Determining the Effective Price of Carbon

Jonathan Drance, Jason Kroft and Luke Sinclair - 

Background to Canada’s National Carbon Policy

The recent federal plan for a national Canadian carbon price – rising to $50/+ CO2e by 2022 – has increased interest in carbon pricing policies and has highlighted the need to go beyond an initial headline number to determine the effective price of carbon. In light of a forthcoming national price on carbon, business, individuals and government must understand the “all-in costs” associated with carbon pricing in order to make sound strategic decisions. Our federal government should be mindful of the different ways in which a carbon price may impact the different regions of Canada and how different carbon levels may impact consumer and business behavior in different regions of Canada.

Ecofiscal Commission Report

Canada's Ecofiscal Commission has issued a timely report – which raises questions about the complexity, transparency and fungibility of carbon pricing policies. The Commission suggests looking beyond the headline number in order to determine the collective price imposed under a proposed carbon tax or a cap-and-trade emissions trading system (ETS).

Marginal Carbon Price

As the Commission notes, the simplest way to determine the effective price of carbon is to look at the marginal carbon price. The marginal carbon price is the price payable for emitting an incremental tonne of carbon. In the report, the Commission identifies the marginal carbon price under existing and proposed carbon pricing policies, enacted or proposed by the various Provinces as at July 2016 – before the Trudeau government announced its federal carbon pricing plan. The analysis performed by the Commission illustrates the conceptual issues underlying any effort, by the federal government or otherwise, to ascertain the effective price of carbon in a specific jurisdiction, and that the goal of consistency of carbon pricing across Canada is complicated. Below is the margin carbon price for the stated Provinces at the estimated future time.

Marginal Carbon Price –
Provincial Carbon Pricing Policies (2020 estimate)

 

BC

Alberta

Ontario

Quebec

Marginal Carbon Price

$30

$30

$19.40

$19.40

The Commission makes it clear that these marginal carbon pricing numbers do not represent a conclusion as to the effective price of carbon.

Average Carbon Cost

Many carbon pricing policies do not levy taxes or fees or issue emissions allowances on a fully-priced and transparent basis. The Commission reviewed the various Provincial carbon pricing policies to determine the proportion of covered emissions that are fully priced – whether by virtue of being fully subject to tax under a carbon tax or levy or fully subject to paid-up emissions allowances under a cap-and-trade system. By taking the marginal rate and adjusting for variable tax rates, minimum thresholds, or for free emissions allowances, the Commission calculated the average carbon cost per tonne of CO2e for the specified provinces, as outlined in the below chart.

Average Carbon Cost –
Provincial Carbon Pricing Initiatives (2020 estimate)

 

BC

Alberta

Ontario

Quebec

Marginal Carbon Price

$30

$30

$19.40

$19.40

Fully Priced Covered Emissions

100%

39%

75%

75%

Other Adjustments

$0

($1.46)

$2.94

$1.03

Average Carbon Cost

$30

$10.24

$17.49

$15.58

The distinction between marginal cost and average cost is most apparent when comparing carbon pricing in BC and Alberta. In BC, the marginal carbon price and average carbon cost are generally the same because BC has adopted a relatively straight forward carbon tax. Whereas, in Alberta, the marginal carbon price of $30/tonne CO2e in 2020 applies to only 39% of covered emissions which, together with other adjustments, results in an average cost of just $10.24/tonne CO2e. The Commission's analysis makes it clear that understanding the specific detail as to how carbon taxes or fees are calculated or assessed (and industries or players that are exempted therefrom) and/or how emissions allowances  are allocated (for free to certain players, for instance) is critical to assessing the effective price of carbon under any particular carbon pricing policy.

Coverage-Weighted Carbon Price

Similarly, the Commission notes that when assessing the effective price of carbon one must account for the per tonne rate applied to covered emissions and also make note of what percentage of carbon emissions are covered by the particular pricing policy in the first place.

The Commission's assessment of the effective price of carbon after adjusting for the proportion of covered emissions in each jurisdiction – which they refer to as the Coverage-Weighted Carbon Price – is as follows:

Coverage-Weighted Carbon Price -
Provincial Carbon Pricing Initiative (2020 estimate)

 

BC

Alberta

Ontario

Quebec

Marginal Carbon Price

$30

$30

$19.40

$19.40

Coverage

70%

78%

82%

85%

Coverage-Weighted Carbon Price

$21

$23.40

$15.91

$16.49

Sensibly, the Commission cautions that there are imperfections with any method of assessing the effective price of carbon, including their own. Still, having the ability to look at carbon prices using a variety of analytical approaches adds texture and perspective to any evaluation of carbon pricing. The Commission specifically states that "even imperfect metrics can be useful and can aid in developing smart climate policy." With climate pricing initiatives and the associated methodology for assessing them still in their infancy, governments are encouraged to take note of the Commission’s report when forming their own climate policy. 

Pan-Canadian Carbon Plan

Jason Kroft, Jonathan Drance and Luke Sinclair - 

What does it mean for you 

As of January 2018, all Canadians will be paying a price for carbon.

The Announcement

After much anticipation, Justin Trudeau recently announced that Canada would implement a national price on carbon by 2018. The announcement was met with significant media fanfare and a touch of provincial dramatics, but a closer look reveals that Trudeau’s carbon plan may uncover more questions than answers.

The following will highlight what we know and, almost as importantly, what we don’t know about Trudeau’s Pan-Canadian Approach to Pricing Carbon Pollution (the Plan).

Canadian Carbon Pricing: The Basics

  • The federal government will set a floor on carbon pricing beginning on January 2018 for those provinces that do not implement their own regime
  • The Plan allows provinces to implement either a carbon tax or use a broad market based mechanism, such as a cap-and-trade scheme
    • Provinces which choose to implement a carbon tax: A national carbon floor price will be set at $10/tonne in 2018 and rise to $50/tonne in 2022
    • Provinces which choose to implement a cap-and-trade scheme: Emissions reduction must remain in line with Canada’s 2030 commitment target of 30% below 2005 emission levels
  • Revenues generated from pricing carbon will remain in the province of origin

Canadian Carbon Pricing in Context

We must concede that, even as more of a proposal than an actual defined policy, Trudeau’s Plan is significant when compared with other carbon pricing initiatives globally. Pro forma, the Plan would be among a handful of leading global initiatives in setting carbon prices – and certainly Canada is the only major hydrocarbon producer to have yet advanced a carbon pricing plan which is this ambitious. Based on the World Bank's 2016 Carbon Pricing Watch[1], the Plan compares to other carbon pricing regimes as follows, all determined on a pro forma basis on the assumption the federal proposal is implemented as proposed.

Top Carbon Price (USD / t CO2e)

Sweden

$137

Switzerland

$88

Finland

$66

Norway

$53

Canada (pro forma, 2022)

$38

Denmark

$26

British Columbia

$23

Ireland

$23

California / Quebec ETS

$13

EU ETS [2]

$5.66

China

$2-6

 

On a comparative basis, Canada’s carbon pricing appears to present a sensible balance between the environment and the economy, but under the surface, the proposed Plan is far from complete.

Outstanding Issues

  • The tools that the government will use to actually introduce and enforce a floor price on carbon
  • How the federal government intends to properly measure and consolidate the two different pricing methods (carbon tax vs. cap-and-trade)
  • How the proposed pricing lines up with Canada’s commitment under the Paris Agreement

While Trudeau’s Plan emphasized consistency between the provinces and suggested using existing regimes, such as British Columbia’s carbon tax or Ontario’s cap-and-trade, as policy anchors, the Plan doesn't yet adequately account for the fundamental differences between the two methods. The Plan also doesn't yet connect the proposed pricing floor with Canada’s commitments under the Paris Agreement at least not in any tangible way. For example, Alberta’s carbon pricing proposal, embraced by Trudeau’s Plan, aims to keep emissions flat until 2030, a far cry from the required 30% reduction under the Paris Agreement. So is Alberta's Plan in compliance or not? Will Saskatchewan receive similar treatment and if so, will the remaining provinces be left to pick up the slack? These questions echo some of the issues we identified prior to the federal election and which still remain unresolved.

Following the announcement, Trudeau issued a dire warning to the provinces. “There is no hiding from climate change. It is real and it is everywhere.” But hiding or not, the provinces will need real answers to some tough questions before they can take, and the nation as a whole can take, a coordinated stance on climate change.


[1] World Bank Group; ECOFYS. 2016. Carbon Pricing Watch 2016. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/24288 License: CC BY 3.0 IGO.

[2]  €4.96 as of September 30, 2016, converted into U.S. dollars at prevailing exchange rates.

Cap and Trade in Ontario - Avoiding the EU's Pitfalls

 P. Jason Kroft and Sam Dukesz - 

The European Union Emission Trading System (EU ETS) is the world’s largest cap and trade system, covering all countries in the European Union. It is also one of the world’s most troubled, as it has largely failed to live up the expectations of emissions reductions that it was initially touted to bring about. This blog post analyzes the impediments to the success of EU ETS, and then provides a forward-looking analysis of the applicability of those impediments to the proposed Ontario cap and trade program. 

A Snapshot of the EU ETS: Program Design and Implementation Problems

The EU ETS was initially implemented in phases, with a pilot Phase I from 2005-2007, followed by a Kyoto Phase II from 2008-2012 and a number of subsequent phases. The initial system covered approximately half of EU CO2 emissions across 31 EU countries. The system was limited to certain sectors, as many sectors, such as transportation, were exempted because of concerns about competitiveness with non-participating jurisdictions. 

The initial process for setting caps on emissions was decentralized by member states, which created strong incentives for individual states to propose high cap limits that favored emission intensive industries in their jurisdiction. This, combined with weak emissions data, led to an overly generous allocation of allowances relative to emissions when the market opened in 2005.

While the price of allowances was initially high, the oversupply in the market quickly depressed demand and prices, causing the price of a single allowance to drop from €30 in 2005 to effectively €0 by 2007. This price drop was exacerbated by the inability to hold allowances over multiple phases in the EU ETS, which guaranteed that the price of an allowance earned in any particular phase would go to zero at the end of that phase. As further aggravation on a strained system, there was some suggestion that companies were passing on the ‘costs’ of allowances to the end consumer even where they had been given free allowances by the government.

The EU responded in subsequent phases with a planned tightening and centralization of the cap, an expanded scope on covered industries, and an ability to bank allowances between phases. While this initially increased allowance prices to over €20, prices have continued to bottom since that point. The current price varies between €0 and €10. This is in part due to a combination of a weakened post-recession EU economy and the increased use of offsets under the Clean Development Mechanism, which grants allowances for offset projects in developing countries. 

Looking Forward: Lessons for Ontario

In creating a cap and trade program, there are a number of lessons the Ontario government can apply from the mixed successes of the EU ETS. Each of the key lessons are listed below.

