supreme Court's 2007 decision in Massachusetts v. EPA in which the court held that the EPA had the authority to regulated GHGs under the Clean Air Act and that its decision not to regulate GHGs was, at the time, "arbitrary, capricious, or otherwise not in accordance with law." The EPA subsequently released a draft finding in April of 2009, which was open to public comment.

The endangerment finding cements the EPA's jurisdiction to regulate greenhouse gases. It was accompanied by a specific finding that "greenhouse gases from new motor vehicles and new motor vehicle engines contribute to the greenhouse gas pollution which threatens public health and welfare." This "cause or contribute" finding will allow the EPA to move forward with its proposed light duty vehicle emissions standards. Canadians can likely look forward to similar standard being enacted in Canada.

Perhaps most importantly, the endangerment finding gives new context to the efforts in Washington to enact climate change legislation. If Congress is unable to pass a cap-and-trade bill, the EPA may step in and regulate emissions more generally. Most stakeholders would prefer emissions regulation to come from Congress, which is able to balance competing interests, rather than from the EPA, which may take a less compromising approach.

New York raids RGGI coffers to pay down deficit

On Wednesday, New York lawmakers approved the transfer of $90 million of Regional Greenhouse Gas Initiative ("RGGI") auction proceeds to help fill the state's $3.16 billion budget deficit. The move sets a very unfortunate precedent in the U.S. Fortunately, Canadian lawmakers appear intent on guarding against similar temptation in provincial climate change regimes.

Covering the power sector in 10 Northeastern and Mid-Atlantic states, RGGI is the United States' first cap-and-trade system. The emission cap, which will decrease by 10% by 2018, is administered by distributing emissions allowances to regulated facilities. Nearly all allowances are auctioned, with the intention that proceeds will be reinvested by the participating states in efficiency, renewable energy, and other clean energy technologies. To date, New York has raked in almost $180.7 million from the sale of allowances under RGGI.

The legislature's decision this week to "re-purpose" these proceeds is unfortunate for at least three related reasons. First, the decision compromises part of the environmental and economic effectiveness of RGGI by halving the amount of RGGI dollars currently available for investment in clean energy and green jobs in the state. As a result, the decision also undermines a key justification for auctioning permits, instead of giving them away for free. Finally, by moving the proceeds into general revenue, the decision lends credence to the criticism that cap-and-trade systems are really cap-and-tax schemes.

New York may therefore have set a precedent that will not only undermine the effectiveness of RGGI, but could also be used to undermine efforts to pass similar cap-and-trade legislation in Washington.

Fortunately, Canadian lawmakers have been more savvy in anticipating the temptation of politicians to dip into funds generated by emission reduction regimes. Under Alberta's Specified Gas Emitters Regulation, regulated entities can comply with emissions targets by paying $15 per tonne into the Climate Change and Emissions Management Fund ("CCEMF"). However, the CCEMF is legally segregated from general revenue, is managed by an arm's length entity (the CCEMC), and may only be used to support climate change mitigation and adaptation projects in the province. The province therefore cannot reallocate that money without rewriting its emissions management laws.

Ontario's cap-and-trade regulation, which was passed this week, contains similar protections. The proceeds of any allowance auctions in Ontario will be designed as "money received for a special purpose" under the Financial Administration Act (Ontario) and will be segregated in a "Greenhouse Gas Reduction Account." Funds from the account will only be available for "costs incurred by the Crown in administering the regulations [...] that relate to greenhouse gases and in carrying out or supporting greenhouse gas reduction initiatives."

Ontario passes cap-and-trade bill

The Ontario Legislature passed the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), 2009 today. As discussed when the bill was introduced in May, the new legislation provides the legal foundation for a cap-and-trade system in Ontario.

While reams of regulations will have to follow before such a system "goes live", the passing of this bill and of the related emissions reporting regulations this week suggests that Ontario is moving forward with its plans to regulate greenhouse gas emissions at the provincial level. As discussed earlier, the announcement may be seen as part of a trend by several provinces (also including Alberta, BC and Quebec) to take bolder action than has been proposed by the federal government. The timing of the announcement suggests that Ontario wants to have a fresh achievement to talk about in Copenhagen next week.

The proposed scheme will cover carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulphur hexafluoride, and "any other contaminant prescribed as a greenhouse gas by the regulation." It provides the government with the power to create tradable instruments (i.e., emissions allowances), which may be distributed for free or auctioned.

As highlighted in the accompanying press release, "the act allows Ontario's program to link to other systems in North America and abroad. Aligned systems would maximize trading opportunities for industry, helping them to make GHG reductions at lowest cost." Fungibility of credits across the border is key to making such a system affordable, a reality that continues to escape some federal policy makers who still advocate for a national system based on emissions intensity, instead of absolute emissions.

The most significant revision since the bill was introduced was the addition of provisions relating to the collection and use of proceeds received by the government from the distribution of allowances. Taking a cue from Alberta's Climate Change and Emissions Management Fund, the bill attempts to segregate such proceeds for use in climate change initiatives. The bill requires that such funds be designated under the Financial Administration Act (Ontario) as "money received for a special purpose and placed in a "Greenhouse Gas Reduction Account." Funds from the account may only be used for "costs incurred by the Crown in administering the regulations [...] that relate to greenhouse gases and in carrying out or supporting greenhouse gas reduction initiatives." Unlike Alberta's approach (and the federal Turning the Corner plan), the new legislation does not appear to contemplate that regulated emitters will be able to pay into the Greenhouse Gas Reduction Account in lieu of reducing emissions or acquiring allowances or offsets.

Ontario passes greenhouse gas reporting regulation

On December 1, Ontario passed O. Reg. 452/09 (the "Regulation") which requires large emitters to report their greenhouse gas emissions to the Ministry of the Environment ("MOE"). The Regulation, which will force companies to focus on their emissions while giving the MOE better data about the province's emissions profile, is seen as an important step towards the creation of a cap-and-trade system in the province.

The Regulation, which applies to 26 types of facility, requires the following:

• reporting of specified GHG data by all facilities that are emitting 25,000 tonnes of carbon dioxide equivalent (CO2e) or more per year;
• annual reporting of GHG emissions, starting with 2010 emissions;
• mandatory use of identified standard quantification methods to quantify emissions starting with 2011 emissions;
• flexibility to use the best alternative quantification methods for 2010 emissions;
• annual third-party verification of emissions, beginning with 2011 emissions;
• emission reports to be submitted on June 1 starting with 2010 emissions in 2011; and
• verification to be completed by September 1 starting with 2011 emissions in 2012.

The delay of third party verification until the 2011 reporting year is intended to allow the required professional services capacity to grow in the province. The flexibility to use best alternative verification methods in 2010 is similarly intended to smooth the transition to standardized reporting requirements in 2011.

In an interesting compromise, the Regulation allows regulated emitters to deduct up to 15,000 tonnes of carbon dioxide generated from a facility through the combustion of biomass, the theory being that the combustion of biomass, which draws CO2 from the atmosphere as it grows, is carbon neutral. In contrast, BC's regulation provides that all carbon dioxide from wood biomass, or the wood biomass component of mixed fuels, is not to be included in the determination of thresholds. The EU ETS takes a similar approach, where emissions from biomass must be reported but are "zero-rated" for the purposes of determining if a facility has stayed under its emissions limit. It is unclear why Ontario adopted a "halfway house" approach to the combustion of biomass.

The MOE has also issued a companion Guideline for Greenhouse Gas Emissions Reporting that details exactly how facilities are to report their emissions.

In crafting the Regulations, Ontario sought to ensure that Ontario's regulatory system for greenhouse gases will be harmonized with whatever system will ultimately be adopted south of the border (note the absence of any concept of "emissions intensity", as found in federal and Albertan approaches). The Regulations have therefore been modelled significantly on the approach proposed by the Western Climate Initiative as well as the September 22, 2009 EPA ruling on GHG reporting.

Québec announces its GHG reduction target: 20% below 1990 levels by 2020

Last week, Québec Premier Jean Charest and Minister of Sustainable Development, Environment and Parks, Line Beauchamp, unveiled the province's target to reduce greenhouse gas emissions (GHG) by 20% below 1990 levels by the year 2020. Seeking to be recognized as a Canadian leader against climate change, Québec has decided to set an objective similar to that established by the European Union.

In making the announcement, Premier Charest acknowledged that the province's target is very ambitious, especially given that 48% of its total energy requirements are currently satisfied by renewable energy sources. At approximately 11 tons per capita, or half the Canadian average, Québec already currently holds the best GHG emissions record in Canada. If it can achieve its 20% reduction target by 2020, the province would have the lowest level of emissions per capita in North America.

In announcing its target, the government stated that the proposed measures to be taken would show flexibility from one economic activity sector to another, notably by taking into account each one's overall reduction potential, international competitiveness, available technology and required transition measures. As an illustration of one particular sector's progress to date and to demonstrate that climate change does not necessarily have to come at the expense of economic growth, the Premier noted that the province's industrial sector had already achieved emissions reductions of over 7% in 2006, as compared to 1990 levels, despite the fact that Québec's GDP had increased by 41% over that same period.

As transportation accounts for 40% of Québec's GHG emissions, the government stated that it would be paying particular attention to that sector. In order to achieve the 2020 target, the government expects to make major investments in mass transit options and will take measures to encourage the increased use of intermodal transportation of goods. It also plans to introduce a GHG emission standard for light-duty vehicles equivalent to that in California. Also, as Québec-based corporations have demonstrated expertise in electric vehicle technologies, the government will encourage the development of that industry, as well as the use of such vehicles.

Lastly, through its participation in the Western Climate Initiative, the province will contribute to implementing the largest GHG cap and trade system in North America in 2012. The government expects that these actions will set the stage for a flourishing green economy by the year 2020 and will gradually reduce Québec's economic dependence on foreign oil. It will also lessen the economic impact of the anticipated oil crisis in the decades to come and improve Québec's trade balance.

With less than a week to go before the December 2009 climate conference in Copenhagen, the province of Québec has now clearly announced where it stands on climate change. In a statement aimed at her federal counterpart, Minster Beauchamp declared that "Through this ambitious target, Québec is showing its partners and the international community that it is fully committed to assuming its share of responsibility. By continuing to demonstrate strong leadership, we hope to change the position of the federal government leading up to the Copenhagen Conference."

Harper to attend Copenhagen

As recently as this morning, the Toronto Star reported that Prime Minister Stephen Harper would not attend the global climate change negotiations in Copenhagen next month. Later in the day, Dimitri Soudas, a spokesman for Harper, told reporters in Ottawa that Harper will be travelling to Copenhagen in December. The Prime Minister's change of heart was no doubt prompted significantly by the White House's announcement yesterday that President Obama would be attending the talks.

