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International Energy Agency launches World Energy Outlook 2009 in London

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

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

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

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

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.

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.

50% reduction by 2050 Climate Change Goal - 'Emerging Nations' Not on Board

At a working session in Toyako, Japan on July 8, 2008, the G-8 leaders met with the leaders from 8 fast-growing, pollution-emitting nations to talk on the topic of global warming. Even though the "Statement on Climate Change" released July 8, and the “Declaration of Leaders Meeting of Major Economies on Energy Security and Climate Change”, released July 9, are full of ambitious and ‘cooperation is key” language, no consensus was reached on the G-8’s climate change goal of reducing emissions 50% by 2050.

China, India, Brazil, Mexico and South Africa, representing 42% of the world’s population, rejected the notion that all should share in the 50% reduction in GHG emissions by 2050 target, on the basis that it is the wealthier countries that have created most of the environmental problem up until now. In a statement, these ‘emerging nations’ commented, "it is essential that developed countries take the lead in achieving ambitious and absolute greenhouse gas emissions reductions.” President Hu Jintao of China is quoted as adding that “developed countries should make explicit commitments to continue to take the lead in emissions reduction.”

This stance on climate change is problematic, in that some developed countries, including Canada, have been taking the opposite approach, saying that major action cannot be taken without these emerging nations on board. This ultimately creates a cycle of “we won’t act unless you are on board, yet you won’t get on board unless we act”. Meanwhile, critics of this cycle point out that this inaction is likely to lead to increased warming of the planet, increased costs in climate change mitigation, and an increase in environmental consequences.

Hopefully the spirit of cooperation will prevail, and, as the Declaration suggests, "launch a comprehensive process to enable the full, effective, and sustained implementation of the Convention through long-term cooperative action, now, up to, and beyond 2012, in order to reach an agreed outcome in December 2009 (Copenhagen Climate Change Conference)."

Canada back on track with its Kyoto registry

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

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

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

Carbon markets boom

Posted by Andrew Lord

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

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

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

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

Posted by Andrew Lord

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

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

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

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

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

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

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.

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

Submitted by Andrew Lord.

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

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

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

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

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

Recent Canadian climate change developments

Submitted by Andrew Lord.

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

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

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

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

Submitted by Andrew Lord

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

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

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

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

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.

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.

New Carbon Marketplace Established by UN

Submitted by Andrew Lord.

The UNFCCC and URC just launched CDM Bazaar, a free information exchange service that aims to make the Clean Development Mechanism market more efficient. The portal connects CDM market participants (but does not provide an electronic marketplace for actual CER transactions). The site is divided into three major sections.

(1) Sellers area: profiles sellers, describes their current and planned CDM projects, and lists CERs available for purchase;

(2) Buyers area: profiles potential buyers; indicates how many CERs they want to purchase, and lists from what countries, project types and methodologies they would consider buying; and

(3) Service Providers area: offers a directory of carbon market technology and service providers.

Anybody can browse the site, but companies must register (at no cost) to be listed in one of the above areas. At the time of posting, the CDM Bazaar had 35 registered users, the majority of them in the Service Providers area. Hopefully this number will grow quickly.

The CDM Bazaar, which focuses on market participants, complements the existing CDM/JI Pipeline site, which focuses on projects. The CDM Pipeline not only lists projects that have been sent for validation/determination, but also provides links to approved methodologies, Designated Operational Entities, Accredited Independent Entities, and other project-related information.