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Copenhagen - What Happened Today

It's really nothing new.

The talks in Copenhagen seem to be confirming the status quo. Developing countries are still looking for someone to pay for climate change so they can continue growth. They are looking to the developed world to do this. Today some African nations walked out of the talks in protest over discussions to let the Kyoto Protocol expire and begin with a new treaty, one to which all countries are bound.

What does it really mean? It has to do with money.

Under Kyoto developing nations have no emissions reduction requirements. Countries to the Kyoto Protocol are to reduce their emissions or purchase international offsets if they don't (clearly it's not entirely this simple, but those are the basics). The purchase of these offsets (which for most industrialized nations are necessary in order to get their emissions below the cap) essentially amount to financial assistance by the developed to the developing world.

The developing nations are not accountable for emissions under Kyoto, nor is the United States, which neither signed nor ratified the treaty. If a new treaty is made, then most developed nations argue that in order to be effective and to involve the U.S., it must also bind the developing world. The developing world isn't particularly keen on this (see our previous blogs commenting on India and China). It would also mean that the financial assistance would stop.

The United States is very clear - for them to buy in, all nations must participate. Canada agrees. However, despite that Canada contributes only about 2% of global emissions, it appears to becoming an international climate change target. Today Canada received two fossil awards (the presentation was shown on the big screen outside the Bella Centre to the amassed crowd of registants) and was the subject of a climate change "hoax" where Canada's emissions reduction goals were falsely identified in a phony news release.

It's not productive. Minister Prentice's Communications director pointed out as much to the press when asked to comment on the incident today. And Canada's reduction target continues to align with that of the United States. The Minister has been saying this for months.

Needless to say, it's still not clear what will come from these negotiations at this point. The Americans know that a binding international treaty will require them to walk a fine line between committing resources to finance the low carbon economy - both domestically and internationally - and what Congress has an appetite for.

Whether the negotiations result in an extension of Kyoto, the favoured option of developing nations, or an entirely new agreement, the favoured option of Canada remains to be seen. We'll know more in the next few days of "Hopenhagen", as they're calling it around here.

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.

Chinese Launch Voluntary Carbon Standard

We have blogged a number of times that if the world is going to make meaningful inroads to the global reduction of emissions, the discussions at Copenhagen in December will have to include real contribution from developing nations, specifically India and China.

China had an interesting announcement today. The Chinese government announced that China will launch a framework for voluntary emissions trading in the global voluntary carbon market. The China-Bejing Environmental Exchange will be a government backed platform for trading carbon in the Chinese voluntary carbon market.

China is the world's top producer of greenhouse gas emissions, in terms of total emissions, although its per capita emissions are far below that of the United States. In previous months, China has been pretty steadfast in its opposition to a global cap on greenhouse gas emissions, excusing itself in the name of opportunity and advancement, much like India has done. Nevertheless, voluntary carbon standards are a step in the right general direction.

According to Reuters, "[t]rade in the global voluntary market, mostly driven by companies looking to reduce their carbon footprints ahead of expected emissions rules, more than doubled last year to more than $700 million". Voluntary carbon standards provide a framework for polluters to get emissions cuts verified and for the creation of credits that can be sold in voluntary carbon markets.

The announcement today comes on the heels of China's assertion on September 22 that it would tie emisions reductions to economic growth. Given these recent announcements and the fact that China seems to be ramping UP to Copenhagen and not down, we'll have to keep a close eye on Chinese climate change policy in the coming months to see how their policy might drive how Copenhagen discussions unfold. More importantly, are these Chinese announcements the real thing or is the Great Wall really just a Great Hype? More tomorrow.

NAFTA partners commit to integrating continental emissions trading market

On August 10 in Guadalajara, Mexico, Prime Minister Harper, President Obama, and President Calderón signed a joint North American Leaders' Declaration on Climate Change and Clean Energy. The declaration contains the seeds of a continental market for carbon credits, but falls short of promising a truly integrated cap-and-trade scheme. It also includes some other items that are receiving mixed reviews from stakeholders. Undoubtedly, the declaration fits into each country's plans for the negotiations in Copenhagen this fall.