That the Prime Minister decided to attend after learning that the President would be there is consistent with Ottawa's strategy of sticking close to the US in the negotiations. In a comment posted this morning by the National Post, federal Environment Minister Jim Prentice again emphasized that "we will do exactly what we have consistently said we would do: We will match U.S. efforts." In Minister Prentice's assessment, the President's recently announced intention to pledge to reduce his country's carbon emissions to 17 per cent below 2005 levels by 2020 is essentially the same as Canada's Turning the Corner commitment to reduce emissions to 20% below 2006 levels by 2020.

Notwithstanding any alignment with US goals, some people still feel that Canada should be committing to deeper cuts at Copenhagen. Such was the message of protesters that staged a sit-in at Minister Prentice's Calgary constituency office earlier this week. Some provincial leaders would agree: BC, Ontario and Quebec have recently set more ambitous reduction targets.

While prospects for finalizing a comprehensive post-Kyoto agreement this year remain virtually non-existent, it is very encouraging that national leaders like Prime Minister Harper and President Obama will make appearances in Copenhagen. Hopefully, their presence will help negotiators forge what Minister Prentice describes as "a political agreement that can generate the momentum required to forge a broader, more specific and comprehensive document over the course of 2010."

Minister Prentice Talks Climate Change; PM Says He'll Go to Denmark

Minister Prentice believes that in order for the international community to reach a new framework to deal with climate change, the U.S. must "get on board".

Speaking to a packed room on November 13 in Edmonton, the Minister spoke about climate change on the global stage and about the road to the UNFCCC Climate Change Conference in Copenhagen, which begins in less than a month. The Minister's key message during the speech was that in order for Copenhagen, the "mother of all negotiations" to result in a meaningful frameworks to address the stabilizing of greenhouse gases in the atmosphere, the United States has to "make a substantial effort going forward".

The Minister's other key message hit a bit closer to home:

"If the US does not make a substantial effort going forward, there is nothing Canada can do. Our own mitigation efforts will be futile - as a practical matter, we should probably focus on adaptation.

If we do more than the US, we will suffer economic pain for no real environmental gain - economic pain that could impede our ability to invest in new clean technologies.

But if we do less, we will risk facing new border barriers into the American market.

In short, we need a substantial effort from the United States; and a comparable effort from Canada, so we can create an effective North American climate change regime with national policies that are harmonized, consistent and free from conflict. A continental system composed of national policies and regulations that are equal in value and of similar effect, so we foster fair competition and maintain free trade in the integrated North American market".

The crux of his comments? That a harmonized (although not identical) climate change framework is absolutely crucial for Canada and for the U.S.

Why?

1. We share a common environment;

2. Our economies are integrated. The Minister remarked, "many firms in such key sectors as aerospace and automotive do not so much compete with each other as cooperate, being suppliers to, and customers of each other, somewhere on complex supply chains"

3. Canada's energy supply = security of energy for the United States - "[w]e are not just the single largest supplier to the American market of oil, natural gas, hydroelectricity and uranium - we are an indispensable supplier to the land-locked northern tier states"

4. Our pipelines and power grids transcend the border.

The Minister also pointed to a number of cross border harmonization initiatives, such as identical tail pipe emissions standards, the fact that both countries are busy preparing national cap and trade systems, and commitments on both sides of the border to clean energy technology.

But ultimately, his remarks confirmed that both Canada and the United States, while committed to addressing the effects of climate change, will not do so at the expense of the economy. The Minister's philosophy and one that is shared by his U.S. counterparts is to "do no harm - to avoid measures, no matter how well-intentioned, that would cause Canadian firms to be not just down in 2009, but out by 2010". What does this mean in terms of reductions? The American Clean Energy and Security Act has passed the House, and the Kerry/Boxer legislation has now commenced its journey through the Senate. The former sets the target of 17% less than 2005 levels by 2020; the latter currently talks of 20%. The Minister confirmed "[t]hat Both are similar to our own 2020 target of 20% less than 2006 levels".

Those dectractors who assert that Canada should be reducing its emissions by 25-40% less than 1990 levels are not focused on the economic consequences to our country. Minister Prentice addressed these critics and said "to say the least, reducing 2020 emissions in Canada by 25-40% from 1990 levels is easier said than done. The impact on the overall economy would be dire. In economic context, reductions of that magnitude equal an amount far in excess of all the emissions generated from all transportation sources in Canada".

Are the critics prepared to put away not only their own cars, but the cars of their relatives and everyone else they know, for good? To stop flying anywhere? Stop taking the bus? Probably not. And if the solution is to purchase international offsets to meet our emissions targets, are they comfortable with billions and billions leaving the country every year? We have to have a reasonable response to climate change in Canada - and it is reasonable that our system be consistent with that of our largest trading partner and not cause economic hardship to a nation of 35 million people.

So what will happen in Copenhagen? Canada's position is pretty clear. The United States' position is also increasingly clear - everyone, not just the developed nations, has to be a party to an international convention. That includes China and India, whose positions have really not shifted in the months leading up to the conference. Small concessions have been made, but really, the message is still "we're going to do what we want".

But, as Copenhagen draws ever closer, it appears that the international community is taking it more and more seriously. This morning the Edmonton Journal reported that there is increasing pressure on world leaders, including the U.S. President, to attend the conference. Prime Minister Stephen Harper's aides confirmed that if others are there, he'll likely attend as well.

With all these variables, the conference is December is shaping up to be very interesting. Stay tuned for on the ground coverage from Denmark.

The Clean Energy Dialogue Continues...

Energy/Environment High on Priority List for New US Ambassador to Canada

We have blogged many times about the Clean Energy Dialogue between Canada and the United States, which was begun when the U.S. President made his first official vist to Canada back in February. Looks like the Clean Energy Dialogue continues. Barack Obama's new envoy to Canada, US Ambassador David Jacobson, who officially started his term on Friday, said energy and environment issues are high on the agenda in discussions between the two countries.

After a ceremony at Rideau Hall with Governor General Michaele Jean where his credentials were formally accepted, the US Ambassador said "I also believe that the issues that predominate in the relationship between the United States and Canada are the kind of issues that I have spent a lifetime dealing with".

Canada A Pillar of Energy Security

In his remarks, Mr. Jacobsen acknowledged that U.S. and Canadian energy security and environmental concerns would be closely linked and up for discussion in the near future.

While U.S. lawmakers released a cap and trade bill into the Senate last week which includes measures smacking of protectionism, Mr. Jacobsen indicated he would soon start to participate in ongoing discussions about these measures, although added that he believed the talks have so far been constructive and cordial.

"Canada is a pillar in the energy security of the United States," he said. "There are also environmental issues that we all know about that are getting more and more important every day, and I expect that I will spend a lot of time dealing with those."

Another Chicago Connection

Mr. Jacobson is a former lawyer, who, like John Podesta, an influential member of the President's transition team and advocate of cap and trade, is also from the President's hometown of Chicago. Mr. Jacobson had been serving in the White House as an advisor on diplomatic postings.

What Does It Mean?

With China on the hunt to buy into Alberta's oilsands, which, let's face it, are the key to energy security for both Canada and the United States in the decades to come, and with the appointment of David Jacobsen, who seems to realize this, it is certainly a very interesting time to be in Ottawa! Perhaps protectionism may have to take a back seat to ensuring Americans have a safe and secure supply of energy.

We'll see. It may all become more clear in December when the world convenes in Denmark.

Two-tier GHG emissions regime for Canada?

The federal government has committed to releasing a comprehensive plan for addressing climate change in advance of the meeting in Copenhagen at the end of this year. The Toronto Star reports that federal Environment Minister Jim Prentice is currently pitching a two-tier emissions management regime as Ottawa's preferred approach. Under a two-tier system, greenhouse gases would be managed at the sectoral level, with a hard cap applying to most sectors but intensity-based targets applying to the oil and gas sector.

Such an approach is motivated by Canada's most intractable climate change question: what should be done about the oil sands? The governments of Alberta and, to an increasing extent, Saskatchewan argue strongly that the oil and gas sector deserves special treatment under any national emissions management regime. They argue that a uniform, national system would impose harmful costs on their economies and could unfairly transfer huge amounts of wealth to the remaining provinces and territories (like the former National Energy Plan).

Those committed to addressing climate change counter that the oil sands are a disproportionately large source of the country's greenhouse gas emissions. Intensity targets in no way guarantee absolute emissions reductions as total emissions can rise with increased production. According oil sands special (i.e., more lenient) treatment could therefore completely undermine Canada's ability to deal with climate change in a meaningful way. Such special treatment would also be especially hard to justify given that the oil and gas sector is so heavily concentrated in just 2 provinces.

Minister Prentice has been pitching the concept to industry and provincial leaders across the country. The Star quotes Andrei Marcu, a Toronto-based board member with the International Emissions Trading Association, as saying that "he's getting a bad reaction...everywhere but in Alberta and Saskatchewan." That bad reaction is likely about to get worse has Mr. Prentice prepares to meet with both Ontario and Quebec in Toronto this week. Ontario and Quebec, as well as British Columbia, have declared their strong preference for a system based on hard caps. Quebec's Environment Minister Line Beauchamp told Montreal's Le Devoir that her province opposes preferential treatment for the oil sands and will make its opposition known in the run-up to Copenhagen.

At some level, provincial governments must sympathize with the enormity of the challenge faced by Minister Prentice. At a three-day summit earlier this summer, provincial premiers avoided the climate change issue almost entirely, agreeing only that Canada would be "well served to work with the United States on a continental approach." Environmentalists were hugely disappointed at the premiers' lack of engagement at what had been billed as the "Showndown in Regina."

Mr. Marcu also predicts that introducing intensity targets for the oil and gas sector would not be "acceptable for integration to the U.S." Earlier this month, the federal government made a joint declaration with the US and Mexico regarding the integration of the North American carbon credit market. Introducing intensity based credits in Canada could poison the well and cause the US and Mexico to reconsider their position.

Cynics suggest that Minister Prentice's two-tier suggestion is a deliberate concession to the federal Conservative's base of power in the face of an increasingly likely fall election. It will no doubt have a polarizing effect on the country. Nevertheless, Minister Prentice remains confident that he will find a position that is acceptable to all provinces and territories.

Cleantech revolution or international trade war?

McKinsey & Company, a consultancy, recently released a report calling on China and the US to work together to create new cleantech industries that will help address climate change. Given the scale of investment, infrastructure and research that will be required, the report warns that the two countries will not be able to "achieve separately what they could jointly." However, recent events suggest that both China and the US (as well as Canada and some European cleantech leaders) are not in the mood to cooperate, choosing instead to protect their domestic industries. If the trend continues, trade wars could erupt and critical climate change negotiations could be compromised.