Addressing Over-Allocation

First, it is crucial to avoid over-allocation of allowances in the inception of a cap and trade program; as such over-allocation can be banked by companies to keep the price of allowances low for years to come. Avoiding such over-allocation requires that the Ontario government has good data on emissions in Ontario on which to base an initial cap. Over the past several years, the Ontario government has been collecting emissions data from companies that release more than 10,000 tonnes of GHG a year or are involved in particular industries. This data has led the Ontario government to set an initial cap of 142 megatonnes of GHG, which is presumably equivalent to what the government believes actual emissions will be in 2017. In other words, the Ontario government is anticipating that there will be no over-allocation of emission allowances. Only time will tell if this anticipation proves true.

Banking Allowances

Second, the Ontario government should ensure that companies can bank allowances over multiple periods in the program. While such a model can exacerbate the negative effects of allowance over-allocation, it is necessary to avoid an external collapse of allowance prices at the end of a given period. Such a model is currently in place in the regulations of the Ontario government’s cap and trade program, where one may submit allowances with a vintage year that is in the year of the compliance period or an earlier year.

Limiting Free or Exempt Allowances

Third, while granting free allowances to certain sectors can be politically palatable, it is a risky way to deal with issues of competitiveness. When allocations are not linked to production, they cannot affect marginal costs, which eliminates incentives to reduce or relocate emissions for entire sectors. The government may be better served by including these sectors in the cap and trade program in some manner that maintains the incentives applied to other companies, but does so in a more gradual fashion. Anecdotally, we believe many industries will be allocated free allowances towards the start of the cap and trade program in order to ease the transition to a low-carbon economy. These free allowances will somewhat dis-incentivize the need to address climate change in the short run.

Robust Offset Rules

Fourth, offset policies must be properly monitored and maintained. The increasing popularity of the Clean Development Mechanism lies in its allowing companies to apply for offsets when they reduce emissions in foreign jurisdictions. These jurisdictions, which are often third-world countries, lack the regulatory and reporting structures to adequately confirm these emission reductions. Unsurprisingly, the Clean Development Mechanism has been rocked by allegations of fraud by participating companies. The Ontario government should ensure that their offset program is heavily monitored and controlled, especially where the applicable offset reduction takes place in a foreign jurisdiction. The Ontario government has not yet released an offset regimen for its cap and trade program. However, it will likely take guidance from Quebec and California. These programs both have strong oversight requirements to ensure that actual offset reductions are taking place. The Ontario government will likely adopt similar requirements.

Coordinating Complimentary Policies

Lastly, some authors have suggested that the issues with the EU ETS are caused by complementary EU environmental policies related to the cap and trade program. These policies, in the view of their critics, relocate emissions, increase emissions reduction costs, and, in the absence of a price floor, depress allowance prices. This is a complex issue that would require further analysis. That said, there are a number of things the Ontario government can do to prevent this potential issue. First, it has installed a price floor on allowance auctions, which should ensure that the price of allowances is not driven to zero. Second, it can confirm that complementary policies are addressing emissions not covered by the cap and trade program, thereby ensuring that the programs are fully complementary and not serving as impediments to the cap and trade program, or vice versa. 

Six Months and Counting for Ontario Cap-and-Trade - Are You Ready?

A Mining Sector Primer

Canada is turning a new leaf on climate change and this will have a real impact on consumers and business. Ontario’s cap-and-trade program, expected to launch January 1, 2017, will require certain emitters to obtain allowances equal to their total emissions. There is some skepticism around this date. Regardless of when introduced, carbon pricing (placing a real cost on the emissions created by business and consumers) is a new reality for those operating in Ontario and elsewhere in Canada

What does this all mean for you?

  • The Ontario provincial government is beginning to implement a program to limit carbon and similar emissions by business.
  • Over time most businesses will need to consider the financial burden (and opportunity) presented by the cap-and-trade regime in Ontario (and similar regimes elsewhere in Canada).
  • The program begins with the largest emitters and gradually increases the scope to include most businesses in the Province with fewer exemptions and ultimately an increased cost.

 What is cap-and-trade generally?

In a cap-and-trade program, a government imposes a general limit (or cap) on the aggregate emissions of covered pollutants and provides allowances (or credits) to covered businesses and other entities. Each allowance entitles the holder to emit a certain amount of the covered pollutants. The allowances can be issued for free initially or at a cost determined by the program rules or an agreed auction. The allowances need to be retired at the end of a compliance period. If a business or entity has more allowances than needed, it can either trade those to businesses or entities that need them or opt to bank them for future use. In this way, the strategic management of emissions can lead a business to hold more allowances than needed, and thus these allowances can be viewed as a business asset that may appreciate in value over time. We foresee the development of a trading market in these credits and the creation of financial instruments and trading strategies around them.

Who is covered by the cap-and-trade program?

Participation in the program is either mandatory or voluntary depending on your level of emissions of carbon dioxide equivalent, or C02e.

  • Mandatory participation for emitters of at least 25,000 tonnes of C02e annually
  • Voluntary opt-in for emitters of over 10,000 tonnes of C02e annually

How do you obtain allowances?

For those obligated to participate in the program, allowances may be acquired in two ways:

  • Purchased through a public auction process
  • Acquired through free allocation (available to competitively sensitive industries only)

What are the expected costs?

It is anticipated that the cost per allowance will be approximately $14- $18 in 2017 (per the Ontario government’s published estimates). The Ontario government predicts that the price of allowances is expected to rise to $95 by 2030, which will equate to annual expenditures of at least $2 million for each covered participant.

How do you determine your annual emissions?

In preparation for the introduction of the cap-and-trade program, Ontario has amended the Greenhouse Gas Emissions Reporting Regulation to require, among other things, emitters of at least 10,000 tonnes of C02e annually who are engaged in certain activities to begin reporting their emissions.

It is important to note that not all types of emissions are created equal. Emitters must be careful to implement the appropriate measurement techniques to properly quantify their emissions.[1]

What does this mean for the mining industry?

For the mining industry, the Regulations mandate that entities engaged in the smelter or refining of certain metals and emit 10,000 C02e or more annually are required to begin quantifying and reporting their emissions, including businesses involved in lead, nickel, zinc and copper production (for example). The Regulations also include a “catch all” provision for single source emitters of greater than 10,000 tonnes of C02e annually. The definition is broad enough to capture all mining sector businesses.

Here are three things you should now be doing?

  • Measure your Ontario emissions.
  • Consider whether the greenhouse gas reporting regime applies to you.
  • Develop a strategy around the costs and opportunities of cap and trade to your business (whether or not you are captured in the first round of the program).

P. Jason Kroft
Jay C. Kellerman

[1] To determine a business’s total emissions, the Regulations make use of an impact formula which multiplies each emission type by its global warming potential, the result of which means that emitting one tonne of methane (CH4) is equal to emitting twenty-one tonnes of C02.

Ontario's "Transformational" Climate Action Plan

Jason Kroft and Luke Sinclair -

As January 1, 2017, the day which marks “ground zero” for climate change reform in Ontario draws near, the provincial government is scrambling to put into place a structure of reforms and incentives that will support its sweeping climate change promises. As you’ll recall from our previous posts, Ontario’s goal is to have a live cap-and-trade plan as of January 1st, and the Province is expecting allowance auction revenues of upwards of $1.8 billion per year. In an effort to inspire confidence and relieve industry tension, the provincial cabinet leaked some details of their “transformational” Climate Action Plan, which contains a detailed strategy on how Ontario plans to achieve its future climate change goals.

Highlights include:

Building Sector

  • Requirements for all new homes to be heated without fossil fuels in 2030 and this requirement will extend to all homes by 2050
  • Introduction of mandatory energy audits for most homes sold in the province
  • $3.8 billion for new grants and subsidies to assist businesses and consumers with their switch from natural gas and other fossil fuels to electricity

Transportation Sector

  • Rebates of up to $14,000 for new electric vehicles with a goal of electric vehicles making up 12% of all new vehicle sales by 2025
  • The plan provides for incentives to fuel distributors to sell fuel blends that may include up to 85% ethanol or other bio-fuels
  • Over $550 million dedicated to electrify the regional train networks and to construct additional bike lanes and bike networks

You will recall from our earlier posts that Ontario’s emissions breakdown, as illustrated in the chart below, suggests that any emissions reduction must come from improvements in the building and transportation sectors (and particularly the types of fuels consumed by those sectors) and that such change will have a significant impact on both businesses and consumers.

The leaked details can be summarized simply as “good-bye fossil fuels, hello electricity” and aim to completely phase out natural gas heating and leverage Ontario’s clean electricity grid for transportation. As always, the devil will be in the details and it is appropriate to have a certain degree of skepticism that the ambitious timeframe and sweeping changes will be effected exactly as proposed.

The plan also includes a swath of other measures to encourage clean industry and clean technology in an effort transform Ontario into a low-carbon economy. The significance of these measures is evident when we consider that natural gas accounts for nearly 76% of all heating, and electric vehicles for less than 1% of all new vehicle sales in Ontario.1 

Desperate times call for desperate measures – we anticipated that to meet the ambitious greenhouse gas reduction plans of this government, significant changes would be required. While the leaked details provide some clarity on how the provincial government plans to spend the $1.8 billion generated by the cap-and-trade plan, there are still many important pieces missing. The proposals intend to alter the fundamental nature of the Ontario economy and it remains to be seen whether a transformational change can be implemented within such a short timeframe. 

Ontario Emissions Breakdown

Source: National Inventory Report 2015 (2013 data), Ontario’s Long-Term Energy Plan and Greenhouse Gas Emission Reporting regulation.

__________________________________________

1. Source: The Globe and Mail; Fleetcarma; Statistics Canada: new motor vehicle sales, by province (monthly).

Examining California, Quebec and Ontario's cap-and-trade systems

 Jason Kroft and Luke Sinclair

In this post we will more closely examine the details of Ontario’s recently announced draft cap-and-trade system in combination with its counterparts in California and Quebec. You will recall that last year we suggested that Ontario's system would follow closely in the footsteps of the existing cap-and-trade systems found within California and Quebec. The link to the May 2015 piece can be found here.

As a result of Ontario’s desire to join the Western Climate Initiative (WCI) and the benefits of a harmonized approach to the salient details of a cap-and-trade system that Ontario would introduce with the programs in Quebec and California, we suggested that any proposed cap-and-trade system must follow the detailed policy architecture of the WCI and accordingly, would mimic to a large extent the content, scope and design of the systems within Quebec and California. We further hypothesized that, based on existing public disclosure, the Ontario government had already effectively committed to joining the WCI and the recently released details of the proposed Ontario system have confirmed our predictions to be accurate. 

Below is a chart which summarizes the main features of California, Quebec’s and Ontario’s cap-and-trade systems, as they relate to several key criteria. We note that the draft regulations introducing the cap-and-trade details are out for comment presently and are subject to change.