A (somewhat) integrated scheme

Although soft pedaled somewhat by Prime Minister Harper in a subsequent statement, the announcement nevertheless represents a significant victory for Canada. Since the early days of the Obama presidency, Ottawa has been pursuing Washington to commit to a North American scheme. The much touted Clean Energy Dialogue fell short of such a commitment. The Guadalajara declaration represents something much closer to a commitment to work together in managing greenhouse gas emissions.

However, the declaration is clearly not a promise to implement an EU ETS-style integrated emissions management regime. Rather, the countries will remain responsible for establishing domestic emissions management rules, as evidence in the following two points of the declaration:

• We will work together as we set and implement our own ambitious mid-term and long-term goals to reduce national and North American emissions;
• We will work together to develop our respective low-carbon growth plans;

Reference to "our own" goals and "our respective" plans suggest that the countries will retain control over their domestic regulatory regimes, particularly the setting of a cap on emissions (but may share ideas for the same with their NAFTA partners). There may therefore be no legal integration of the North American emissions cap.

However, the declaration appears to contemplate legal integration of the "trade" component of the three countries domestic cap-and-trade systems. The following two points contemplate the development of a cross border market for carbon credits.

• We will develop comparable approaches to measuring, reporting, and verifying emissions reductions, including cooperating in implementing facility-level greenhouse gas reporting throughout the region;
• We will build capacity and infrastructure with a view to facilitate future cooperation in emissions trading systems.

The first of these points appears intended to provide for a level of fungibility of credits, where credits generated in one jurisdiction could be recognized as being equivalent for compliance purposes in another jurisdiction. The second point directly addresses the potential to enable cross border trading of emissions credits.

Interestingly, the declaration draws no distinction between emissions allowances (i.e., the emissions permits that would be distributed by regulators and would be used to implement an emissions cap) and carbon offsets (i.e., credits that are generated as a result of emissions reductions undertaken by entities not subject to the cap and that may be sold to regulated entities for compliance purposes). However, federal Environment Minister Jim Prentice was reported by the Globe and Mail as predicting that the countries would focus initially on the cross border trade of offsets.

A focus on offsets would not be surprising. Carbon offsets are viewed as a policy tool for reducing the overall cost of complying with a cap on emissions. Rather than undertake expensive capital improvements to reduce emissions, regulated players have the option of purchasing offsets from entities that can voluntarily reduce emissions at lower costs. By creating a continental wide market for offsets, the three countries may be able to lower the overall cost of a cap-and-trade system by increasing the supply of offsets.

The possibility of an integrated offset market brings with it the promises and risks inherent in international trade. On the one hand, the U.S. could be a huge market for offsets created by Canadian offset project developers. On the other hand, the opportunity could quickly shrink if the U.S. imposed import restrictions on the number of offsets that could be sourced from Canada (the Waxman-Markey bill already contemplates such a limit) or if Mexico grabs a disproportionate share of the market by supplying offsets at prices that Canadians cannot beat.

Other aspects of the declaration

Proponents of large infrastructure investment will be pleased to see that the declaration also includes commitments to develop a North American smart grid and to cooperate on regional carbon capture and storage initiatives.

Environmentalists are already bristling at absence of firm reduction targets and the inclusion of "wiggle room" in the declaration. For example, the preamble includes the statement that "we support a global goal of reducing global emissions by at least 50% compared to 1990 or more recent years by 2050, with developed countries reducing emissions by at least 80% compared to 1990 or more recent years by 2050" [emphasis added]. The year 1990 is internationally recognized base year for measuring emissions reductions under the Kyoto Protocol. Reference to "more recent years" leaves open the possibility that the NAFTA countries will set less demanding 2050 targets based on later reference years (that have higher baseline emissions).