Signs of Chinese protectionism

China has attracted significant media intention in recent months for a series of potentially trade-distorting measures. A pattern of behaviour may be emerging that suggests both private industry and the state are determined to give every advantage possible to China's domestic cleantech sector. The following are examples:

• Alleged dumping: The CEO of Suntech, a Chinese company that is the world's second largest manufacturer of solar panels, recently told the New York Times that his company is selling products in the U.S. at below marginal cost. He later clarified that the pricing was set to gain market share, but U.S. producers were already characterizing the practice as dumping. As reported in the NY Times, U.S. trade lawyer Alan Wolff (perhaps eagerly?) predicts that such behaviour could eventually trigger a WTO dispute. He noted, "antidumping cases against products from China have to date largely covered traditional, basic products such as chemicals and steel. A case against solar panels from China would be a landmark case."
• Domestic content requirements: China has also been widely criticized for recently enacting Buy Chinese provisions that require companies applying for stimulus money for renewable power and low carbon projects to apply for government permission to source parts and equipment abroad. As discussed by the Financial Times, China enacted these provisions just months after railing against Buy American provisions.
• Preferential treatment for domestic project developers: The Buy Chinese provisions were also enacted in the wake of a series of procurement decisions in which established foreign players like Vestas were shut out of projects in China. See this Financial Times article for more background.
• Import restrictions: China is reported to have recently banned the import of scrap polysilicon into the country. The scrap is a by-products of chip manufacturing that is suitable for making solar panels. Given the current glut of polysilicon on the global market, the ban is seen by some analysts as a move to protect China's domestic polysilicon manufacturers. China characterizes the ban as a move to protect the environment given that the scrap may have come into contact with toxic chemicals. The environmental justification of trade measures has been one of the more intensely litigated issues under the WTO.
• Proposed export bans: According to Business Green, a draft report released in July by the Chinese Ministry of Industry and Information Technology suggests a total ban on the export of terbium, dysprosium, yttrium, thulium and lutetium and a export quota on neodymium, europium, cerium and lanthanum. These minerals and rare earth metals are critical in the manufacture of hybrid cars and wind turbines. Some suspect that China wants to protect supply for its domestic cleantech manufacturers. The report was released after the U.S. and Europe filed a complaint at the WTO in June regarding Chinese export limits on bauxite, coke, magnesium, manganese, silicon metal and zinc.

U.S. also looking inward

The US is by no means innocent. It received its share of criticism for proposed Buy American restrictions on stimulus money. The Obama administration continues to face lots of pressure from powerful groups to make sure that stimulus money and climate/energy policy is crafted to create jobs in the US (see e.g., Big Labor's Made in America Tour), as blogged about recently.

Already, the U.S. has enacted some dubious measures in the name of cleantech, a particularly notorious example being a biofuel tax incentive that turned black liquor into liquid gold for failing pulp producers. The incentive was another blow to the beleaguered Canadian pulp industry. Ottawa responded with a similar, although somewhat more environmentally focused, incentive.

The US is also trying to draw in short term investment in renewable power by transforming a former tax incentive into a grant for up to 30% of the cost of qualifying projects.

Perhaps most tellingly, the draft Waxman-Markey climate bill includes provisions regarding a "border adjustment" mechanism that could be used to impose what amount to carbon tariffs on imports from countries that have less rigorous climate change legislation.

Chinese companies like Suntech see the writing on the wall and are moving to open manufacturing facilities in the US.

Protectionist trend extends to Europe and Canada

Last week, Business Green ran a good piece on cleantech protectionism. While the article points to China as the most notorious culprit, China is not the only country singled out for criticism. Germany and Spain are also accused of providing trade-distorting "soft loans" to domestic producers, as well as of favouring domestic proponents in renewable power RFPs.

Here in Ontario, industry players are anxiously awaiting the release of domestic content requirements under the Green Energy Act. These requirements will require project proponents who wish to participate in the potentially lucrative feed-in tariff regime to source some portion of their components, labour and/or capital in Ontario. The domestic content requirements are a bit of a hot potato for Minister Smitherman who simultaneously wants to declare Ontario's renewable sector to be open for business while making good on his promise to create 50,000 new green collar jobs in the province.

Implications

If the protectionist trend continues, the cleantech revolution could spark a cleantech trade war. Protectionism tends to beget protectionism: protectionist measures in countries like China will be used to justify the imposition of protectionist measures in other countries (and vice versa). While the WTO provides a forum for resolving such disputes, the process is long and the results not always certain (particularly where protectionist measures are draped in environmental justifications).

Perhaps the most disturbing part of the emerging protectionist trend is that it is occurring before the successor treaty to Kyoto or the U.S. cap-and-trade legislation have been finalized. Trade issues are informing the negotiation of both instruments. The protectionist stances taken by key global trading players today may make it harder to conclude either negotiations and may lead to compromises that are not in the world's best economic or environmental interests.

The cleantech "revolution" makes twin promises: that green jobs are the cure to the past year's financial crisis and that technology can solve the climate change problem. China, the U.S., Europe, and Canada all seem to be keying more strongly on the first promise. However, it is not in the world's best interest to create domestic cleantech industries that are premised on government protection. This is particularly the case in light of McKinsey & Company's observation that the scale of the climate change problem demands a cooperative solution.

U.S. public debate surrounding Climate Change heats up a notch

Public debate in the United Sates surrounding proposed Climate Change legislation just heated up a notch (pun intended) as a result of rallies planned by a "Grass Roots" group in about 20 states to express concerns about proposed federal clean air legislation before the U.S. Congress. The rallies are planned prior to Congress' return from its August recess.

The group, called Energy Citizens, is a coalition of more than 100 organizations, including some 15 oil and gas groups. Energy Citizens' plans have gained significant notoriety of late as a result of showing up in an e-mail message from the American Petroleum Institute (API)'s President Jack N. Gerard to chief executives of API's member companies.

As for Gerard's e-mail, it provoked a strong response from Greenpeace USA's Executive Director Phil Radford, who pointed out in a written response that the API's endorsement of Energy Citizen's objective to defeat Climate Change legislation would be contrary to several prominent API members public support for climate action and the Waxman-Markey bill. Such prominent API members notably include Royal Dutch Shell PLC, BP PLC and ConocoPhillips, which are also members of the U.S. Climate Action Partnership (USCAP).

In reaction to the controversy, API claims that the organization is not sponsoring Energy Citizens, which would however appear to contradict the e-mail itself, where the API states that the objective of the rallies is to "put a human face on the impacts of unsound energy policy [...]" and that the API will "call on the Senate to oppose unsound energy policy [...]"

In the closing paragraphs of his e-mail, Gerard asks the API members to "please treat this information as sensitive [...] we don't want critics to know our game plan." To this, Radford simply responds "Game plan known."

As is to be expected, the debate surrounding the proposed legislation will only continue to increase, with groups on each side ramping up their efforts to vilify the other. It will certainly be interesting to see how key players such as the Oil & Gas industry will position themselves, as the more polarized viewpoint holders will most likely not allow them to stay on middle ground.

U.S. Senators Pen Letter of Warning on American Climate Bill

Ten Democratic Senators sent a letter to President Barack Obama on Thursday last week (August 6) advising that they would not support a climate bill which did not contain provisions to maintain a level playing field for American manufacturing.

Does the letter call the potential success of the U.S. climate bill into question?

The Senators represent midwestern coal producing states. According to the New York Times, without the support of these Democratic Senators, "it is unlikely that the Senate can pass a major climate change bill". As we've reported to you before, the American climate change bill narrowly passed through the U.S. House of Representatives at the end of June. The bill is now moving slowly through the Senate, which is also preoccupied with debates about health reform.

The Senators, Evan Bayh of Indiana; Sherrod Brown of Ohio; Robert C. Byrd and John D. Rockefeller IV of West Virginia; Bob Casey and Arlen Specter of Pennsylvania; Russ Feingold of Wisconsin; Al Franken of Minnesota; and Carl Levin and Debbie Stabenow of Michigan, warn:

"It is essential that any clean energy legislation not only address the crisis of climate change, but include strong provisions to ensure the strength and viability of domestic manufacturing. Further, any climate change legislation must prevent the export of jobs and related greenhouse gas emissions to countries that fail to take actions to combat the threat of global warming comparable to those taken by the United States....In addition a longer term border adjustment mechanism is a vital part of this package to prevent the relocation of carbon emissions and industries if other major emitting carbon countries fail to commit to an international agreement requiring commensurate action on climate change. "

The letter continues to focus on the "border adjustment mechanism" (read: tariff) and suggests that the mechanism could spur countries to reach a global accord in Copenhagen in December "by eliminating the competitive benefit of not acting to address this global problem". The letter concludes "[w]e would find it extremely difficult to support a final measure that does not effectively deal with these important measures. We look forward to working with you and your Administration to ensure that climate change legislation does not produce an international race to the bottom".

Does this letter spell p-r-o-t-e-c-t-i-o-n-i-s-m? Certainly sounds like it. In fact, President Obama confirmed that he was concerned about the letter, calling the tariff provision "potentially protectionist".

This is a serious situation for the President, who has pleged to lead the world to a new treaty in Copenhagen. The newly elected President shot out of the proverbial climate change gate early in his term passing energy efficency and conservation reforms and promising aggressive domestic legislation. The problem is "to get the legislation passed will require compromises aimed at protecting the economies of manufacturing and coal states".

Are countries, such as India and China, faced with a "border measurement adjustment" going to be in a negotiating mood in Copenhagen? Can't imagine they will. Will other Senators whose interests differ from those 10 who penned the letter have their own demands? Can't imagine they won't.

How does this affect Canada?

We know that the Canadian federal government is already closely monitoring the progress of the U.S. climate bill for evidence of protectionist policy. Canada has vowed that its climate change policy will align (although not mirror) that of its largest trading partner. If these Senators have their way and protectionism of the nature they are suggesting is introduced into the U.S. climate bill, Canada's response is going to have to be carefully crafted.

Stay tuned. We'll keep you posted.

US Congress Passes Climate Change Bill

The U.S. House of Representatives passed what is being called "historic" climate change legislation on Friday. The Waxman-Markey bill passed through Congress by a vote of 219-212. Eight Republicans voted in favour of the bill; forty-four Democrats voted against it.

The Waxman-Markey bill went through countless revisions before it was passed on Friday. In its final form in Congress, the Bill contained over 1300 pages and according to the New York Times, "the bill's sponsors were making deals on the House floor right up until the time of the vote".

Proponents of the bill are hearlding its passage as "a staggering achievement" and one which will pave the way for "an international deal in Copenhagen this December - as well as a bilateral deal with China, hopefully sooner". Detractors on the other hand, called the bill "a national energy tax and predicted that those who voted for the measure would pay a heavy price at the polls next year".

At the heart of the bill is a cap and trade system which sets an overall limit on greenhouse gas emissions, but allows industry to trade emissions permits among themselves. The cap would grow tighter over the years, pushing up the price of emissions and ideally, driving industry to renewable and other clean sources of energy.