 

California

Quebec

Ontario

Regime

Administered by the California Air Resources Board, which adopted California’s Cap and Trade Regulation

Administered by the Minister of Sustainable Development, Environment and the Fight against Climate Change, which adopted the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances

To be administered by the Ministry of the Environment and Climate Change, which plans to adopt the Cap and Trade Regulatory Proposal

Population

38.8 million

8 million

13.6 million

Gross Regional Product

US $1.9 trillion

US $276 billion

US $537 billion

Participating Jurisdictions[1]

Quebec, California and Ontario

Quebec, California and Ontario

Quebec, California and Ontario

Greenhouse Gases Covered

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases. These represent the gases covered by the Kyoto Protocol

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases. These represent the gases covered by the Kyoto Protocol

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases. These represent the gases covered by the Kyoto Protocol

Sectors Covered

Electricity (including imports) and industry in 2013; plus distribution and importation of fuels used for consumption in the transportation and building sectors

Electricity (including imports) and industry in 2013; plus distribution and importation of fuels used for consumption in the transportation and building sectors

Electricity (including imports) and industry; plus distribution and importation of fuels used for consumption in the transportation and building sectors

Emissions Threshold

Emitters of at least 25,000 metric tons CO²e annually

Emitters of at least 25,000 metric tons CO²e annually

Emitters of at least 25,000 metric tons CO²e annually, with an opt in for emitters of between 10,000 and 25,000 metric tons CO²e annually

1990-2012 Emissions in million metric tons of CO² equivalent

1990- 431

2005- 483

2012- 459

1990- 84

2005- 86

2012- 78

1990- 177

2005- 206

2012- 167

Target

1990 levels by 2020

20% below 1990 levels by 2020

15% below 1990 levels by 2020

Emissions Target in million metric tons of CO² equivalent (Target Year)

431 (2020)

67 (2020)

151 (2020)

Maximum Emissions Covered in million metric tons of CO² equivalent

370 (2017)

59 (2017)

142 (2017)

Status

First auction on November 14, 2012; compliance obligations began January 1, 2013

Compliance obligations began January 1, 2013

Compliance obligations begin January 1, 2017

Allocation Method

Mixed – some free allocations for industry, auctions for others. The percentage of free allowances allocated to businesses will decline over time

Mixed – some free allocations for industry, auctions for others. The percentage of free allowances allocated to businesses will decline over time

Mixed – some free allocations for industry, auctions for others. The percentage of free allowances allocated to businesses will decline over time

Price Floor at Auction

$10 per metric ton for both 2012 and 2013 before
rising 5% per year (plus inflation) starting in 2014 

$10 per metric ton starting in 2012 and rising 5% for each year
thereafter (plus inflation)

Approximately $13.72 per metric ton starting in 2017 and rising 5% for each year thereafter (plus inflation)

Affiliations

Helped establish Western Climate Initiative in 2007

Joined Western Climate Initiative in 2008

Proposal to join the Western Climate Initiative

Linkage Status

Linked with Quebec’s cap-and-trade system in 2014

Linked with California’s cap-and-trade system in 2014

Proposal to link with California’s and Quebec’s cap-and-trade systems in 2017

Offset Limit

Can account for 8% of a regulated entity’s compliance obligation

Can account for 8% of a regulated entity’s compliance obligation

Separate offset regulation, which sets out the requirements proponents must meet to be able to create, verify and register offset credits, will be proposed later in 2016

2013 Offset Use Limit (Millions of Offset Credits)

13

2.1

Types of Offset Categories

  • U.S. forest and urban forest project resources;
  • Livestock projects;
  • Ozone depleting substances projects;
  • Urban forest projects
  • Covered manure storage facilities – CH4 destruction;
  • Landfill sites – CH4 destruction;
  • Destruction of ozone depleting substances (ODS) contained in insulating foam
    recovered from appliances

As expected, the similarities between the California, Quebec and Ontario are extensive and the Ontario features largely conform to the standards set by the WCI. In particular, Ontario’s price floor for carbon logically parallels the pricing mechanism in both California and Quebec and, relative to population, Ontario’s 2020 emissions target is also in line with both jurisdictions. With proposed offset regulations to follow later in 2016, it remains to be seen whether such regulations will continue to reflect the existing systems in Quebec and California. Specifically, the Ontario government has emphasized the importance of creating offset credits that are real, permanent and quantifiable. It is our strong belief that a robust offset program will be critical to Ontario’s success in meeting its emission targets and effectively combatting climate change. Irrespective of what is proposed, to the extent that any elements of the Ontario cap-and-trade system are incompatible with the WCI, the provincial government has already stated it will make any amendments necessary to ensure WCI compliance. We will report on the offset regime in Ontario when it is introduced.



[1] Ontario’s participation is based on the current regulatory proposal and, if enacted, will not be in effect until 2017.

 

Examining California and Quebec's cap-and-trade systems

P. Jason Kroft and Jonathan Drance -

In our latest blog piece covering Ontario’s planned adoption of a cap-and-trade system that will be linked with the existing systems in Quebec and California, we described some of the major recent developments in Ontario and the United States to help put the province’s cap-and-trade efforts in context. These developments include: the successful implementation of legislation and market mechanisms to curb sulfur dioxide and nitrogen oxide emissions in the 1990s and early 2000s, the development of the Western Climate Initiative, the signing of a Memorandum of Understanding with respect to a provincial and territorial cap-and-trade initiative between Ontario and Quebec, and the introduction of enabling cap-and-trade legislation in Ontario. In this piece, we illustrate the key elements of Quebec and California’s linked cap-and-trade regime with a view towards anticipating how Ontario may choose to design its system over the coming months.

While the content, scope and design of Ontario’s cap-and-trade system has yet to be determined, there is already a significant congruence between the California and Quebec regimes. For example, both systems cover the same greenhouse gases and sectors, set the same emissions thresholds and have virtually identical allocation methods. Several other similarities are also evident when comparing Quebec’s relative population size and gross regional product to those of California (21% and 16%, respectively). For example, Quebec’s Allowance Budget, Maximum Emissions Covered, Emissions Target and Offset Use Limit (as illustrated in the table below) are all between 15% and 16% of California’s, closely mirroring their differences in population size and economic activity. On this basis, with a population of 13.6 million (35% of California) and a gross regional product of US $570 billion (30% of California), Ontario’s cap-and-trade system may well yield similar relative results. Naturally, however, other factors will come into play as Ontario implements cap-and-trade, and we will follow these developments closely.

The significant parallels between Quebec and California’s cap-and-trade systems have enabled both markets to integrate quickly and seamlessly. Despite only officially linking carbon markets in 2014, Quebec and California have already successfully held two joint auctions of greenhouse gas allowances in December, 2014 and March, 2015, respectively. The third joint auction of greenhouse gas allowances between the two jurisdictions was recently held on May 21, 2015.

Given Ontario’s desire to link with the cap-and-trade markets in Quebec and California, their systems will likely play a significant role in dictating the approach Ontario takes. Below is a chart that summarizes the main features of California and Quebec’s cap-and-trade systems as it relates to several key criteria the Ontario government will have to consider in the coming months.

 

Comparing California and Quebec’s Cap-and-Trade Systems as of May 28, 2015

 

California

Quebec

Regime

Administered by the California Air Resources Board, which adopted California’s Cap and Trade Regulation

Administered by the Minister of Sustainable Development, Environment and the Fight against Climate Change, which adopted the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances

Population

38.8 million

8 Million

Gross Regional Product

US $1.9 trillion

US $304 billion

Participating Jurisdictions

Quebec and California

Quebec and California

Greenhouse Gases Covered

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases. These represent the gases covered by the Kyoto Protocol

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases. These represent the gases covered by the Kyoto Protocol

Sectors Covered

Electricity (including imports) and industry in 2013; plus distribution and importation of fuels used for consumption in the transportation and building sectors.

Electricity (including imports) and industry in 2013; plus distribution and importation of fuels used for consumption in the transportation and building sectors.

Emissions Threshold

Emitters of at least 25,000 metric tons CO²e annually

Emitters of at least 25,000 metric tons CO²e annually

Target

1990 levels by 2020. On April 29, 2015, California Governor Edmund Brown issued an executive order to establish a California greenhouse gas reduction target of 40% below 1990 levels by 2030. This new goal aligns California’s 2030 target with that of the European Union.

20% below 1990 levels by 2020. Considering raising target to 25% below 1990 levels by 2020

2013 Allowance Budgets (Millions of Allowances)

162.8

23.7

Maximum Emissions Covered in million metric tons of CO² equivalent (Year of Maximum Allowance Availability)

394.5 (2015)

63.3 (2015)

Emissions Target in million metric tons of CO² equivalent (Target Year)

334.2 (2020)

51 (2020)

status

First auction on November 14, 2012; compliance obligations began January 1, 2013

Compliance obligations began January 1, 2013

Allocation Method

Mixed – some free allocations for industry, auctions for others. The percentage of free allowances allocated to businesses will decline over time

Mixed – some free allocations for industry, auctions for others. The percentage of free allowances allocated to businesses will decline over time

Price Floor at Auction

10 per metric ton for both 2012 and 2013 before
rising 5% per year (plus inflation) starting in 2014 

10 per metric ton starting in 2012 and rising 5% for each year
thereafter (plus inflation)

Affiliations

Helped establish Western Climate Initiative in 2007

Joined Western Climate Initiative in 2008

Linkage Status

Linked with Quebec’s cap-and-trade system in 2014

Linked with California’s cap-and-trade system in 2014

Offset Limit

Can account for 8% of a regulated entity’s compliance obligation

Can account for 8% of a regulated entity’s compliance obligation

2013 Offset Use Limit (Millions of Offset Credits)

13

2.1

Types of Offset Categories

  • U.S. forest and urban forest project resources;
  • Livestock projects;
  • Ozone depleting substances projects;
  • Urban forest projects
  • Covered manure storage facilities – CH4 destruction;
  • Landfill sites – CH4 destruction;
  • Destruction of ozone depleting substances (ODS) contained in insulating foam
    recovered from appliances

 

The significant similarities between Quebec and California’s systems are largely dictated by detailed policy architecture prepared over a period of several years by the Western Climate Initiative (WCI) and their partner jurisdictions. The WCI, launched in 2007, consists of a voluntary coalition of US states and Canadian provinces that have developed guidelines to facilitate mutual cooperation in order to reduce greenhouse gas emissions, in particular by developing and implementing a North American system for cap-and-trade. Since its inception, WCI partners, including Quebec and California, have been working together to create a linked cap-and-trade system that covers each member jurisdiction. In September of 2008, the WCI released Design Recommendations for the WCI Regional Cap-and-Trade Program, laying out the vision and basic program parameters of a cap-and-trade system. The report directly contemplated linkages with cap-and-trade programs in other jurisdictions. At section 13.5, the report states: “The WCI Partner jurisdictions will seek bilateral and multilateral linkages with other government-approved cap-and-trade systems so that those allowances and allowances issued by WCI Partner jurisdictions would be fully fungible.”