On the road to Copenhagen

The Guadalajara declaration is almost certainly a component of each of the NAFTA country's negotiating strategy in the run up to Copenhagen. For the U.S., it is evidence that Washington is open to international cooperation on the climate change issue. For Canada, it is likely an attempt to align the country with one of the biggest players at the Copenhagen negotiating table. To get full value of that strategic alignment, however, Canada will have to make good on its promise to table a meaningful domestic emissions regulation proposal before November.

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.

Offset System for Greenhouse Gases Announced

If you've been following our blogs, you'll have read about our thoughts with respect to the federal government's implementation of national climate change initiatives (read up on it here) . With the provinces scrambling to enact their own legislation, delayed federal regulation could prove difficult to align with existing provincial systems and become problematic to implement.

Have the winds of change begun to blow? Canada's Environment Minister, Jim Prentice, announced today that the Federal Government will be moving forward with its Offset System for Greenhouse Gases. The system represents a significant advance towards finalizing Canada's domestic regulatory framework for greenhouse gas emissions and establishing a Canadian carbon market. In its current form, the Offset System will establish tradable carbon credits and a forum in which businesses and individuals can buy and sell credits for use in voluntary or regulated greenhouse gas systems. For instance, those companies subject to greenhouse gas emissions regulations will be able to purchase offset credits for compliance purposes. Small businesses, individuals and even travellers who wish to voluntarily offset the greenhouse gas emissions from their activities, will also be able to acquire and utilize carbon offset credits under the proposed regime.

Apart from encouraging cost-effective domestic greenhouse gas reductions in areas that will not be covered by planned federal greenhouse gas regulations, such as the forestry and agricultural sectors, potential offset projects could vary considerably, ranging from new forest creation to methane capture.

Although plans to move forward with the development of the Offset System seem to have cemented, the scheme's logistics have yet to be finalized. In August, 2008 a draft guide proposing the rules and guidance to quantify greenhouse gas reductions for projects in Canada's Offset System was published in the Canada Gazette. This will be followed by the June 12 release of two more draft guides containing proposed rules and guidance on the requirements and processes used to generate offset credits and to verify the eligible greenhouse gas reductions achieved from a registered project. Interested parties will have 60 days to comment on these guidance documents and all three Offset System guides are expected to be finalized by fall of 2009.

With so much still brewing in the Canada's climate change kitchen, we've only begun to shed light on this new development. Stay tuned for more on the Davis blog as things begin to heat up!

Eileen Rhein, Summer Student and Jennifer Cleall

September 2008 Climate Change Law bulletin now available

Carbon offsets are no longer just a voluntary niche product in Canada. Rather carbon offsets are increasingly becoming a sought-after compliance tool for greenhouse gas emitters who are or will be regulated under provincial, federal and regional emission reduction initiatives. Many new offset projects will have to be implemented in Canada to meet this burgeoning demand. Companies with experience in a wide array of sectors including cattle farming, agriculture, forestry, bioenergy, waste management, methane capture, renewable energy, oil and gas, industrial processes, and transportation may be well poised to profit from this emerging market. Sophisticated regulated emitters may also be motivated to turn a compliance cost into a business opportunity by investing in offset projects. In a market whose scope will be determined by regulation, all market participants should consider taking advantage of immediate opportunities to influence the way that offsets will fit into provincial, federal, and regional emissions reduction initiatives. The September 2008 Climate Change Law bulletin discusses the opportunities to access and influence these emerging markets for carbon offsets.

Ottawa's GHG offset system to include a "fast track" project approval system for first 6 months

submitted by Grant Boyle

On August 9 the federal government published a draft Guide for Protocol Developers for Canada’s Offset System for Greenhouse Gases. The draft Guide will undergo a 60 day consultation period before a final Guide is published. The Guide is intended to provide details on the requirements to complete an Offset System Quantification Protocol and the steps that must be followed to create offset credits under the federal GHG emissions framework.

Projects must take place in Canada, must have started on or after January 1, 2000, must be surplus to all legal requirements (federal, provincial/territorial and regional) and go beyond what is expected from the receipt of other climate change incentives (federal, provincial/territorial). Credits may be issued for reductions achieved after January 1, 2008.