The legislation is "a patchwork of compromises" and certainly not what was originally envisaged by its sponsors. In its final form, the bill has a goal of 17% reductions in emissions relative to 2005 levels by 2020 and 83% by 2050. These numbers were loosened in order to woo fence-sitting Representatives in the weeks and days before the vote. In comparison, Canada has set a goal of 20 by 2020 relative to 2006 levels and 60 - 70 by 2050. If the US targets remain the same and the bill becomes law, Canada's targets may eventually align with the US levels.

Interestingly, but perhaps not surprisingly, it appears that the Democrats who voted against the bill were motivated by policy and economics and not by ideology. These representatives are primarily from areas dependent on coal for electricity and heavy industry for jobs and economy. You can see an interative map of the Congressional vote here. In contrast, the Republican supporters of the bill came from California, Delaware, New Jersey and New York.

It looks like the closeness of the vote, with 44 people from the majority Democrats voting AGAINST the bill, means the hard work is really yet to come for the President and the bill's sponsors. It is not certain what the legislation may look like in its final form - if we had a crystal ball, we'd love to be able to tell you. However, what is clear is that the discussion is not over. The bill goes to the Senate next before it lands in its final form on the President's desk.

Watch for our bulletin on the Waxman-Markey bill and our analysis of what the bill may mean for us in Canada in the next day or so.

Dandelions are Springing Up Everywhere

We blogged the other day that Canada is pushing back its target start date for the regulation of emissions at the federal level to align more closely with the American schedule. In a discussion with media from London on May 28, Minister Prentice indicated that the GHG reduction targets would be in effect as late as 2012 in order to ensure they were aligned with the system south of the border. The Turning the Corner Plan called for targets to be developed in 2008 and come into force in 2010.

In a speech to the CD Howe Institute on June 4, the Minister remarked "[w]e will outline the full suite of policies that relate to all major sources of emissions this year, in 2009. I have said this, this will happen time and time again and it will happen by the time we reach the international table at Copenhagen. The process then of drafting the detailed regulations under CEPA will consume much of 2010, the following year. In some cases - the tailpipe emission standards being the obvious illustration - we have already started that process, but 2010 will be the year in which the regulations are drawn together. The regulations will be drafted with a view to an application date of January 1, 2011 and they will be brought into force thereafter on a sector by sector basis. We will make individual decisions on a sector by sector basis in terms of the application date for those".

The critics used to complain that Canada was moving forward without a plan and now they critics bitterly declare that Canada is lagging behind. Isn't that ironic given a year ago we were busily lambasting the U.S. for their lack of climate change initiatives. Canada lagging behind? I don't think so - we're moving forward, just not cohesively.

What is the consequence of Canada pulling back at the federal level (and what, exactly, is the meaning of the blog title), you ask? While the federal government waits for its biggest trading partner to define its domestic targets, regulatory frameworks addressing climate change are springing up all over the place like dandelions on a prairie field.

Alberta's emissions reduction targets were introduced in 2007. BC brought in a carbon tax last year. Ontario passed the Green Energy Act this year and has recently introduced a cap and trade bill (although the implementation date has been pushed back to 2012). So has Quebec. Saskatchewan introduced comprehensive climate change legislation in May. We're expecting that the Maritime provinces and Manitoba, which have established action plans already, will follow suit with regulatory frameworks soon.

All of these provincial frameworks have an opportunity to emerge because the federal framework is being delayed. But are the provinces going to bump into one another? What if you're a corporation operating in B.C., Quebec, Alberta and Ontario - what do you do? Are the provinces on a collision course with the federal government? Where's it all going?

We have some thoughts about that. Stay tuned the next couple of days and we'll explore it.

Minister Prentice Concludes International Climate Change Trip

Environment Minister, Jim Prentice, concluded a series of important international climate change discussions today in London. The Minister participated in the World Business Summit on Climate Change in Copenhagen, the Major Economies Forum in Paris, and a carbon capture and storage conference in Bergen. The Minister ended his trip in London, where he had extensive discussions his UK counterpart, the Rt Hon David Miliband.

All roads continue to lead to Copenhagen, as we've been saying for a number of months (see here, here and in particular here. In a May 24 speech at the World Business Summit, to which he was invited by the Danish Minister, Minister Prentice remarked:

"I think the fundamental question for business leaders here today is how do we build confidence and momentum towards Copenhagen, and in particular for the business leaders and the companies [those business leaders] represent, what responsibility do you have and what role do you play in that process".

The Minister also indicated to that he is optimistic about the prospect of achieving international agreement on climate change strategy in Copenhagen and cautioned leaders about "green protectionism".

The Minister confirmed to media this morning that Canada's climate change policy would be unveiled in advance of Copenhagen and reiterated Canada's commitment to 20% by 2020 relative to 2006 levels. He advised that the specific domestic approach would be tabled first in Canada and then at the international level.

One of the most important points to come out of the discussion this morning, is the continental approach to climate change, which Minister Prentice has previously indicated is so vital.

Canada's trading relationship with the United States is the biggest trading relationship in the world. Clearly any federal climate change strategy must work in concert with the U.S. approach to climate change. Any policies which Canada develops to address climate change must also reflect Canada's national interest. We have blogged many times about meaningfulness of co-operation on both a North American and global basis. In his remarks to the media today, Minister Prentice further reiterated these important points.

However, the Minister also stressed that while Canada's climate policy must be concordant with that of its neighbour to the south, it does not mean that the policies will be exactly the same all the time. Minister Prentice gave fuel economy standards as an example of where it is in Canada's best interest to mirror that of the United States - the auto industry is truly cross border and having identical fuel standards makes sense. But there are other areas, electricity generation, for example he said, where they are not the same. The Minister asserted that while Canada's policies would work on an equivalent basis with those of the U.S., they need not be identical. For the time being, the United States has not yet arrived at a domestic policy or target. As a result, it is difficult for "Canada to define continental solutions".

What Canada's policy will ultimately be is important. But what is truly and fundamentally important is making progress - how will we find real solutions for climate change? The answer: Technology. Transformative change will only be able to occur through investments in technology. In his Copenhagen speech, Minister Prentice emphasized this point:

"[T]he challenge before us is all about technology. That just cannot be overemphasized, because we're talking fundamentally about a transformation of the capital stock, the technological investments in our society. This will take time. It will take massive investments...".

"Massive" investments in technology and transformative change have already started. Canada, and Alberta in particular, has already demonstrated it is serious. The Canadian government has pledged $1 billion to carbon capture and storage technologies. The Alberta government another $2 billion.

Perhaps the most unique sources of funding is the Climate Change and Emissions Management Fund.. The $122.4 million from 2007 and 2008 compliance years will be specifically allocated for purposes related to the reduction of emissions or improving the ability to adapt to climate change. With all these investments in transformative technology, we are leading the way.

Ontario introduces cap-and-trade bill

Ontario's Ministry of the Environment tabled the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), 2009 (the "Bill") today. The Bill amends the Environmental Protection Act (Ontario) ("EPA") to lay the groundwork for implementing a cap-and-trade system in the province.

The Bill proposes to revive s. 176.1(1) of the EPA to read as follows:

"The Lieutenant Governor in Council may make regulations establishing programs and other measures for the use of economic and financial instruments and market-based approaches, including without being limited to emissions trading, for the purposes of maintaining or improving existing environmental standards, protecting the environment and achieving environmental quality goals in a cost effective manner."

The Bill then specifies a non-exhaustive list of types of regulations that may be made to create the cap-and-trade system. The Bill appears to leave open the question of whether allowances will be auctioned or given away free of charge. It also contemplates trades with jurisdictions outside of Ontario. This is consistent with Ontario's membership in the Western Climate Initiative.

The Bill also provides for regulations that designate "a person or body to administer programs and other measures" established under the proposed act. For example, Ontario could choose to establish an arm's length corporation to administer allowance auctions and to distribute the revenues received thereunder.

Huge amounts of regulatory detail must still be drafted. The full details of Ontario's plan are therefore still unknown. Some indication of Ontario's plans may be found in a discussion paper included with the Bill (but originally released in December).

Both the proposed legislation and the discussion paper have been posted on the Environmental Registry for a 60-day comment period until July 26, 2009.

Stay tuned for more details.

Quebec tables cap-and-trade bill

The government of the Province of Quebec has tabled Bill 42 to introduce a cap-and-trade system in the province. The Globe and Mail reports that the bill may be passed as early as June, with reporting obligations beginning next fall. The first caps will be implemented for the period of 2012 to 2015.

The Globe quotes Quebec Environment Minister Line Beauchamp as saying, "we hope Quebec's participation in this common market with Ontario, Manitoba, British Columbia will incite the federal government to co-operate with the provinces to develop a Canadian carbon market compatible with what is taking place elsewhere in the world."

Ontario is apparently set to follow suit in the coming weeks. Ontario Premier Dalton McGuinty recently said, "we [the leaders of Ontario and Quebec] both agree that we have an opportunity, even a responsibility here in Canada, to put in place a carbon-exchange register that will, one way or another, serve as kind of a pilot project that the federal government and maybe even the government in Washington can use as a base for a national program."

Ontario and Quebec signed an accord last year to implement a joint cap and trade scheme. Along with Manitoba and British Columbia, they are also members of the Western Climate Initiative ("WCI"), which is committed to implementing a regional scheme by 2012.

The announcements follow on a report by the federal Environmental Commissioner (discussed here) that is critical of the federal government's existing emissions reduction plans. Ottawa has been signalling recently that it may update its plan to achieve its goals of protecting Canada's interests while harmonizing to the greatest extent possible with developments south of the border.

Clean Energy Dialogue Finds a Friend in Steven Chu

The Clean Energy Dialogue between Canada and the United States was begun in February after President Obama visited Ottawa. Shortly after the historic meeting, our Environment Minister, Jim Prentice, met with his U.S. counterparts and others in Washington, D.C. to discuss how to move the Clean Energy Dialogue forward.

In interviews this week, Steven Chu, the U.S. Secretary of Energy was asked whether there should be international collaboration on energy research.

Dr. Chu's responded that "there is no reason why [energy research] should be compartmentalized" and said that it was particularly true for carbon capture and storage technology. Dr. Chu also commented:

"If countries actively helped each other, they would also reap the home benefits of using less energy. So any area like that I think is where we should work very hard in a collaborative way - by very collaborative I mean share all intellectual property as much as possible. And in my meetings with counterparts in other countries, when we talk about this they say, yes, we should really do this".

The focus of the Clean Energy Dialogue is the expansion of clean energy research and the deployment of clean energy technology. Both Canada and the United States realize that in order to address climate change new energy technologies must be created. It is not the responsibility of one country to go about this alone. It seems Steven Chu would agree.

Is There Weak Link in the Climate Change Chain?

The writer has been frequently blogging about the climate change initiatives which have been undertaken by President Obama since his inauguration in January. Since he took the Oath of Office, the President has been touting, among other climate change plans, the idea of a cap and trade system for governing GHG emissions. He has consistently defended critics of this system, some of whom have referred to it as a cap and tax system, as a necessary link in his climate change chain.