Two years later, the WCI released the Design for the WCI Regional Program, which provides a comprehensive roadmap for WCI partners as they implement cap-and-trade in their jurisdictions. Like its predecessor in 2008, the document places a great deal of emphasis on congruent regulatory schemes and linkages with other jurisdictions. While noting that not all WCI partner jurisdictions will implement the cap-and-trade program, the report recognizes that all WCI partners participated in creating the program design, and that it is structured so that additional partners can join in the future. The report outlines several benefits of linking cap-and-trade systems with other jurisdictions, such as:

  • Incorporating more opportunities to reduce greenhouse gas emissions can improve cost-effectiveness while also achieving greater emissions reductions;
  • Expanding the geographic coverage of the price of greenhouse gas emissions can reduce the risk of emissions leakage and maintain competitiveness;
  • Enlarging the market for emission allowances and offsets can improve market liquidity, reduce volatility, and reduce the likelihood of manipulation; and
  • Collaborating among jurisdictions can provide an opportunity to share administrative functions, reducing the costs of program operation and enhancing consistency across jurisdictions.

Ontario has also consistently emphasized the importance of linking cap-and-trade systems with other jurisdictions. In 2008, for example, Ontario Premier Dalton McGuinty and Quebec Premier Jean Charest signed a Memorandum of Understanding (MOU) with respect to a provincial and territorial cap-and-trade initiative. The MOU heavily contemplates and encourages linkages to other greenhouse gas cap-and-trade systems, noting that such linkages can reduce greenhouse gases at lower costs, allow for larger trading volumes, improve liquidity and speed the pace of innovation, among other benefits. Shortly after entering into the MOU, the government of Ontario demonstrated its further commitment to a cap-and-trade system by introducing enabling legislation in 2009 - Bill 185, or the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trade). The Bill provided the government with broad authority to implement emissions trading systems and establish rules relating to the scope, trading, distribution and administration of such a system. Like the WCI and MOU, Bill 185 explicitly contemplates integration with other regional cap-and-trade systems.

Given the significant progress made by the WCI and its partner jurisdictions as it relates to the architecture of cap-and-trade, the emergence of the linked Quebec and California systems, and Ontario’s desire for linkage, it is unlikely that Ontario’s approach to cap-and-trade will differ materially from the Quebec or California regimes. Caution should be exercised before any deviations in our structure or design from the regimes in Quebec or California are developed. We expect Ontario’s system, once unveiled, to largely mirror the characteristics illustrated in the chart above. Further, California’s Senate Bill No. 1018 at Section 12894(f) sets out four requirements for linking market-based mechanisms with other jurisdictions, as follows:

  1. The jurisdiction with which the state agency proposes to link has adopted program requirements for greenhouse gas reductions, including, but not limited to, requirements for offsets, that are equivalent to or stricter than those required by Division 25.5 (commencing with Section 38500) of the Health and Safety Code.
     
  2. Under the proposed linkage, the State of California is able to enforce Division 25.5 (commencing with Section 38500) of the Health and Safety Code and related statutes, against any entity subject to regulation under those statutes, and against any entity located within the linking jurisdiction to the maximum extent permitted under the United States and California Constitutions.
     
  3. The proposed linkage provides for enforcement of applicable laws by the state agency or by the linking jurisdiction of program requirements that are equivalent to or stricter than those required by Division 25.5 (commencing with Section 38500) of the Health and Safety Code.
     
  4. The proposed linkage and any related participation of the State of California in Western Climate Initiative, Incorporated, shall not impose any significant liability on the state or any state agency for any failure associated with the linkage.

Evidently, these requirements essentially mandate policy congruence with California, which will further shape Ontario’s cap-and-trade system to resemble those in Quebec and California.

As with any program designed to achieve policy aims through capital markets and commercial means, the devil will be in the details. We will be sure to update this blog and the chart above as new developments are announced in Ontario in the coming months.

Ontario's cap-and-trade system in context

P. Jason Kroft and Tamir Birk -

As we recently discussed here, on April 13, 2015, Ontario Premier Kathleen Wynne formally announced plans to create a cap-and-trade system for greenhouse gas emissions in Ontario, to be linked with the systems already in place in Quebec and California. This is not the first time Ontario’s government has announced intentions to implement cap-and-trade in the province; prior efforts have lacked the political will and determination to bring cap-and-trade to fruition. In this blog post, we highlight some of the major recent cap-and-trade developments in Ontario and the U.S. to help put the re-launching of the province’s cap-and-trade efforts in context.

The Acid Rain Program (ARP), established under Title IV of the 1990 Clean Air Act (CAA) Amendments, was the first federal U.S. law to adopt an emission trading system on a large scale and was a precursor to a similar regime that was established in Ontario shortly thereafter. The ARP was a market-based initiative taken by the United States Environmental Protection Agency (EPA) beginning in 1995 to reduce atmospheric levels of sulfur dioxide (SOx) and nitrogen oxide (NOx), the primary precursors of acid rain, from the power sector. The program set a permanent cap on the total amount of SOx that may be emitted by electric power plants in the country, with allowances being bought and sold in secondary markets. Reductions in NOx emissions were also required and were mainly achieved through retrofits to coal-fired plants. The program was largely hailed as a success, significantly reducing SOx and NOx emissions in the U.S. In Ontario, the first air emissions trading program was introduced in 2001. The program includes the Emissions Trading Code, which was intended to supplement Ontario Regulation 397/01, which governs emissions trading under the Ontario Environmental Protection Act. The program introduced the use of a market-based system for reducing emissions of NOx and SOx in the province.

Unlike the system introduced in 2001 that was limited to SOx and NOx emissions, the Government of Ontario has been contemplating the introduction of a wide-ranging cap-and-trade system for greenhouse gas emissions since at least 2008, when it joined the Western Climate Initiative (WCI). The WCI consists of a voluntary coalition of US states and Canadian provinces that have developed guidelines to facilitate mutual cooperation in order to reduce greenhouse gas emissions. One of the WCI’s main goals is to work together with member jurisdictions to “identify, evaluate, and implement emissions trading policies to tackle climate change at a regional level.” In fact, California and Quebec’s cap-and-trade systems that came into force in 2013 are based largely on design recommendations made by the WCI. Under the WCI, member jurisdictions are not compelled to establish a cap-and-trade system, rather, the WCI’s non-binding nature allows jurisdictions to maintain their autonomy in combatting climate change. California and Quebec are currently the only two WCI members that utilize an integrated cap-and-trade system.

Also in 2008, Ontario further moved towards the establishment of a cap-and-trade regime when Ontario Premier Dalton McGuinty and Quebec Premier Jean Charest signed a Memorandum of Understanding (MOU) with respect to a provincial and territorial cap-and-trade initiative. The MOU set out the two provinces’ plans to create an interprovincial cap-and-trade system for the trading of emissions credits, which was expected to be implemented by as early as 2010. Interestingly, the MOU invited other provinces and territories to sign on and “work collaboratively on the cap and trade initiative”, and contemplated forming linkages with other North American and international trading schemes. California and Quebec’s cap-and-trade systems were formally linked in 2014, with its first joint auction of greenhouse gas allowances taking place in December 2014, and its second in March, 2015.

Shortly after joining the WCI and entering into the MOU, the Government of Ontario demonstrated its further commitment to a cap-and-trade system by introducing enabling legislation in 2009. Bill 185, or the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), amended the Environmental Protection Act through the addition of provisions that provided the government with broad authority to implement emissions trading systems and establish rules relating to the scope, trading, distribution and administration of such a system. Like the WCI and MOU, Bill 185 explicitly contemplated integration with other cap-and-trade systems, noting that such linkages could provide emissions reductions at a lower cost, while improving the pace of innovation and allowing for larger trading volumes and liquidity.

Premier Kathleen Wynne officially announces Ontario cap-and-trade regime

P. Jason Kroft and Tamir Birk -

As anticipated, Ontario Premier Kathleen Wynne formally announced plans Monday morning to join Quebec and California in building a cap-and-trade system for greenhouse gas emissions. Calling climate change “one of the greatest challenges mankind has faced”, Ontario will soon impose sector-specific limits on emissions. Once the details are finalized over the next six months, the Province will sell or auction permits to companies that represent the right to emit a stated volume of pollution. Companies that pollute more than their limit must purchase permits from other companies that plan to emit less. As such, proponents of cap-and-trade argue that market forces incentivize businesses to adopt cleaner and more efficient practices. “The action we take today will help secure a healthier environment, a more competitive economy and a better future for our children and grandchildren,” Wynne said.

Opponents of the system argue that cap-and-trade is simply a carbon tax by another name. Increasing costs to businesses, they argue, will invariably lead to consumers paying more for a wide variety of goods and services. The University of California Berkeley, for example, estimates that cap-and-trade will add 2.6 cents per litre to the price of gasoline in Ontario.

The government plans to reinvest the proceeds raised through cap-and-trade into projects that reduce greenhouse gas emissions. These include projects aimed at reducing household energy consumption, building more public transit and assisting factories and businesses in reducing their environmental footprint. Initial estimates indicate that a cap-and-trade system in Ontario could generate between $1 billion and $2 billion in revenue per year.

Despite the Premier’s announcement, few details or dollar figures were provided. Among other uncertainties, it remains unclear how much the Province expects to raise by the sale or auction of permits, what the costs of introducing the system will be, how emission caps will be set, and what the effect on consumers is expected to be.

Environment Minister Glen Murray stated that the government will consult the public as it irons out the details for a cap-and-trade regime by October. We will be sure to update this blog once more details are revealed.

Ontario to implement cap-and-trade system

P. Jason Kroft and Tamir Birk -

As recently reported to the Globe and Mail newspaper by government sources, Ontario Premier Kathleen Wynne is preparing to implement a cap-and-trade system for greenhouse gas emissions as part of the Province’s strategy to combat climate change. The initiative would be tied to Quebec and California’s existing cap-and-trade system, which held its first joint auction of greenhouse gas allowances in December, 2014, and its second in March, 2015. An official announcement is expected by Ontario Environment Minister Glen Murray in the near future, with further details to come later this spring and summer.