The quantification requirements in the Guide are based on the ISO 14064 standard. The Guide does not provide or recommend an approach to quantify GHG reductions from specific project types and will rely on project proponents to develop and submit their own protocols to Environment Canada for approval, unless the protocol type has already been approved by the Ministry. The approvals process is expected to take 5-8 months.

During the first six months of the operation of the Offset System, Environment Canada will implement a modified and accelerated process to review and approve Offset System Quantification Protocols that are derived from a list of 40 “external protocols” from other systems, including: the Clean Development Mechanism, Alberta’s Specified Gas Emitters Regulation, the California Climate Action Registry, the Greenhouse Gas Abatement Scheme in New South Wales, France’s Offset System, and the Regional Greenhouse Gas Initiative. The Guide includes a proposed list of external protocols for “fast track” approval:

Agriculture
*Including Edible Oils in Cattle Feeding Regimes (Alberta)
*Reducing Days on Feed of Cattle (Alberta)
*Reducing the Slaughter Age of Cattle (Alberta)
*Anaerobic Decomposition of Agricultural Materials (Alberta)
*Livestock Project Reporting Protocol Capturing And Combusting Methane From *Manure Management Systems (California)
*GHG Emission Reductions From Manure Management Systems (CDM)
*Innovative Feeding Of Swine and Storing and Spreading of Swine Manure (Alberta)
*Tillage System Management (Alberta)

Energy Efficiency
*Waste Gas Or Waste Heat Or Waste Pressure Based Energy Systems (CDM)
*Residential Buildings (Alberta)
*Commercial Buildings(Alberta)
*Waste Heat Recovery Projects (Alberta)
*Waste Heat Recovery Project - Streamlined(Alberta)
*Energy Efficiency Projects (Alberta)

Forestry
*Afforestation Projects (Alberta)
*Forest Management (California)

Fossil Fuels
*Industrial Fuel Switching From Coal Or Petroleum Fuels To Natural Gas (CDM)
*Switching From Coal And/Or Petroleum Fuels To Natural Gas In Existing Power Plants For Electricity Generation (CDM)

Geological Sequestration
*Acid Gas Injection (Alberta)
*Enhanced Oil Recovery (Alberta)

Methane
*Landfill Gas Capture And Combustion (Alberta)
*Landfill Project Reporting Protocol Collecting And Combusting Methane From Landfills (California)
*Landfill Gas Project Activities (CDM)
*Coal Bed Methane, Coal Mine Methane And Ventilation Air Methane Capture And Use For Power (Electrical Or Motive) And Heat And/Or Destruction By Flaring Or Catalytic Oxidation (CDM)
*Aerobic Composting (Alberta)
*Aerobic Landfill Bioreactor Projects (Alberta)
*Coalmine Methane and Abandoned Mine Methane Capture and Destruction Projects (General Electric AES)
*Waste Water Treatment Methane Capture and Destruction Projects (General Electric AES)

Renewable Energy
*Biomass to Energy from Biomass Combustion Facilities (Alberta)
*Electricity Generation From Biomass Residues (CDM)
*Run Of River Power Generation (Alberta)
*Solar Power Generation (Alberta)
*Wind Power Generation (Alberta)
*Introduction Of A New Primary District Heating System (CDM)
*Grid Connected Electricity Generation From Renewable Sources (CDM)

Transportation
*For Gravel And Lightly Surfaced Road Re-Surfacing Projects (Alberta)
*For Freight Modal Shifting (Alberta)

Waste
*Recovery & Utilization Of Gas From Oil Wells That Would Otherwise Be Flared (CDM)
*Non-Incineration Thermal Waste Management (Alberta)

Other
*Biofuels Productions And Usage (Alberta)
*Catalytic Reductions Ofn2o Inside The Ammonia Burner Of Nitric Acid Plants (CDM)

WCI Draft Cap and Trade Design Prioritizes Forestry, Agriculture and Waste Management Offsets

Submitted by Grant Boyle

WCI’s July 2008 draft design recommendations suggest capped emitters will be able to use offset credits to meet 10% of compliance obligations.