Is he backing down?

President Obama held a press conference yesterday which was nationally televised. During the Q&A after his remarks, one reported stated that the budget being written by Senate Democrats did not include either of middle class tax cuts or cap and trade system that was in the President's draft budget. The reporter questioned whether President Obama would sign a budget which did not include these two items. The President answered "we never expected, when we printed our budget, that they would simply Xerox it and vote on it". He further commented:

"When it comes to cap-and-trade, the broader principle is that we've got to move to a new energy era, and that means moving away from polluting energy sources towards cleaner energy sources. That is a potential engine for economic growth. I think cap-and-trade is the best way, from my perspective, to achieve some of those gains, because what it does is it starts pricing the pollution that's being sent into the atmosphere. The way it's structured has to take into account regional differences. It has to protect consumers from huge spikes in electricity prices. So there are a lot of technical issues that are going to have to be sorted through. Our point in the budget is: Let's get it started now. We can't wait. And my expectation is that the Energy committees or other relevant committees in both the House and the Senate are going to be moving forward to a strong energy package. It will be authorized. We'll get it done. And I will sign it".

Even if cap-and-trade isn't included?

Remarks by the Energy Secretary, Steven Chu, last week may confirm that cap-and-trade may put the U.S. at a disadvantage with its trading partners if other countries refuse to impose similar restrictions on their own manufacturers. Speaking before a House science panel, Mr. Chu confirmed "if other countries don't impose a cost on carbon, then we will be at a disadvantage". Mr. Chu went on to raise fears of U.S. protectionsim by proclaiming that his country "would look at considering perhaps duties to offset that cost".

We may continue to see climate change initiatives come from the White House; but will the most controversial plans, of which cap-and-trade is the biggest - be delayed or abandoned altogether? We'll see if these proposals are the weak links in the climate change chain.

CO2 a Pollutant in the US?

The Obama Administration continues its almost weekly announcements in its crusade against climate change. On Monday, the Environmental Protection Agency sent the White House a proposed finding that Carbon Dioxide endangers human health. Making a finding that CO2 endangers human health is something that both John Podesta and Todd Stern have been advocating for years through the Centre for American Progress.

Why is this announcement important? Currently CO2 is not considered a pollutant. Despite that CO2 is a greenhouse gas which contributes to climate change, it has not been considered a danger to human health by the United States - until now. If the EPA's proposed finding is accepted by the White House Office of Management and Budget, it would pave the way for the EPA to use the Clean Air Act to control emissions of CO2. It would also raise pressure on Congress to establish a cap and trade system to regulate emissions.

This does not mean that CO2 is going to be regulated immediately or that the administration will finalize rules for the regulation of greenhouse gases in the near future - these types of rules and a system for governing emissions could take years. However, if the White House finds that CO2 is a danger to human health, it is another link in the President's climate change chain.

The writer has blogged that linking environment and climate change to the economy would serve to centralize power in the federal government in the United States. The possible regulation of CO2 under the Clean Air Act by the EPA, a federal agency, is further evidence of that.

Canadian Climate Change Themes

The Clean Energy Dialogue between Canada and the United States was sparked in February after the Prime Minister met with President Obama. The President's Climate Change advisor, Carole Browner, met with the Minister of Environment to discuss Canada's approach to climate change during those meetings. A couple of weeks later, Canadian Ministers, including the Minister of Environment, traveled to Washington to meet with their American Counterparts. Since then, Jim Prentice has been busy speaking about Canada's response to climate change. A number of themes are emerging from the Minister's remarks:

1. Environment Policies are Instruments of Economic Renewal and Security : The Minister confirmed in a speech to the Institute of Corporate Directors on March 6, that Canada's environmental approach is to "make our national environmental policies positive instruments of economic renew and of national development". Environment policy and energy policy are inexorably linked. Canada has a history of environmental stewardship and has a responsibility to maintain that what at the same time creating wealth and building industry. Maintaining environmental integrity while enhancing our North American energy security is going to be a priority for the Federal government. We will start to see more overlap between Energy policy and Environmental policy.

2. Canada/U.S. Co-operation on Climate Change: This is no surprise. Since the President's visit in February, both the Prime Minister and the Environment Minister have said that Canada and the U.S. need to work together closely to address climate change. Minister Prentice has confirmed that Canada and the U.S. must work closely to build a new carbon economy and to ensure that "our policy and regulatory frameworks are coherent and supportive" and has called the relationship with the United States crucial in the context of the transformation to clean energy. There are a number of subthemes:

(a) Cap and trade: In a speech on February 27, Minister Prentice confirmed that Canada has committed to pursue a North-America-wide cap and trade system and that we will "work closely with the new U.S. administration to build the North American low-carbon economy". He is optimistic that Canada and the United States will arrive at a workable solution that defines "common or similar carbon reduction targets, that creates similar mechanisms to allocation emissions and...provides for the trading of credits on a North American basis".

(b) Fuel efficiency: Minister Prentice told the CBC on March 1 that Canada is prepared to go in the same direction as the United States and that he supports one fuel efficiency standard for the two countries.

(c) New technologies: The Minister remarked that Canada and the United States have a strong and shared interest in promoting the development and deployment of clean energy technologies. The Clean Energy Dialogue will include discussions about Carbon Capture and Storage, an interconnected electricity grid, nuclear energy, wind, solar, hydro and other "more remote renewable sources of energy". Canada's action plan has Canada "on course to reduce domestic greenhouse gas emissions by 20% by 2020 and by 60 to 70% by 2050". In order to achieve these goals, Canada must invest in new technologies.

3. Canada Must be a Leader : Canada is one of the top ten energy consumers in the world. Our challenge is to "stand among the world's elite as a clean energy superpower" and to demonstrate that Canada is a user of clean energy. The Minister told his March 6 audience that the government is "committed to ensure that Canada is actively and constructively engaged in the [Clean Energy Dialogue]" and that it "intends to be a leader and a responsible partner in defining the way forward".

4. International Agreement : both the United States and Canada seem to be setting their sights on Copenhagen in December and both countries believe that in order for climate change policies to be effective domestically, international co-operation is required. Canada's climate change policy is "based on a clear desire to include all of the major emitters in the world". Major emitters would include China and India and other developing nations.

5. Climate Change is Everyone's Responsibility : Although the impetus for climate change has to come from government with active participation and engagement of industry, the responsibility extends to all citizens "from all walks of life". Canada's climate change strategy will involve "how we consume and conserve energy in our homes and in our offices". In his February 27 speech, Minister Prentice remarked:

Thirty years ago, drunk driving was tolerable. It's not anymore. Twenty years ago, it was acceptable to drive without a seatbelt. It's not anymore. Up until a few years ago, Canadians could smoke anywhere in public. They can't anymore. Attitudes shifted. Behaviours changed. The same needs to happen with the environment.

Watch for these themes to start emerging in other departments of the federal government. Climate change is one of the most important issues facing governments today. We'll keep you posted on new developments in Canada. Stay tuned.

Stern offers qualified optimism about quick passage of climate change legislation

Passing climate-change legislation before December would be "an extremely tall order." This was Todd Stern's caution to international government officials gathered at a climate change conference in Washington this week. Nevertheless, Stern added that "nothing would give a more powerful signal to other countries than to see a significant, major, mandatory plan" from the U.S.

Stern (who has been the topic of previous postings) is the Department of State's Special Envoy for Climate. His comments reflect a tension that the Obama administration will have to balance in the coming months. On the one hand, President Obama has committed to moving quickly on the climate change file. The administration also wants to assert U.S. leadership in the international negotiation of a post-Kyoto regime. Specifically, Stern acknowledged that enacting domestic legislation before the negotiations in Copenhagen in December would sent "a powerful signal" to other countries to reduce their emissions (although Stern also said of the Bali roadmap targets, "it's not possible to get that kind of number"). On the other hand, the administration faces significant obstacles to passing legislation by December. The government is already tackling a financial crisis. It may also face strong opposition from representatives (including Democrats) from coal-rich and manufacturing-dependent states. See this article in the Wall Street Journal for more information.

Hopefully the need for expediency will prevail. In recent months, Canada has taken steps to align itself with the new administration on the climate change issue. It would be unfortunate if Canada too went another year without finalizing its plan to reduce emissions.

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.

President Obama in Canada: What Just Happened and What Does it Mean

Wow! What is must have been like to have been in Ottawa today when Prime Minister Stephen Harper and President Obama had their much anticipated meeting. How lucky those people happened to be in the Market when the President stopped by for a Beavertail or who cheered on as the he waved to the crowds gathered on Parliament Hill and Wellington Street. What a cool day to be in the capital.

Although the leaders' agenda touched many matters, economy, climate change & the environment and national security (I see a theme here...) were at the centre of comments made by both the President and the Prime Minister after their meeting.

Prime Minister Harper said that the two countries have begun a "Clean-Energy Dialogue", which will see senior officials from both sides of the border working together on the development of clean energy, science and technologies. If you've been paying attention to the comments from our Environment Minister, this will come as no surprise. Although the President confirmed that the U.S. must firm up its own environmental policies before entering into binding agreements with Canada, he said that the "dialogue will move us in the right direction".

Why? Because Economy = Environment/Climate Change = National Security and both the U.S. and Canada recognize that. The goal of the Clean-Energy Dialogue will be to position the U.S. and Canada at the forefront of global leadership on "clean energy" and climate change.

How? By focusing on:

1. Technology
2. Innovation
3. Energy research
4. Carbon capture and storage
5. Renewable Energy

The governments of both countries will have to collaborate to pursue technology and innovation to fight climate change, stimulate the economy and preserve national security. The Clean-Energy Dialogue will bring private enterprise and science together with government funds to develop new technologies to combat global warming and lead the world from economic crisis.

Seems to me that huge dollars will be involved and government intervention on both sides of the border will be required in order to put the Clean-Energy Dialogue partners on the road to the Green Economy. Right now, that road is leading to Copenhagen.

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.

PM appoints new ADM to tackle North American carbon trading scheme

The federal government continues to ramp up its efforts to negotiate a North American emissions trading scheme. Effective January 5, Prime Minister Stephen Harper has appointed Bob Hamilton as a new Associate Deputy Minister of the Environment. While details of the appointment have not been publicized, Point Carbon reports that Mr. Hamilton's responsibilities will be to develop a North American carbon emissions trading scheme with the new US administration.

Minister of the Environment Jim Prentice has previously emphasized that climate change represents the intersection of environmental, energy and economic policy (see previous posting). Mr. Hamilton will help bring the economic perspective to the Ministry of Environment. He was associate secretary of the Treasury Board since August 2008 and had previously worked as a senior assistant deputy minister in the tax policy branch of the Department of Finance between 2003 and 2005.