Under a cap-and-trade system, Ontario would limit the amount of carbon that can be emitted by certain businesses and raise money by selling or auctioning emissions permits that represent the right to emit a specific volume of carbon. Permits are then traded on secondary markets. Companies that wish or need to emit more carbon than the regulated cap or than the permits they then hold must purchase permits from other companies that plan to emit less than the limit. Proponents of a cap-and-trade system will note that forward looking businesses can adopt cleaner or more efficient energy uses and thus profit under a cap-and-trade system by holding excess emissions permits that are available for sale. Under the current joint Quebec-California program, companies are able to trade carbon allowances across jurisdictions to comply with local greenhouse gas emission limits. A Quebec company, for example, could purchase allowances from a certified greenhouse gas emissions reduction project in California in order to comply with its own Quebec provincial targets, and vice versa. Initial estimates indicate that a cap-and-trade system in Ontario could raise between $1 billion and $2 billion per year which would then likely be invested in green programs.

Ontario’s cap-and-trade system has been contemplated since at least 2008, when the Province agreed to price carbon emissions by signing the Western Climate Initiative with Quebec, British Columbia and California. Despite passing enabling legislation for a cap-and-trade system a year later, the Province never moved forward. Premier Wynne may have the momentum and political opportunity to implement cap-and-trade now.

As discussed here, Ontario recently initiated a 45-day public review and comment period on climate change, following the government’s release of its climate change discussion paper. The paper, which identifies the risks and challenges associated with climate change in Ontario, and the public comment period, was aimed at informing the government’s decision on its climate change strategy, as it questioned which carbon pricing mechanism to adopt in the Province. Unlike Quebec, for example, British Columbia utilizes a carbon tax that puts a price on every tonne of carbon burned. It appears that Ontario will proceed down a path similar to Quebec and employ cap-and-trade (at least in part) to address climate change policy.

We will be sure to update this blog with any new developments. In future blog posts, we will explain in greater detail the mechanics underlying the current California and Quebec systems and will provide commentary on the details of the Ontario cap-and-trade regime as they unfold. As in any program aimed at achieving policy aims through capital markets and commercial means, the devil will be in the details. We will examine these details in future blog pieces.

Ontario to implement carbon reduction program

P. Jason Kroft and Andrew Sullivan -

Ontario’s Ministry of Environment (MOE) has released a discussion paper to support a dialogue on the elements of a potential Provincial greenhouse gas (GHG) reduction program (the Program). Greenhouse Gas Emissions Reductions in Ontario: A Discussion Paper (the Paper) considers, among other things, the following aspects of the Program: principles and goals for development; potential elements; scope; emissions reduction targets; certain compliance options; and public consultation.

Since 2009, the MOE has been collecting data on GHG emissions from large emitters. The Paper makes it clear that, moving forward, the MOE intends on implementing the Program with the intent to reduce GHG emissions. However, it is unclear, at this point, the exact form the Program will take. What is clear is that the public and stakeholders will be consulted with any further design of the Program.

The MOE notes the significant progress to reduce GHGs being undertaken in Europe, Australia, Asia, the US, and most importantly, Canadian Federal and Provincial initiatives. The Paper states that Ontario is interested in an equivalency agreement with the Federal Government. Such an agreement would mean Federal GHG regulations would not apply in Ontario where Provincial regulations meet or exceed Federal standards.

The Program’s principles and goals include the following:

  • Achieving cost-effective, absolute reductions that considers Provincial competiveness and supports an equivalency agreement with the Federal Government;
     
  • Simplicity and transparency;
     
  • Equitable treatment of industry sectors;
     
  • Rewarding early-movers;
     
  • Promoting investment in clean technology;
     
  • Broad alignment with other emission reduction programs; and
     
  • Integration with other Provincial environmental policies.

The following is a summary of key aspects of potential elements and scope of the Program:

  • Timing: the MOE would seek to have the Program in place one year prior to any Federal industry-wide regulation of GHGs.
     
  • Covered GHGs: carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons and perfluorocarbons from covered industries.
     
  • Covered Industries: at a minimum, those same industrial sectors to be regulated by the Federal regulations. Potentially, the MOE could broaden the scope of large emitters consistent with facilities currently covered under Ontario’s Greenhouse Gas Emissions Reporting regulation (O. Reg. 452/09).
     
  • Inclusion of Electricity Sector: the MOE is considering including emissions from the electricity sector in the Program and setting an emissions limit aimed at stabilizing emissions from the electricity sector over time.
     
  • Emissions Reduction Target for the Industrial Sector: the emissions limit for industrial sectors are set at the forecast of total emissions expected at the start of the Program, and are to decline by five per cent over five years.
     
  • Potential Approaches to Emissions Reductions: a mix of 1) production-based benchmarks; 2) energy benchmarks; and, 3) reductions from an historical baseline.
     
  • Compliance Options: the Paper acknowledges stakeholder’s desire for flexible compliance options including investment in technology, trading emission credits, and the use of offsets. 

The Paper concludes with a call for comments regarding the Program from the interested public, industry stakeholders, non-government organizations and Ontario’s First Nation and Métis Communities. The Paper has been posted on the Environmental Registry for a 90 day public review that commenced January 21, 2013 and ends on April 21, 2013.

All comments on can be directed to:

Sheri Beaton
Project Manager
Ministry of the Environment
Integrated Environmental Policy Division
Air Policy Instruments and Programs Design Branch
77 Wellesley Street West
Floor 10
Ferguson Block
Toronto Ontario
M7A2T5
Phone: (416) 314-4826

Otherwise, interested parties can submit a comment online through the Environmental Registry. All comments received prior to April 21, 2013 will be considered as part of the decision-making process by the MOE if they are submitted in writing or electronically using the form provided in the Environmental Registry notice and reference Environmental Registry number 011-7940.

We will monitor the implementation of this Paper and the development of the Program over time.

California's inaugural cap-and-trade auction declared a success

Andrew Sullivan -

On November 14, 2012, the California Air Resources Board (ARB) held its first auction for the purchase and sale of carbon allowances for its nascent cap-and-trade regime. ARB chairwoman, Mary Nichols, declared the auction a success. For a number of reasons, there is good cause to agree with her. First, a tonne of carbon for the 2013 vintage year sold for $10.09. That’s slightly above the $10.00 price floor set by the ARB. The highest bid was a whopping $91.13. Second, there were three times the number of bidders at the auction than actual buyers, indicating a healthy and competitive market. Additionally, 97% of allowances were purchased by entities required to participate in the regime indicating prices were not influenced by speculative buyers. Rather, it seems to indicate regulated entities are looking to retire allowances in anticipation of compliance. Finally and most importantly, the auction sold out. All 23,126,110 2013 vintage year allowances were purchased, raising approximately $233 million. The kickoff of this auction creates the largest carbon market in North American and the second largest in the world, behind only the European Union Emissions Trading Scheme.

As we have noted on this blog before, California is acknowledged as a leader in climate change initiatives. Undoubtedly, Canadian environmental regulators will look to California’s cap and trade model with great interest. This is particularly true of Canadian provinces that are partners with California in the Western Climate Initiative (WCI): British Columbia, Manitoba, Ontario, and Quebec. The WCI is a partnership between California and the aforementioned provinces to implement a joint strategy to reduce greenhouse gases. The success or failure of California’s cap and trade scheme is likely to influence any Canadian WCI member’s willingness to adopt a similar scheme.

CRA denies tax deduction for Alberta Climate Change Fund Payments

Doug Richardson and Julie D’Avignon -

As emissions and cap-and-trade regimes develop, the tax issues relating to such regimes evolve and receive further consideration. One aspect of Alberta’s emission reduction regime is the Climate Change and Emissions Management Fund (the Fund). A greenhouse gas emitter that is subject to Alberta’s provincial emission reduction target may pay $15 per tonne into the Fund to the extent its emissions are in excess of the emissions target set by Alberta’s regime. The money collected by the Fund is intended to be invested into projects, initiatives and technologies relating to reducing emissions.

One of the tax issues relating to this type of regime is the nature of contributions to the Fund for tax purposes, and in particular whether the contributions are deductible for tax purposes. 

The Canada Revenue Agency (CRA) was recently asked whether the administrative penalty that may be assessed on a person who has failed to meet the emissions limits established by Alberta’s Climate Change and Emissions Management Act is deductible for income tax purposes[i]. CRA noted that section 67.6 of the Income Tax Act (Canada) prohibits a deduction in respect of any amount that is a fine or penalty imposed under federal and provincial law by any person or public body that has authority to impose the fine or penalty. Accordingly, CRA’s view was that amounts described as penalties under Alberta’s Climate Change and Emissions Management Act are not deductible in computing taxable income. An interesting result for many taxpayers who may have taken the position that the payments to the Fund are remedial payments, as opposed to penalties, and therefore have claimed deductions as such.



[i]CRA Doc. 2012-0440471E5 (July 10, 2012).

Greater fines and new administrative penalties for environmental violations in Quebec since February 1st

Myriam Fortin -

The final measures provided under Bill 89, An Act to amend the Environment Quality Act in order to reinforce compliance came into force this February 1st, giving the Ministry of Sustainable Development, Environment and Parks (Ministry) greater powers against contraveners.

Fines may now reach one million dollars for natural persons and six million dollars for legal persons for a violation of the Environment Quality Act (EQA).

Quebec’s greenhouse gas regulatory regime, mainly the Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere and the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, is adopted pursuant the EQA.

In addition to greater fines, monetary administrative penalties may now be imposed by the Ministry’s relevant regional office director based only on his assessment of the file after a violation of the EQA is observed, without further investigation, collection of evidence or judicial procedures. A notice of violation will simply be sent, informing the contravener of the violation and amount of the fine, which may vary between $250 and $10,000, depending on the nature of the offence and whether it applies to a legal or natural person.

These amendments have an even greater impact on directors and officers whose participation in an offence under the EQA no longer has to be established by the Ministry to incur liability. Rather, if a legal person commits an offence under the EQA, its directors and officers are presumed to have committed the same offence unless they demonstrate their diligence.

Quebec adopts greenhouse gas emission regulation

Jason Streicher -

On December 14, 2011, the Government of Québec officially adopted the Regulation respecting the cap-and-trade system for greenhouse gas emission allowances (the Regulation) which is based on the rules established by the Western Climate Initiative (WCI).

The Regulation will come into force on January 1, 2012. The first year of the system will be a transition year which will allow emitters and participants to familiarize themselves with how the system works. In 2012, emitters and participants will be able to register with the system, take part in pilot auctions and buy and sell greenhouse gas (GHG) emission allowances on the market. No reduction or capping of GHG emissions will be required during this transition year.

The capping and reduction of GHG emissions will start officially on January 1, 2013. Starting on January 1, 2013 some 75 operators, primarily in the industrial and electricity sectors, whose annual GHG emissions equal or exceed the annual threshold of 25 kt CO2e (25 thousand tonnes of carbon dioxide equivalent), will be subject to the capping and reduction of their GHG emissions.

Starting on January 1, 2015, the operators of businesses that distribute fuel in Québec or import fuel for their own consumption, and whose annual GHG emissions due to its combustion reach or exceed the annual threshold of 25 kt CO2e, will also be subject to capping and reduction.