Project types under “priority” consideration include: Agriculture (soil sequestration and manure management); Forestry (afforestation/reforestation, forest management, forest preservation/conservation, forest products); and Waste management (landfill gas and wastewater management).

According to the proposal, project types that reduce emissions covered by the cap-and-trade system ( such as electricity projects) would not be eligible to create offsets.

Starting in 2009 WCI Partners will coordinate to develop and approve standard protocols for the project types.

WCI Partners may approve and certify offset projects located throughout Canada, the United States, and Mexico, where projects are subject to comparably rigorous oversight, validation, verification and enforcement as those located within the WCI jurisdictions.

In the case of offset credits under the Kyoto Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI), the WCI Partners may establish “added criteria to ensure similar rigor to WCI approved/certified offset projects or other requirements”. The WCI Partners are also considering a method that restricts the use of offsets from projects located outside WCI jurisdictions for compliance purposes in the WCI.

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.

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.

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.

Battle of the voluntary emissions standards heats up

Submitted by Andrew Lord

Yet another standard for voluntary carbon credits was launched this week. However, the proliferation of new standards risks clouding the air rather than clearing it.

The launch of the aptly named Voluntary Carbon Standard ("VCS") was announced on November 19, 2007. The VCS is the product of a two-year consultation between The Climate Group, the International Emissions Trading Association ("IETA"), the World Business Council for Sustainable Development ("WBCSD"), and other NGOs and market specialists. The standard is in part a response to the growing concern that the voluntary market may be infested with credits of dubious quality and value. The VCS rules are intended to be as robust as those under the Kyoto Protocols' Clean Development Mechanism ("CDM"). Consequently, credits generated by projects that comply with the VCS should be seen as more reliable - and therefore more valuable - than credits generated by projects that follow other standards (or no standard at all). Proponents of the VCS are therefore confident that the standard will be widely adopted as buyers become more discerning.

However, at least two NGOs have already issued critiques of the VCS. Climate Focus' critique suggests that the VCS is as cumbersome as the CDM and therefore does not add any new value to the certification market. Climate Focus also calls into question the legality of provisions of the VCS dealing with ownership of credits and the interface of the VCS credits with Kyoto AAUs. WWF's critique focuses on what it describes as "loopholes" in additionality rules and validation/verification processes. With respect to additionality, WWF is concerned that the VCS will allow developers to receive credits (which are intended to overcome the financial barriers to "better than business as usual" operations) for projects that merely replicate normal market behaviour or respond to regulatory requirements. WWF's concerns about validation and verification may be mitigated as complementary certification programs for greenhouse gas professionals are developed (see, for example, the programs of the Greenhouse Gas Management Institute).

The VCS just one of several recent standards created in an attempt to increase the rigour and transparency of the voluntary market. For example, Ecoenergy International launched a Code of Best Practice for Verified Emission Reductions at the end of October. A proliferation of competing standards may confuse, rather than help, those who wish to certify the credits they generate.

That confusion will no doubt be exacerbated by the introduction of complementary specifications for emissions reductions projects, the most widely recognized being the ISO 14064 series of standards (described by one service provider here). "Specifications" are not the same as "standards." Specifications tell project developers what they need to do to make their emissions reductions verifiable. Standards tell project developers how to measure reductions so that those reductions are directly comparable to those from similar projects. To offer an accounting analogy, a specification would state that one must prepare annual statements while a standard would specify the rules governing the content of those statements.

In addition to standards and specifications, some organizations are offering other products that are intended to give emissions reductions projects better exposure in the marketplace. For example, the Canadian Standards Association offers a couple of registry products where qualified projects may be publicly posted.

What seems to be emerging is a "brand war" between organizations offering standards, specifications and other emissions reduction certification products. In the short term, this war may leave project developers and investors shell shocked. In the longer term, the victor (or victors) will be determined by credit buyers whose choices will determine what constitutes a high-quality credit worth paying for.