Minister Prentice: Environmental, energy and economic policy are parallel roads to the same destination

Environmental, energy and economic policy will remain tightly intertwined at the federal level. This was Minister of the Environment Jim Prentice's message to business leaders at at the Lake Louise World Cup Business Forum on November 28, 2008. "It is understood that when we speak of environmental policy, we also speak of energy policy. And when we speak of energy policy, we speak of economic policy," noted Minister Prentice during his address. "These are all parallel roads to the same destination. That destination is one of an enduring Canadian prosperity."

Minister Prentice's remarks are consistent with the message that has been emerging from Ottawa since the federal Conservatives won another minority government on October 14.

The remarks were made in the midst of the global economic crisis. However, the economic crisis is not the only factor that will shape Canada's climate change policy. Minister Prentice also pointed to President-elect Obama's position on the environment and energy as well as the ongoing UN negotiations regarding the successor agreement to Kyoto as factors that must be considered.

With respect to the US, he said that Canada must "forge an immediate relationship with the new American administration in order to quickly and collectively address the environmental issues that straddle the borders of our two nations." Minister Prentice, along with his counterparts in International Affairs and International Trade, have already reached out to President-elect Obama to discuss a continental cap-and-trade regime. He emphasized that Canada must "work collectively on all fronts - domestically, in North America, and as a leading contributor to international efforts - to make real progress."

While Minister Prentice set out an integrated framework for federal climate change policy, he did not propose any specific regulations, nor did he address Canada's existing Turning the Corner climate change plan. The fate of Turning the Corner,which was to be implemented by January 1, 2010, is now very uncertain.

Creating an integrated environmental, energy and economic policy will necessarily involve compromise. The concern among environmentalists is that in an age of economic turmoil and energy scarcity, environmental interests may be subordinated to economic and energy supply concerns. Given the immediacy of the economic crisis and the urgent push to enact environmental legislation, there is a risk that short term economic concerns could lead elected officials to craft weak greenhouse gas emissions regulations, with significant long term consequences for the global environment.

Federal government announces intention to pursue North American approach to climate change

CBC reported yesterday that newly appointed Minister of International Affairs Lawrence Cannon said that the Canadian government will seek a North American climate change agreement with the new administration of U.S. president-elect Barack Obama. The U.S. federal government is widely expected to implement some form of cap-and-trade regime in the coming years. The cap-and-trade approach would be a significant departure from the Harper government's focus on emissions intensity reduction under former Minister of the Environment John Baird.

Minister Cannon said that he expects that newly-appointed Minister of the Environment Jim Prentice would be active in the file in the coming weeks. Minister Prentice, who was formerly Minister of Industry, will bring pragmatic experience that theToronto Star describes as a keen understanding of "the links between industry, prosperity and resources." Ministers Cannon and Prentice will also be engaging Stockwell Day in the file in his new role as Minister of International Trade.

The prospect of an integrated North American greenhouse gas regime is both promissing and daunting. It holds the promise of being a huge market that will create correspondingly huge opportunities for forward-thinking businesses. However, the level of coordination and negotiation that will be required to bring the system to fruition is very daunting. Skeptics are already grumbling that by hitching itself with the future plans of Washington, Ottawa has merely given itself an excuse to do nothing in the short term.

The announcement calls into question the long term viability of initiatives at the provincial leval (e.g., Alberta's climate change and emissions management regime) and regional level (such as the Western Climate Initiative). It also begs the question of what the federal government will do with its Turning the Corner plan.

Election results: Green Shift shelved, Turning the Corner still on the table

On October 14, 2008, Canada held a federal election that saw the Conservative Party form another minority government. While the Conservatives gained some seats and the parties traded seats in some ridings, the overall balance of power remains much the same as it was before the election. As a result, while Prime Minister Harper may be "pleased with the strengthened mandate we've received", he will still have to work with the Liberals, NDP and Bloc Quebecois to advance his agenda (the Green Party failed to win any seats).

With respect to climate change, the election results mean that the Liberal's Green Shift plan, including a proposed carbon tax, will be shelved for now. The government will likely press ahead with its Turning the Corner plan. It is very likely that the opposition parties will continue to assail the Turning the Corner approach, particularly to the extent that it is based on emissions intensity targets. However, concerns about the economy could mean that the environment will not receive as much attention as it has in recent years.

WCI releases Draft Design for regional cap-and-trade system

The Western Climate Initiative (“WCI”) released its Draft Design of the Regional Cap-and-Trade Program (the “Draft Design”) on July 23, 2008. The WCI is a partnership of 11 US states and Canadian provinces, including BC, Manitoba, Quebec and Ontario (collectively, the “Partners”) that is developing a regional cap-and-trade system for greenhouse gas emissions. The Draft Design, summarized below, outlines the WCI’s current recommendations for the system and will be subject to public comment in the coming months. The WCI plans to release its final recommendations this fall.

The scope of the Draft Design is more ambitious in many respects than other climate change mitigation plans. The Draft Design contemplates capping the emissions of six greenhouse gases (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride), whereas the EU ETS cap applies only to carbon dioxide at this time. Under the WCI scheme, facilities emitting more than 25,000 tCO2e would be regulated. This threshold is 75% lower than the 100,000 tCO2e thresholds in the Alberta Specified Gas Emitter Regulations and the federal “Turning the Corner” plan. Like other mitigation plans, the WCI will regulate emissions from electricity generation and industrial facilities (including both combustion and process emissions). However the Draft Design recommends also regulating emissions from residential, commercial, and industrial fuel combustion at facilities below the 25,000 tCO2e thresholds and from transportation fuel combustion. However these sources will not be regulated until the second compliance period. Interestingly, emissions from biofuels and biomass will not count towards the cap, creating an opportunity for such fuels to displace fossil fuels.

Emissions from generating stations and industrial facilities in the WCI region will be regulated at the point of emission. Emissions from electricity imported from non-WCI jurisdictions will be regulated at the first point of distribution in the WCI. Emissions from sources below the 25,000 tCO2e threshold and from transportation fuels will be regulated “up-stream” from the point of emission, for example at the first point at which the fuel is distributed in the WCI region.

An aggregate cap for the entire WCI region will be established for 2012 based on the estimated emissions for that year. The cap will be adjusted in 2015 to account for the additional smaller fixed combustion sources and transportation sources discussed above. The cap will decline steadily from 2012 to 2020 and will be enforced in 3-year compliance periods. The WCI has yet to give any indication what the initial cap or rate of decline will be.

The aggregate cap will be apportioned to each of the WCI Partners. The Draft Design does not describe the specific apportionment methodology, but does state that the methodology “will address factors such as production and consumption of electricity, projected population growth and economic activity, and other factors.” WCI Partners will then be responsible for distributing emissions allowances to regulated entities “as they see fit” and for administering compliance in their respective jurisdictions.

Even though Partners will have significant autonomy in administering their allocation, they will be expected to harmonize their efforts in certain significant respects. The Draft Design suggests that Partners shall “consider standardizing the distribution of allowances over time” to address potential competitiveness issues. Additionally, Partners will be expected to set aside a portion of their allowances for “public purposes”, such as subsidizing renewable energy, R&D, or CCS. Finally, individual Partners agree to auction a portion of their allowances, such allowances must be sold through a “coordinated regional auction process.”

Regulated entities will be allowed to bank allowances, but will not be able to “borrow” from future allocations. Allowances will be tradable not just within a particular Partner’s jurisdiction, but across the entire WCI region. The Draft Design also contemplates the creation and trading of offsets. The treatment of offsets will be discussed in a separate posting.

Of particular relevance to British Columbia, the Draft Design states that “WCI Partners agree that individual jurisdictions may use fiscal measures that contribute to achieving overall comparable GHG emission reductions and internalize the price of carbon as expected through the regional cap-and-trade program for transportation and residential/commercial fuels.” Specifically, the WCI will determine a mechanism for integrating BC’s provincial carbon tax in the regional cap-and-trade program.

Ontario to Jump Onboard the WCI

On July 18, 2008 Ontario’s Premier Dalton McGuinty announced that Ontario is moving from ‘observer’ status to a member of the Western Climate Initiative (WCI), which includes BC, Manitoba, Quebec, Arizona, California, New Mexico, Oregon, Washington, and Utah. The WCI is a group of Canadian provinces and U.S. states banding together in a regional initiative to address climate change. Alaska, Colorado, Idaho, Kansas, Nevada, Wyoming, Saskatchewan and the Mexican states of Sonora Baja California, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas have observer status. The WCI expects to complete design recommendations of a regional, multi-sectoral cap and trade program by August 2008 and roll out the program by 2010.

More details on the WCI can be found in our new Climate Change Law Bulletin - Issue No. 1 (July 1, 2008): Emerging GHG Compliance Emissions Trading Systems in North America.

BC Public Sector may purchase $24 million in offsets to be carbon neutral by 2010

Submitted by Grant Boyle

On June 26 B.C. released its Climate Action Plan, which outlines strategies that will help the province reach 73% of its goal of reducing GHGs 33% by 2020 from 2007 levels. The Plan outlines existing and upcoming policy initiatives that are intended to help reduce emissions from transportation, buildings, waste, agriculture, industry, energy and forestry in the province.

One of the legislated requirements highlighted under the Plan is for the province’s public sector to be carbon neutral by 2010. Under the BC Greenhouse Gas Reduction Act, all provincial ministries, health authorities, school districts, colleges, universities, Crown Corporations and other government agencies must be carbon neutral as early as 2010.

Public sector organizations must publically report emissions, reduce emissions and offset any remaining emissions. The government will set up the Pacific Carbon Trust as a new Crown Corporation to meet public sector demand for offsets. The 2008 Budget provides $24 million to invest in GHG-reduction projects. Although, the government has not indicated what type of offsets the Trust will accept, the Plan says that the initial mandate of the Trust is to offer “credible, low cost offsets” to the public sector. In light of Victoria’s indication that no regulations to implement BC’s Greenhouse Gas Reduction Cap and Trade Act will pass this year, the Pacific Carbon Trust’s mandate could drive the first compliance market for carbon offsets in the province, creating new opportunities for carbon reduction project developers.

The 2008 Budget also allocates around $100 million to support energy efficiency upgrades in public buildings and $15 million for communications tools that reduce the need to travel as measures to reduce emissions from the public sector.

California releases draft climate change plan

On June 26, the California Air Resources Board ("CARB") released the discussion draft of its Climate Change Draft Scoping Plan (the "Draft Scoping Plan"), enacted pursuant to Assembly Bill 32, the California Global Warming Solutions Act of 2006 ("AB 32"). The Draft Scoping Plan sets out California's roadmap for achieving greenhouse gas emissions reductions. Given that California has a history of leading environmental change, and that some of its initiatives are not confined within the state's borders, regulators and businesses operating in Canada, the U.S. and Mexico should pay careful attention to developments in the Golden State.