The Government of Québec has stated that, unlike traditional regulation, where companies must not exceed an emission standard (a strict limit on the discharge of pollutants), the cap and trade system will give companies flexibility in planning their short, medium and long term investments. In effect, the system will allow companies to buy emission allowances on the market until they are ready to modernize or replace certain equipment. Companies that reduce their GHG emissions below the regulatory requirement would have an allocation of emission units that is higher than what they actually produce. By selling their excess units, such companies could either recover part of their investments or use the proceeds to engage in further optimization.

Links to our previous blogs on this Regulation are available here.

New proposed amendments to the Quebec GHG reporting regulation

Myriam Fortin -

After the coming into force on December 30, 2010 of the Regulation amending the Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere, a new draft regulation was published October 5, 2011 (English version / French version), proposing additional amendments intended to harmonize the regulation with requirements of the Western Climate Initiative (WCI), in order to allow a good functioning of the greenhouse gas (GHG) cap and trade system.

The draft regulation proposes emissions calculation methods for twelve industry sectors, being nickel and copper production, ferroalloy production, magnesium production, nitric acid production, phosphoric acid production, ammonia production, electricity transmission and distribution and use of equipment to produce electricity, carbonates use, glass production, mobile equipment, electronics manufacturing, and natural gas transmission and distribution.

Amendments are also proposed to calculation methods applicable to many other industry sectors in order to harmonize them with WCI requirements introduced in 2010, and a section on the estimation of missing data is added to all calculation methods.

Many articles are modified to clarify the scope of the regulation, applying reporting thresholds by establishment rather than enterprise, except for certain enterprises in the energy sector, which are considered as establishments under the proposed changes.  In addition, the number of years during which the emissions of an establishment must be below the reporting threshold to exempt it from reporting is proposed to be increased from 3 to 4 consecutive years.

Pursuant to the draft regulation, filing of the verification report will be required at the same time as the emissions report, on June 1st, whereas the current regulation allows the verification report to be filed three months after the emissions report, on September 1st. Furthermore, in addition to the current requirement for the verifying organization to be ISO 14065 accredited, the verification will have to comply with an ISO 17011 program.

More details on Quebec's draft cap-and-trade regulation

As we previously reported here, Quebec’s draft Regulation respecting a cap-and-trade system for greenhouse gas emission allowances (the Regulation) will come into force on January 1, 2012, subject to amendments. 

The cap-and-trade system (System) will require the registration of “emitters,” which is broadly defined as persons and municipalities who produce more than 25,000 tonnes of CO2 equivalent per year at an establishment, and who i) conduct an enterprise in electric or natural gas utilities, mining, oil and gas exploration, steam and air conditioning supply, manufacturing or gas pipelines; ii) acquire electricity generated outside of Quebec, or iii) manufacture and distribute hydrocarbon fuels in Quebec.

Emitters must verify their emissions during certain compliance periods (the first period commencing January 1, 2013 and ending December 31, 2014), and must cover their emissions above a “cap” with offset credits issued by the Quebec Minister of Sustainable Development, Environment and Parks (Minister), or by a government with whom Quebec has agreed to recognize their offset credits. Emission allowances may be traded with other emitters or participants in the System, or may be purchased from the Minister. Emissions reductions made during the eligibility period from January 1, 2008 to December 31, 2011 may also be used as early reduction credits.

Failure to cover emissions in excess of the cap will lead to an administrative sanction equal to a deduction of 3 emission units or early reduction credits for each missing allowance required to cover the excess. Contravention of the Regulation may result in fines up to $250,000 for a legal person, or any person or municipality operating an enterprise.

Quebec Releases draft Cap and Trade Regulations

On July 6, 2011, Quebec's Ministry of Sustainable Development, Environment and Parks announced that it has published a draft regulation on greenhouse gas (GHG) cap-and-trade based on the Western Climate Initiative (WCI) guidelines, for a 60-day public consultation.

Once the consultation period has expired, the regulation to be adopted will enable Quebec to be ready to set up the carbon market as soon as January 1, 2012. As noted in yesterday's blog entry, in order to synchronize with California, the first year of the program will be transitional. This will allow emitters and market participants to familiarize themselves with how the system works and enable them to transition to their obligations under the GHG cap-and-trade system that will come into force on January 1, 2013. They will be able to register as system users, take part in pilot project auctions and exchange (buy and sell) GHG emission allowances through the market.

Industrial sites that annually emit 25,000 or more tons of equivalent CO2 in greenhouse gas will be subject to the system for capping and reducing their emissions.

California delays start of Cap and Trade until 2013

Cora Zeeman -

On June 29, 2011, the California Air Resource Board announced that it is delaying the start of the state's cap and trade program until 2013, a year later than was originally envisioned. CARB will initiate the cap and trade program in 2012 but use that year to test various aspects of the program; no greenhouse gas (GHG) emissions reductions will be required until 2013. However, the 2014 reduction target of 6% below business as usual and the goal of reducing emissions to 1990 levels by 2020 are unchanged.

In the announcement, CARB Chair Mary Nichols said that the delay is necessary because it is so critical that the cap and trade regime be a success. CARB will be initiating all elements of the cap and trade program in 2012, including establishing market oversight mechanisms, conducting trainings, holding auctions and developing linkages with partners in the Western Climate Initiative (WCI), to ensure all aspects of the program operate as intended.

In light of CARB's announcement, market watchers consider it reasonable to expect British Columbia and Quebec, the Canadian WCI members on track to initiate cap and trade programs in 2012, to delay industry compliance with GHG emissions reduction targets until 2013 to be in step with California. The readiness of Ontario and Manitoba, the other two Canadian WCI members, to participate in the WCI in 2012 has been in doubt for the past few months. While provincial elections in Ontario set for October have caused the incumbent Liberal government to hold off on pushing ahead with the program, Manitoba expects to join the WCI only after the program has begun.

New Democratic Party reintroduces bill to cap greenhouse gas emissions

On June 15, 2011, the NDP, Canada's main opposition party, reintroduced a bill that proposes to legislate stronger targets for greenhouse gas (GHG) emissions reductions in Canada.  Bill C-224, the Climate Change Accountability Act to cut GHG emissions by 25% below 1990 levels by 2020 and by 80% below 1990 levels by 2050. Canada's current target is based on a 2006 base level and seeks to reduce GHG emissions by 17% by 2020.  As we reported previously, the same bill was defeated in the Senate last year.
 

CARB issues court-ordered alternatives to California's Cap-and-Trade Program

On June 13, 2011, the California Air Resources Board (CARB) released a Supplement to its Functional Equivalent Document (FED) (the environmental review document for its cap-and-trade program). CARB was ordered by the San Francisco Superior Court to remedy deficiencies in the initial FED's analysis of alternatives to the cap-and-trade program proposed in the AB 32 Scoping Plan (for more information on this cap-and-trade program, please see our  previous blog post).

This ruling was initially a tentative one, but was finalized on May 20, 2011. For more information on the Court's determination, please see our earlier blog post

The Supplement provides a more extensive analysis of the five alternatives to the Scoping Plan. These include: (1) a no project alternative, (2) an alternative based on cap-and-trade, (3) an alternative based on source-specific regulatory requirements, (4) an alternative based on a carbon fee or tax, and (5) an alternative program based on a variation of proposed strategies.

The Supplement will be open for 45 days (until July 28, 2011) for public comment. The Supplement (along with the FED for the AB 32 Scoping Plan) will be considered by the board of CARB for approval on August 24, 2011 in Sacramento, California. Should the revised analysis prove sufficient from the court's point of view, it is likely that California's cap and trade program will begin as scheduled in 2012. Although implementation of convergent cap and trade programs in British Columbia, Ontario, Quebec and Manitoba may be delayed until after 2012, as members of the Western Climate Initiative, these provincial cap and trade programs will link into the California program to form a larger regional carbon market.

Emerging trends in global carbon finance

P. Jason Kroft and Cora Zeeman -

Recent developments in international carbon finance have seen investors and carbon intermediaries moving away from the global carbon market and towards local initiatives, such asregional carbon trading regimes, as a means of participating in carbon reduction financing or achieving climate change objectives. This short piece identifies and begins to examine this trend away from global carbon market development and towards regional initiatives and some of the reasons for this movement.

At the 1997 climate change conference in Kyoto, Japan, 193 nations, including the European Union (EU), arrived at a global consensus on using financial measures to combat climate change. The Kyoto plan introduced restrictions on greenhouse gas (GHG) emissions by industrialized countries and the creation of credits to emit GHGs that would be tradeable in a global carbon market. Developing countries, including China and India, were not given GHG emissions limits and could sell credits based on their own GHG emission reductions to industrialized nations. When the Kyoto commitments entered into force in 2005 and, as a result, became a binding international commitment, they were taken up in earnest by the EU and were made mandatory under the EU Emissions Trading Scheme (ETS). An emissions trading system has the advantage of allowing companies to choose the most cost-effective means to achieve GHG emission reduction targets by either purchasing allowances or decreasing emissions.

Thirteen years after these international commitments were made, the December 2010 climate change summit in Cancun, Mexico and the April 2011 talks in Bangkok, Thailand demonstrate that the global consensus on the Kyoto carbon finance mechanism is breaking down. Developing countries are rejecting the agreements from the Copenhagen summit in December 2009 by insisting that any new international agreement must be legally binding, and non-European developed nations reject a binding international agreement unless the U.S. and other major emitters commit to emissions reduction targets as well. All the while the U.S., the world’s second largest GHG emitter and absconder from the Kyoto plan, continues to grapple over “how, when and to what extent they can reduce GHG emissions”[1]and carbon markets are struggling internationally.[2]

Due to this and, as some suggest, the hangover from the financial crisis, the global carbon market is showing signs of stalling. Although carbon trading was once hailed as the next trillion dollar market, data published by New Energy Finance shows that the value of carbon emissions credits traded in 2010 reached $120 billion, which represents a 5% increase over 2009 levels[3]. However, the volume of trades fell by 10% over the same period. This data on the size of the global carbon market should be considered in relation to other global commodities markets. Measured carbon market activity is easily dwarfed by the $21 trillion market in crude oil.

According to the World Bank, the financial crisis spurred financial institutions and private investors to “deleverage and redirect their positions away from risky investments and toward safer assets and markets.”[4]Perhaps in part as a result of such redirected focus and in part because of the slow movement on the climate change and carbon markets regulatory front, the number of carbon traders and brokers has declined.2009 saw an increase in market consolidation, where financial players that survived the financial crisis chose to acquire undervalued portfolios rather than engage in origination themselves. Other players have exited the market or significantly reduced their activity. IntercontinentalExchange, operator of the voluntary carbon trading platform housed by the Chicago Climate Exchange, closed its U.S. carbon platform in January and Bloomberg News reports that the International Emissions Trading Association’s membership has declined about 16% since it emerged at the 2009 Copenhagen climate summit[5]

All the while, global temperatures are still rising and droughts and flooding continue to wreak havoc across the world, from Pakistan and Russia to Brazil and Australia. Without investor demand spurred by global GHG emissions limits, the global price of carbon will be difficult to buoy. Clear policy and regulatory signals must be provided if a stronger global market is to emerge.