CARB's goal is to reduce emissions to 1990 levels by 2020, which amounts to approximately a 10% reduction from today's levels. The goal is ambitious, but should still be understood in perspective. Had the United States ratified the Kyoto Protocol, it would have been under an obligation to reduce its emissions to 7% below 1990 levels by 2012. California's long term goal is significantly more ambitious: the Draft Scoping Plan requires an 80% reduction of greenhouse gases from 1990 levels by 2050.

The following are the key elements of CARB's recommendations for achieving those goals:

• Expansion and strengthening of existing energy efficiency programs and building and appliance standards;
• Expansion of the Renewables Portfolio Standard to 33 percent;
• Development of a California cap-and-trade program that links with other WCI Partner programs to create a regional market system;
• Implementation of existing State laws and policies, including California’s clean car standards, goods movement measures, and the Low Carbon Fuel Standard;
• Targeted fees to fund the State’s long-term commitment to AB 32 administration.

CARB has emphasized the need to take a comprehensive and integrated approach to fighting climate change. Its recommendations therefore combine market mechanisms, regulations, voluntary measures, fees, and other policies and programs to reduce greenhouse gas emissions. While CARB will lead the implementation of the plan, every agency, department and division of the state government will be mobilized to put the plan into action. California will also continue to call on businesses and corporations to make climate change part of their fiscal and strategic planning.

While California is once again taking an environmental leadership role, it does not intend to tackle the problem of climate change alone. The state is already cooperating with six other states and B.C., Manitoba and Quebec in the Western Climate Initiative ("WCI") to design a regional greenhouse gas emission reduction program that includes a cap-and-trade approach. CARB intends to design a state-level cap-and-trade system that will integrate with the WCI.

The Scoping Plan is currently just a draft. CARB expects to release a Proposed Scoping Plan in October 2008 that will incorporate feedback about the Draft Scoping Plan. CARB intends to adopt the Proposed Scoping Plan in November after a 45-day comment period. Once the Scoping Plan has been adopted, it will still have to be implemented through regular lawmaking processes.

Lieberman-Warner Bill Blocked by Senate Republicans

Posted by Daniel Jarvis and Grant Boyle

The U.S. bill, put forward by Senators Joe Lieberman and John Warner (amended by Senator Barbara Boxer) to bring into force the now titled “Lieberman-Warner Climate Security Act of 2008”, aimed to cut greenhouse gas emissions from 86% of U.S. sources by 71% by 2050 from 2005 baseline levels through a cap and trade scheme. The scheme would have auctioned a considerable number of the allowances allocated in the scheme - about 20% in 2012 and about 70% by 2050. At the same time, the scheme would have directed $5.8 trillion to consumers and utilities in the form of free allowances and revenue from auctions to offset higher energy costs and help polluting industries shift to low-carbon technologies.

In a 48-36 vote, the legislation fell 12 votes shy of the 60 required for continued consideration. Senators Barack Obama and John McCain did not vote, but sponsors said they and other Senators submitted statements to the Senate indicating they would have voted to move the bill forward if they were present.

Even though the bill is now stalled, it has set the stage for future emissions legislation proposals and negotiations. “We have convinced a majority in the Senate to support mandatory, comprehensive, market-based legislation to curb global warming and enhance US energy security," said Senator Joe Lieberman on his website.

Lieberman and Warner introduced the bipartisan bill in October 2007. On December 5, 2007, the Senate Environment and Public Works Committee voted to report the bill favorably to the full Senate, marking the first time that a Congressional committee had reported comprehensive climate legislation in either the Senate or the House of Representatives.

Ontario and Quebec announce cap-and-trade alliance

Cap-and-trade is coming to central Canada. Premiers Dalton McGinty and Jean Charest announced this week that Ontario and Quebec would work together to implement a cap-and-trade system for the two provinces. The target will be to reduce emissions to 1990 levels (which would still fall short of Canada's Kyoto commitments). Premier McGinty said the system should be implemented by 2010.

No other details of the proposal have been released. However, it is expected that the Ontario-Quebec system will be modelled at least in part on the Western Climate Initiative ("WCI"). The WCI is an alliance of states and provinces that will implement a regional cap-and-trade system. Quebec is a WCI member (as are Manitoba and BC) and Ontario is a registered observer. WCI released Draft Design Recommendations for its cap-and-trade system on May 16, 2008 (see our related posting) and will be issuing its final recommendations in September. BC has already indicated that it intends to harmonize its provincial cap-and-trade system with that implemented by the WCI. It is likely that Quebec and Ontario will follow suit.

As reported by the CBC, the announcement by Ontario and Quebec was met with scorn from Ottawa. Federal Environment Minister John Baird accused Premiers McGuinty and Charest of "political posturing" and claimed that "What the premiers are talking about is much in the line of what we're doing, but it's just talk." The Premiers got in their own jabs, with McGuinty accusing the Federal Conservatives of having a lack of imagination and Charest noting that the rest of the world is moving towards a cap-and-trade model, not the intensity-based approach being taken by Ottawa. Federal NDP leader Jack Layton also jumped into the fray, saying that the Premiers were filling a "vacuum of leadership" on the issue of cutting greenhouse gas emissions.

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.

BC introduces cap-and-trade legislation to complement carbon tax

Submitted by Andrew Lord

Having introduced a significant carbon tax earlier this year, the BC government unveiled a second plank in its aggressive effort to tackle climate change. On April 3, 2008, the BC government introduced Bill 18, Greenhouse Gas Reduction (Cap and Trade) Act (the "Act"). The Act would create a cap-and-trade system for greenhouse gas emissions in the province that could be an effective complement to the carbon tax.

Under the Act, the BC government would issue B.C. Allowance Units ("BCAUs"), each corresponding to a right to emit one tonne of carbon dioxide equivalent, to companies in designated sectors. Those companies would then only be permitted to emit the amount of greenhouse gases for which they held BCAUs. This is the "cap" that makes the policy environmentally effective. Those companies who emit more than their assigned amount of BCAUs would have several alternative compliance options, which together constitute the "trade" element that makes implementing the cap more economically efficient. Such companies could do the following:

• Purchase BCAUs from other companies who were able to cut their emissions below their assigned amounts;
• Purchase Recognized Compliance Units ("RCUs") from other jurisdictions (discussed below);
• Create or acquire BC Emissions Reductions Units ("BCERUs"), which will be generated by projects that avoid or sequester emissions, to offset their excess emissions; or
• Pay an administrative penalty.

The details of the BC cap-and-trade system will be developed in parallel with the Western Climate Initiative (the "WCI"). The WCI, whose signatories include BC, Manitoba, California, Oregon, Washington, New Mexico, Arizona, Utah and Montana, will implement a regional cap-and-trade system. By harmonizing the systems, BC hopes to create increased liquidity for carbon instruments. The Recognized Compliance Units mentioned above are expected to largely be sourced from WCI members.

The Act will also establish the administrative apparatus required to track the allocation and trading of the various units and to approve BCERUs and RCUs.

Carbon taxes and cap-and-trade systems are recognized as two ways of placing a price on carbon. The two approaches are significantly different both in the way they achieve the goal of reducing emissions and also in the breadth with which they may be implemented. With respect to the way a emissions are reduced, carbon taxes put a price on carbon in the expectation that consumers will shift demand away from carbon-intensive products. That price incentive should result in reduced emissions. However the result is not guaranteed, particularly if the price signal is not strong enough. Cap-and-trade systems, by contrast, legislate what amounts to a scarcity of emissions. Combined with measures to create a liquid market, that scarcity results in a price for carbon. However it is the legislated scarcity, and not the price signal, that controls the level of emissions. Because that scarcity can be controlled directly, reduced emissions can be guaranteed to a much greater extent than through carbon taxes. With respect to the breadth with which the two approaches can be implemented, a carbon tax can be implemented for all types of consumers, from big businesses to individuals, and can thus drive down emissions across the economy. In contrast, a cap-and-trade system is complex to administer and is thus better suited for large emitters than for individual consumers.

These counterbalancing differences make a carbon tax and a cap-and-trade system complementary. BC therefore appears to be undertaking a very sophisticated, progressive, and hopefully effective approach to addressing the problem of climate change. Check back here for updates as Bill 18 makes its way through the BC Legislative Assembly.

Intensity of greenhouse gas debate continues to increase

Submitted by Andrew Lord

The federal government released the details of its plan to reduce industrial greenhouse gases last week. The plan has already drawn a lot of fire from various groups. Much of the criticism focuses on the fact that the Conservative government does not plan to regulate aggregate emissions, but has instead chosen to regulate emissions intensity.

Aggregate emissions are the total emissions of greenhouse gases for a particular industry, sector or country over a given period. Aggregate emissions drive climate change and are the subject of instruments like the Kyoto Protocol. Emissions intensity, by contrast, refers to the quantity of greenhouse gases that may be emitted for a given unit of industrial production. The problem with an emissions intensity based regulation is that aggregate emissions can rise if industrial production rises. Intensity-based targets may therefore not actually mitigate climate change.

The government's focus on emissions intensity is being attacked on at least three fronts: policy, economics and law. First, policy-focused NGOs have been quick to highlight the inherent flaw in the emissions intensity-based approach, pointing out that the plan will not achieve its stated objective of mitigating climate change. For example, Claire Demerse of the Pembina Institute noted that the plan is misleading where it states that the targets will "effectively require oil sands starting operations in 2012 to implement carbon capture and sequestration (CCS)" (as reported by Point Carbon) She notes that the plan actually requires no such thing, but only provides financial incentives for using the technology. Depending on the overall economics of the project, such incentives may be insufficient to prompt the desired mitigating action.

Economists have also criticized the approach as being out of step with the emerging global carbon market. Rik Parkhill, interim co-chief executive officer of the TSX Group said that an "intensity-based system in Canada, apart from being potentially incompatible with other, larger and more liquid markets, could be smaller and less efficient for intensity-based trading that for a system based on trading under a strict cap" (as reported by Reuters). A strict cap on aggregate emissions, such as that imposed under the EU Emissions Trading System, would create the scarcity that is required to establish a reliable and compelling price for carbon. A reliable and compelling price is necessary to create sufficient liquidity in the proposed carbon market. To ensure that Canada is included in a liquid international market, Parkhill anticipates that exchanges and other financial regulators will continue to "lobby hard to make sure that carbon trading systems are wrestled into some form of compatible form on both sides of the pond."

Finally, a decision released by the Federal Court last week turned on the efficacy of emissions intensity based targets. The case concerned a challenge by several NGOs of a joint Alberta-Federal panel's environmental assessment of the proposed Kearl oil sands project. The panel concluded that intensity-based mitigation measures and regulations would be sufficient to ensure that greenhouse gas emissions from the project would not result in significant adverse environmental impacts. The Federal Court took issue with the fact that the panel had not provided cogent reasons in support of that conclusion. The court held that "given the amount of greenhouse gases that will be emitted to the atmosphere and given the evidence presented that the intensity based targets will not address the problem of greenhouse gas emissions, it was incumbent upon the Panel to provide a justification for its recommendation on this particular issue." The court therefore ordered that the matter be remitted to the same panel with the direction to provide a rationale for its conclusion.