In the face of a deepening sense of uncertainty over the future of the global emissions reduction effort and the likelihood that international policymakers will be able to reach a legally binding agreement, regional and national emissions mitigation efforts offer financial players some opportunities to engage the problem of climate change while securing returns on investment. For example, even with the binding international commitments made in Kyoto set to expire in 2012, the EU is adhering to its plans to extend carbon trading under the EU ETS and intends to increase the scope of the program by including airlines to the range of regulated companies next year. Other jurisdictions, including New Zealand, Taiwan, Brazil and South Korea have either committed or are considering national emissions trading programs.

In its 12th Five-Year Plan for the period 2011-2015, China, the world’s largest GHG emitter and vocal opponent to binding international GHG reduction targets for developing countries, is planning to apply a range of market mechanisms to complement existing regulations and standards directed at its carbon emissions. In April 2011, the Chinese government announced that it will launch pilot cap and trade schemes in six provinces before 2013 and set up a national cap and trade platform by 2015. This announcement is intended to implement the country’s commitment to reduce its carbon intensity, the amount of carbon dioxide produced per unit of GDP, by 40-45 percent by the end of 2020 from 2005 levels. Reuters reports that Guandong, one of the selected provinces, has already submitted plans to cap the energy use of its cities in the Pearl River Delta region and incentivize them to trade consumption permits with one another.[6]

National and regional carbon trading strategies are underway even in one of the most unlikely of places, the U.S., which has shown opposition to binding international GHG reduction targets. The trading volume of the Regional Greenhouse Gas Initiative (RGGI), a coalition of 10 states in the north-eastern U.S. aiming to reduce GHG emissions from power plants, grew almost ten-fold in 2009 to US$2.2 billion in expectation of federal emissions regulation, according to the World Bank.[7]However, it now appears unlikely that such regulation will emerge any time soon and since December 2010, when RGGI permits slumped to a record low, several states have indicated their inclination to withdraw from the RGGI. In March 2011, New Hampshire’s Senate has approved legislation to amend its participation in the RGGI. Other member states have announced that they are examining taking similar action.

Despite setbacks in the north-east, regional initiatives are still alive, if just barely, in the western U.S. Living up to the state’s reputation as a first mover on environmental issues, in December 2009, the California Air Resource Board (CARB), the state agency tasked with reducing the state’s GHG emissions, approved a state-wide cap and trade program to begin in January 2012. The program seeks to build a regional carbon market known as the Western Climate Initiative (WCI). Although five states have failed to enact implementing legislation, leaving California the sole WCI participant in the U.S., a number of Canadian provinces, including Ontario, Quebec, Manitoba and British Columbia, have begun implementing the regulations necessary to join the WCI. Despite having survived a multi-million dollar campaign to halt its implementation, a recent ruling from the California superior court could stall the state’s cap and trade program while CARB is required to consider alternative GHG mitigation strategies. As a result of the ruling, there is uncertainty around timing of the launch of the program. The results of California’s foray into carbon trading will likely determine the eventual fate of a national carbon trading regime as Congress will look to California to assess the viability of a cap and trade program in the U.S.

It is widely believed that a global agreement is a pre-requisite to a global carbon market, which is in turn the pre-requisite to setting a price on carbon, which is what spurs investor demand. Given this, it may be surprising that, in the face of the failure of the international community to renew the consensus on global climate change action, some carbon market participants remain optimistic about the future of the global carbon market. In fact, Bloomberg New Energy Finance predicts that the global carbon market will grow by 15 percent in 2011, the most in three years.[8]The reality is that a global agreement is not necessarily the only answer. If key elements are established to make it possible to progressively link regional and national emissions trading systems, desired emissions reductions could be achieved. This proposal has recently been espoused by Henry Dewent, head of the International Emissions Trading Association who addressed hundreds of corporate executives and financiers at the Navigating the American Carbon World Conference in April 2011. The Los Angeles Times quotes Dewant as saying: “[t]he way forward lies in individual regional, national and state systems over the world reaching out to each other over time.”[9]


[1] Ben Sills, March 22, 2011, “Global Carbon Credits Die as Smart Money Backs Indian RECs”.
[2] Ben Sills, March 26, 2011 “Carbon Traders go back to the drawing board’, the Washington Post”.
[3] Press Release, January 6, 2011, “Value of the Global Carbon Market Increases by 5% in 2010 but Volume Declined”.
[4] 2010 State and Trends of the Carbon Market Report.
[5] Supra note 1.
[6] David Stanway, April 11, 2011, “China planning emissions trading in 6 regions – Point Carbon”.
[7] Supra note 3.
[8] Catherine Airlie, January 6, 2011, “Carbon Market to Grow 15% This Year, Bloomberg New Energy Finance Predicts”.
[9] Margot Roosevelt, April 18, 2011, “California’s carbon market: Will cap-and-trade work?”

Election 2011: Canada's climate change future

P. Jason Kroft and Annie Pyke

With the federal election just a few days away, we thought it would be useful to our readers to identify what each major political party's published campaign platform says about climate change and Canada's role in curbing greenhouse gas (GHG) emissions. It is certainly fair to conclude that to the extent that there has been robust discussion of real substantive issues in this political campaign (a premise that is certainly not free from any doubt), the topics of climate change, cap and trade and implementation of international protocols to address GHG emissions (among other topics relating to the environment) have not been a focus of discourse for most of the major political parties. Whether climate change remains a topic that engages the voting public is an unanswered question for another day, but it is at least our proposition that most of the major political parties have not identified there to exist real political advantage to making the environment and climate change a major campaign focus. For present purposes, we are not questioning the sufficiency or merit of any plan, just letting you know what the plans are. Of course, we would like to hear from you as to you own views on these plans. 

The following is a brief summary of each major political party's stated plans to deal with climate change (in alphabetical order by party name).

Bloc Quebecois

The Bloc Quebecois continues to support the Kyoto Accord and the Kyoto goal of a 6% reduction in GHG emissions from 1990 levels for the period of 2008-2012 and a 25% reduction from 1990 levels by 2020. The Bloc Quebecois supports a cap on emissions and would establish a carbon exchange in Montreal. An independent body would be charged with certifying GHG reductions and imposing financial penalties for failure to meet reductions.

The Bloc Quebecois would also increase support for research and development to support GHG reductions and implement tax incentives to help families convert their home heating systems and undertake energy efficient retrofits in their homes.

Based on the materials available, it is unclear when the proposed carbon exchange would be implemented and there is also no indication as to which industries would be covered by the Bloc's programs.

For more information, please go to www.blocquebecois.org or www.blocquebecois.org/English.aspx

Conservatives

During his time as Prime Minister, Stephen Harper has established regulations to raise the renewable fuel content in gasoline, to reduce tailpipe emissions and introduced regulations to reduce GHG emissions in the production of electricity; made investments in clean energy research and development (including carbon capture and storage); and initiated the Clean Energy Dialogue between Canada and the United States to enhance collaboration on reducing GHGs and combating climate change.

The Conservatives have set a target of a 17% reduction in domestic GHG emissions from 2005 levels by 2020, the same goal as the Obama administration in the United States. The Conservatives are the only major political party who do not support a cap-and-trade program and plan instead to impose emissions regulations on specific industrial sectors. Reductions in GHG emissions will also be achieved through the replacement of fossil fuel energy sources and the Conservatives have pledged to support economically viable clean energy projects that will assist regions and provinces in the replacement of fossil fuel with renewable fuel sources, based on the following criteria: national or regional significance, economic and financial merit and significant reduction of GHG emissions. The Lower Churchill hydro-electric project has been singled out as an example of the type of project which the Conservatives would support.

A further part of the Conservative plan to reduce GHG emissions is the extension of the ecoEnergy Retrofit-Homes Program for a year. This program provides grants of up to $5,000 per unit to offset the costs of energy-efficient home improvements.

The Conservative target for GHG emission reduction is the lowest of any of the parties and it is also unclear which industries would be regulated.

For more information, please go to www.conservative.ca

Green Party

The Green Party has the most ambitious targets for GHG reduction (perhaps befitting its political party name and orientation), with the published goal of reducing emissions by 30% below 1990 levels by 2020 and to 85% below 1990 levels by 2040, regardless of what other countries pledge to do. The Green Party would also phase out greenhouse gas halocarbons CFCs, HFCs, PFCs and SF6 between 2012 and 2017 and reduce Canada's nitrous oxide emissions by 85% by 2025. In addition, the Green Party continues to support the Kyoto Clean Development Mechanism and supports the extension of the Kyoto Accord to cover international aviation and shipping.

As part of their plan to reduce GHG emissions, so-called "Large Final Emitters" would participate in a cap-and-trade program and an escalating carbon tax would be applied to all carbon dioxide, methane, nitrous oxide, fugitive and other GHG emissions. A carbon tax would also be imposed on all exports of coal, oil and gas from Canada. It is unclear what would be included under the definition of "Large Final Emitters", although it does include the fossil fuel industry.

The Green Party is focused on moving away from reliance on fossil fuels and in connection with this, all subsidies for oil, coal, gas and the coalbed methane industries would be eliminated and the funding currently earmarked for carbon capture and storage research and development would be redirected into renewable energy projects. The Green Party would not approve any new coal-fired electrical generation plants and would pass legislation to keep the West Coast crude oil-tanker free such that a new West Coast crude oil port will not be built and crude oil traffic in the Port of Vancouver would be phased out. A further point of note is that the Green Party plans to implement a national power grid to facilitate the transmission of power between provinces and encourage the development of renewable energy.

For more information please visit www.greenparty.ca

Liberal

The Liberal target for GHG reduction is 80% below 1990 levels by 2050. In order to assist with reaching this target, the Liberals would implement a cap-and-trade system that applies to all sectors of the economy across the country. The cap-and-trade program would include an auction for emission allowances. The current Liberal two-year budget does not include any revenues from a cap-and-trade auction which indicates that either the program will not be implemented within the next two years or that auctions will not be undertaken within the next two years.

The Liberals would also designate "Clean Resources" as a "Canadian Champion Sector", which means it will be a priority across government departments, the focus of collaboration with other governments and will be targeted for tax incentives for innovative, emerging firms. The term "Clean Resources" means the responsible harvest of natural resource products and cleaner extraction, management and consumption of resources and covers the entire supply chain, including the energy sector. As part of this focus, the Liberals plan to quadruple renewable energy production from 2009 levels by 2016 and in order to do so, the Liberals will bring back the Renewable Power Production Incentive (the RPPI) and have pledged $1 billion in funding for the RPPI.