In light of all of the above criticism, perhaps the federal government will feel compelled to do the same.

Recent US developments: Baby steps, but steps nonetheless

Submitted by Andrew Lord

There have been several notable developments south of the border recently. Taken individually, the developments may appear small. However taken together, they are evidence of a trend in the US towards controlling greenhouse gas emissions in a meaningful way.

In a news conference in Paris on February 25, James Connaughton and Daniel Price, key environmental and economics advisers to President Bush, announced that the U.S. is ready to accept binding international obligations to reduce greenhouse gas emissions. However, they did not indicate when or by how much the US would be willing to cut its emissions. Also, the they remained emphatic that the US would participate in a global scheme only if nations like India and China also participated. These omissions and caveats have led some European leaders to dismiss the announcement as a repackaging of an old position. The BBC quoted one unnamed official as saying, "President Bush won't be in office to sign off the next climate agreement so we really no longer really care what he thinks." However, it is encouraging to see that the US remains engaged in the international effort to mitigate climate change.

Domestically, tax incentives are widely seen as being instrumental in promoting renewable energy investment in the US. It was therefore also encouraging to see the US House of Representatives passed the "Renewable Energy and Energy Conservation Tax Act of 2002" (Bill H.R. 5351) this week. The bill is particularly enticing because it funds tax breaks for green energy by repealing tax breaks for Big Oil. It extends tax credits currently available for various forms of investment in renewable generation and energy efficiency for several years. The bill also provides new tax credits for investment in renewable energy and energy conservation bonds, as well as for the production of plug-in hybrid vehicles, cellulosic biofuel, and electricity from renewable marine and hydrokinetic sources. Several other tweaks to the Internal Revenue Code are also included in the bill. Perhaps the most controversial aspect of the bill is that it attempts to achieve revenue neutrality by clawing back $18 billion in tax subsidies previously made available for the domestic production of oil, natural gas and related products. This provision is expected to be fatal to the bill when it crosses President Bush's desk. However, similar legislation is likely to fare better after the new Presidential election.

In other news from the House of Representatives, the House's energy committee, chaired by John Dingell, released a white paper this week that expressed concern that regional and state cap-and-trade initiatives could interfere with federal efforts to develop a national cap-and-trade system. The paper notes that the "country is now at the difficult and familiar stage of transitioning from multiple, often unconnected, State and local climate change programs to a comprehensive, national approach to addressing the global problem of climate change." The paper suggests that, if the states continue to develop their own programs, "more stringent State programs might unduly burden interstate commerce or increase the governmental or societal resources needed to achieve the necessary reductions," could shift carbon emissions to less stringent states, and could hamper the ability of the federal government to balance state interests. However, the paper acknowledges that states could be good laboratories for cap-and-trade schemes and may be well-poised to create systems suited to local circumstances. While the paper treats the tension between the states and Washington as a policy question, it is also a legal question of the constitutional division of powers. Whether viewed through the lens of policy or constitutional law, the discussion is evidence that governments at all levels in the US are getting serious about implementing laws to control greenhouse gas emissions.

One thing is clear: local initiatives are moving ahead much more quickly than federal initiatives. On February 14, the first publicly-announced compliance trade under the Regional Greenhouse Gas Initiative (RGGI) was completed. RGGI, which includes 10 northeast and mid-Atlantic states, will cap CO2 emissions in the region beginning January 1, 2009. Icap, the environmental brokerage that arranged the trade, confirmed that the trade was for options for delivery in 2009-2010 but did not disclose the number of units that were traded. Options for RGGI units, each corresponding to a short ton of CO2, reportedly traded for between $5-10 US. This is the very first concrete indication of the potential value of compliance trades in the emerging US cap-and-trade market. That RGGI is open for business proves that progress can be made even before the new President is elected.

However there can be no doubt that the future of the US carbon market is tightly tied to the presidential election. As an example, the election appears to have already had a measurable impact on the price of carbon in the US. The price of units on the Chicago Climate Exchange (CCX), a completely voluntary CO2 market, shot up right after Super Tuesday (February 5). The price when from about $2.75 to over $4.50. Given that John McCain, Barack Obama and Hillary Clinton all support a mandatory cap-and-trade approach, the jump in price may reflect the market's expectation that emissions credits will be worth much more after the election. Like all of the developments discussed above, the change is most meaningful not because of what it says about the state of affairs today, but because of what it suggests about the market of the future.

US cap-and-trade inevitable - market could be worth $1 trillion

Submitted by Andrew Lord

Economic researchers at New Carbon Finance released a report this week estimating that the US will be home to a carbon market will be worth $1 trillion by 2020. The forecast assumes that the US will implement an economy-wide cap-and trade system within 4-5 years and that the system will be confined to domestic trading only.

Currently, the US House of Representatives and Senate are discussing 13 different climate change bills, most of which propose a market-based solution such a cap-and-trade system. It is likely that some version of one of these bills will be passed after the US presidential election. All three front-runners in the presidential race have declared their support for a mandatory cap-and-trade system. Both Hillary Clinton and Barack Obama would like to see emissions reduced by 80% from 1990 levels by 2050. John McCain, who sponsored the McCain-Lieberman Climate Stewardship Act introduced in 2003, hopes to achieves a more modest reduction of 60% over the same period.

The impact of a cap-and-trade system is forecasted to be enormous. Researchers expect the carbon trading market to be worth about $1 trillion by 2020, more than twice the size of the EU ETS. This forecast is based on an estimated carbon price of $40 per tonne as early as 2015. A price of $40 per tonne is expected to raise the cost of electricity by 20%, of gasoline by 12%, and of natural gas by 10%.

The researchers noted however that the impact need not be so severe. All 13 bills currently under consideration share a common feature: they would limit the trading of emissions to the US only. They all restrict trading with other cap-and-trade systems, such as the EU ETS, and forbid participation in the Kyoto Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI) projects. If the system permitted international trading and participation in CDM and JI projects, the price of carbon would be closer to $15 per tonne. A price of $15 per tonne would only raise the cost of electricity by 7%, of gasoline by 4%, and of natural gas by 5%.

The increasing likelihood that the US federal government will implement a cap-and-trade system will have repercussions both domestically and abroad. Domestically, a federal system could displace many initiatives that are already under way. For example, several states have already committed to participate in regional cap-and-trade systems, most notably the Regional Greenhouse Gas Initiative (RGGI) in the Northeast and the Western Climate Initiative in the West. Some states are also taking local action. For example, California intends to implement a cap-and-trade system for its electricity market.

Internationally, the leadership of the US could prompt other jurisdictions to implement similar programs. For example, Japan announced this week that it would study the feasibility of a cap-and-trade system, an idea that it had vehemently opposed in the past. US leadership abroad may not just be by good example: there is already talk of imposing trade sanctions on imports from countries unwilling to participate in mandatory emission caps.

It is almost certain that Canada will follow the lead of its neighbour to the south. The question is one of timing. The federal government may sit tight until the US makes its move. However, some provinces seem more restless. BC, for example, just announced a new carbon tax (see below) and is already a member of the Western Climate Initiative. Regardless of when the government makes its move, pro-active Canadian businesses should start planning for change now.

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.

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.

Australia Gears Up for Carbon Trading

Posted by Daniel Jarvis.

As John Howard’s re-election campaign in Australia warms up, so too has his stance on climate change. Howard signalled yesterday that Australia will develop a carbon trading scheme and invest AU$627 million in new measures (CAD$571 million) to help tackle emissions of greenhouse gases and global warming. Missing from Howard’s speech, were any hard targets for the reduction of GHG emissions, but he has signalled that these would be coming after 2008, so that modeling of impacts could be carried out.

Details of the emissions trading scheme and new measures that have emerged include:

• credits will be issued and auctioned under a “cap and trade” scheme allowing firms to emit a certain level of greenhouse gases. Firms emitting more than their allotted amount will be required to purchase additional credits;
• the deadline for setting up the emissions trading scheme is 2011;
• the scheme will include a “safety valve” emissions fee limit, to ensure that businesses do not suffer unfairly in the transition process;
• firms that cut emissions in the lead-up to the scheme will be rewarded for these cuts;
• research into the potential of nuclear energy in Australia will be funded;
• AU$336 million (CAD$306 million) will be invested in green vouchers for schools to improve energy and water efficiency, with every school eligible for up to AU$50,000 (CAD$ 45,585) to install solar hot water systems and rain water tanks;

Critics are panning Howard’s plan as too little, and too late. They point to Australia’s track record as one of the world’s worst polluters per capita, and one of only two fully industrialized countries (the other being the U.S.) that refused to sign on to the Kyoto Protocol. Howard, however, states that action by his government since 1990, will prevent about 87 million tonnes of GHG’s a year from entering the atmosphere by 2010. In his speech, he also commented that, “Australia will more than play its part to address climate change, but we’ll do it in a practical and balanced way, in full knowledge of the economic consequences of our nation.”

Airlines Embrace Emission Trading

Greenhouse gas emissions from international air travel were not covered by the Kyoto protocol because of the difficulty in assigning the emissions to a responsible country. Does a Canadian flying from New York to Paris on a Lufthansa flight create GHG emissions that are the responsibility of Canada, the US, France or Germany? Given the small percentage of global emissions that international travel represents, this issue was left to be dealt with at a later date.

It is now a later date. International air travel is growing at a high rate. This in turn means that international air travel (and international air shipping) are increasing as a proportion of total global GHG emissions. Air Canada recently announced it will offer customers a chance to offset emissions, and Expedia offers the same option to its clients. With the writing clearly on the wall, the International Air Transport Association has come forth and stated its support for an international cap and trade system for GHG. IATA has pledged its support for a system that would allot airlines an ultimate cap on the GHG emissions they could emit. Where these emissions were exceeded, the airlines would then have to purchase emissions credits from companies that exceeded their own emissions targets. The IATA briefing notes from the 2007 annual meeting stated that “airlines will likely be net buyers of allowances.”

Possibility Of A Canada Wide Emission Cap And Trade System Leaked

After asking what BC's signature to the WRCAI meant for a cap and trade system on GHG meant for the rest of Canada, and how this move would play out in Canada, it was interesting to hear of the contents in a leaked speech by Canada's Conservative government on this very issue.  Although the details have been limited, it would appear that a Canada wide system is once again being considered, as is the possibility of broadening the system to the US and Mexico. Interestingly, it also appears that the international link is being considered as a future expansion of the system rather then an initial move which once again raises the question of how emission in BC, which could conceivably be tradeable on two different markets, would be affected.