The "Canadian Clean Energy Partnership" is another part of the Liberal plan to reduce GHG emissions. This partnership, composed of the federal, provincial and territorial governments as well as the private sector and certain stakeholders, will work together to manage the transition to a low-carbon economy. A focus of this partnership will be on the oil sands and eliminating the 15% differential compared to conventional oil.

The Liberals have also stated that they will put an immediate end to the Accelerated Capital Cost Allowance for oil sands investments (the Conservatives are currently phasing this out for complete phase out by 2015) and have pledged the $500 million in tax revenue this will create towards research to decrease GHG emissions and investments in monitoring and research on the environmental impacts of the oil sands.

The Liberals would also create a Green Renovation Tax Credit, with the goal of retrofitting 1 million homes by 2017. This $400 million program would be a permanent refundable tax credit which would allow a tax credit of up to $13,500 for making energy efficient changes to a home. In addition, the government would also cover 50% of the home energy audit required in advance of the renovation.

For more information, please visit www.liberal.ca

NDP

The NDP have set a goal of reducing GHG emissions to a level 80% below that of 1990 by the year 2050, with interim targets for 2015-2045. To ensure this goal is achieved, the NDP would reintroduce the Climate Change Accountability Act. The NDP also plan to implement a cap-and-trade program with an auction of emission permits, although this program would only apply to Canada's "biggest polluters". The revenues from cap-and-trade auctions of emissions permits would be redistributed across Canada to fund investment in green technologies, business and household energy conservation, public transit, support renewable energy development and transitioning workers to the green economy. While it is unclear what the scope of "biggest polluters" would be, the NDP budget recognizes revenue from cap-and-trade starting in 2011, indicating that the program would be implemented immediately.

The NDP would cut subsidies to non-renewable energy and re-allocate the subsidies to re-instate federal financial initiatives for clean power (both renewable energy and co-generation), with a focus on community-owned renewable energy facilities; create incentives for innovation in green technology including support for research and development and commercialization; create a revolving fund for home energy efficiency retrofits, to curb energy consumption, reduce GHG emissions, create local jobs and give savings on home energy bills; to develop a "Green Jobs Fund" to support the transition of workers to the clean energy economy; support low-income and energy dependent individuals with respect to rising energy costs; and to implement training programs for green energy engineers, technicians, construction workers and maintenance and audit professions. Canadians would also be able to purchase "Green Bonds" which would be established with the purpose of investing in green energy research and development and commercialization and community-scale renewable projects.

The NDP would discourage the bulk export of unprocessed oil and gas resources and encourage value-added, responsible upgrading, refining and petrochemical manufacturing in Canada to maximize the economic benefits and jobs for Canadians from this industry.

For more information, please visit www.ndp.ca

The above is just a summary of some of the highlights of each major political party's published plan to deal with climate change and GHG emissions and it is important to consider these points in the context of each party's overall platform, available on-line at their respective websites. We will of course be monitoring over time how the elected government implements these plans and will continue to regularly identify on this blog important regulatory and policy announcements that are presented at all levels of government across Canada.

San Francisco Judge rules against California Cap-and-Trade system

In a recent case decided in the Superior Court of California, Association of Irritated Residents vs. California Air Resources Board et al, a San Francisco County judge made a tentative ruling against the California Air Resources Board (CARB) ordering CARB to postpone the implementation of regulations to reduce greenhouse gas emissions, including the creation of a cap-and-trade system. The judge ruled that CARB failed to properly consider alternatives to a cap-and-trade system and that alternatives should have been presented to the public for comment. If the ruling is finalized, it could impact both future and existing greenhouse gas regulation in California. Pursuant to the rules governing court proceedings in California, both sides have 15 days from January 21, 2011, the date of judgement, to file objections to be considered by the Court prior to the issuance of the final order. For more information on the proposed California cap-and-trade program, please see our earlier blog post.

Advisory Panel to Canadian Government recommends national Cap and Trade Program

In a report released yesterday entitled "Parallel Paths: Canada-U.S. Climate Policy Choices" , the National Roundtable on the Environment and Economy (NTREE) said that, given the uncertainty over U.S. climate change policies, the Canadian government should create its own national climate change regulations and then adapt to fit U.S. policies at a later date. In this report, the NRTEE reached four conclusions with respect to the relationship between Canadian and US climate policies:

1) Canada’s unique emissions profile and economic structure mean that matching Canada's greenhouse gas (GHG) emissions targets with those of the U.S. would lead to higher carbon prices in Canada. If the Canadian government followed through with its proposal of matching Canada's GHG targets to those of the U.S., fewer emission reductions would in fact occur due to the projected higher growth of emissions in Canada than in the U.S. The result would be that Canada would not meet its stated 2020 GHG reduction target.

2) Competitive issues are only significant for about 10% of the Canadian economy (i.e. that portion which is considered emissions-intensive and trade-exposed), including sectors such as oil and gas, mining and cement manufacturing.

3) Trade measures in the U.S. legislative proposals (i.e. the Kerry Boxer Bill  and the Waxman-Markey Bill ) and low-carbon fuel standards  pose manageable economic risks Canadian industry should Canada adopt equally stringent climate change policies as the U.S.

4) Costs imposed by any climate policies that the Canadian government implements (and resulting emission reductions) will have the most impact on Canadian industry. Costs to businesses arising from U.S. policies or from differences between Canadian and U.S. policies will not be the only source of economic costs.

The NRTEE argues that Canada would enhance its economic competitiveness by regulating GHG emissions now and avoiding more expensive actions later. The NRTEE recommends that the government implement a "Transitional Policy Option", in which it calls for a national cap-and-trade system that would, among other things, involve contingent pricing of GHG emissions at a price no more than $30/tonne CO2e higher than in the U.S., ii) auction permits for GHG emissions and iii) allow industry participants to buy and sell those emissions permits and other international emissions permits and domestic offsets to keep prices low for Canadian firms. The NRTEE report said that this kind of cap-and-trade system would "walk a middle line between harmonizing with the U.S. on carbon price and on emission-reduction targets, balancing competitive and environmental concerns", provide the industry with more flexibility than a strict regulatory approach, and reduce the overall cost to the country.

Both the U.S.and Canadian governments have committed to reducing GHG emissions by 17% below 2005 levels by the year 2020. However, even if all the NRTEE's policy advice is adopted, the Canadian government would not be on track to meet its 2020 target. The NRTEE's recommendations would result in emissions cuts of 3% below 2005 levels by 2020 and without such action, the level would be 10% higher than 2005 levels

In preparing this report, the NRTEE undertook "the most comprehensive analysis yet published on the economic risks and opportunities for Canada of climate policy in the context of the Canada-United States relationship" by completing over a year of analysis and original modelling to determine how far and how fast Canada could go to meet its stated emission reduction targets while growing the economy.

Chicago Climate Exchange to discontinue greenhouse gas cap-and-trade program

The Chicago Climate Exchange ("CCX") recently announced that they will discontinue the CCX emission reduction program at the conclusion of its Phase I and Phase II program at the end of this year.  Launched in 2003, the CCX emission reduction program was North America’s first voluntary greenhouse gas (“GHG”) cap-and-trade scheme. CCX Members made voluntary but legally binding commitments to reduce their annual GHG emissions by 6 per cent below their emissions baselines by the end of 2010.  Members who reduced emissions beyond their targets earned surplus allowances to sell, bank or trade with Members who did not meet their targets.

Carbon Financial Instrument (“CFI”) contracts were used to perform these trades.  The closing prices for a CFI contract fell to $0.05 in January 2010, from its all-time high of $7.40 in May 2008. Since February 2010, the CCX has had zero monthly trading volume.

In place of the emission reduction program, the CCX will create the CCX Offsets Registry Program, which will eliminate emission reduction targets in favour of a general marketplace for emission offsets.

"Fundamentally, with any program that relies on voluntary compliance for something not yet mandated into law, it makes it more difficult ultimately to have as vibrant a market as you'd want," said Bruce Braine, Vice-President of Strategic Policy at American Electric Power, one of the CCX’s founding Members.

Other CCX affiliate programs such as the European Climate Exchange and the Chicago Climate Futures Exchange will continue unchanged.

Cap-and-trade get a boost

Further to our blog post on October 25, 2010 (California vote could hinder cap-and-trade efforts), Proposition 23 was defeated by California voters in the November 2 election. The proposition would have suspended California’s emissions-reduction law until certain economic targets, including a decline in the unemployment rate, were met.

As reported in the Globe and Mail (Globe and Mail Link = http://www.theglobeandmail.com/report-on-business/economy/prospects-for-cap-and-trade-system-waning/article1783998/), the defeat of Proposition 23 could help boost the momentum behind the Western Climate Initiative’s proposed cap-and-trade market, which is schedules to launch in 2010. The Western Climate Initiative includes California, six other American states, Ontario, Quebec, British Columbia and Manitoba.
 

US elections provide divided result for western climate initiative

In yesterday's elections, California voters showed their continued support for the state's climate change policies, voting against a ballot initiative that would have suspended current climate change policies until certain economic targets were met and electing Democrat Jerry Brown as governor . The election results are an important milestone for the Western Climate Initiative ("WCI'), of which California is the largest participant, as the republican candidate had promised to revisit the state's climate change and cap-and-trade commitments.
 
Voters in New Mexico, another WCI participant, elected Republican Susana Martinez as governor. This could effect New Mexico's continued participation in the WCI as Martinez opposes a carbon emissions cap-and-trade program

California Releases Proposed Cap-and-Trade Regulation

On October 28, 2010, the California Air Resource Board ("CARB") announced the release of its proposed greenhouse gas cap and trade regulation  as part of the state's commitment to the Western Climate Initiative ("WCI"). British Columbia, Ontario, Quebec and Manitoba plan to join California and several other states in the launch of the WCI cap and trade market in 2012.
 
A key part of CARB's AB 32 Scoping Plan, the cap-and-trade program provides an overall limit on the emissions from sources responsible for 85% of California's greenhouse gas emissions. The release begins a 45-day public comment period culminating in a December 16, 2010 public hearing at which CARB will consider adopting the proposed program.

British Columbia Releases Proposed Cap-and-Trade Regulations

On October 22nd, 2010, the government of British Columbia released draft cap and trade regulations for public consultation. The proposed regulations establish the rules for emissions trading and offset projects in the province and are part of the province's commitment to the Western Climate Initiative. The public consultation period is open until December 6, 2010.

California vote could hinder cap-and-trade efforts

The viability of a California cap-and-trade program will hinge on the outcome of the state's November elections. Voters in California will decide on a proposition to delay action on climate change until certain economic targets are met, and the Republican candidate for governor has also promised to revisit the current climate change plan.

As reported in the Calgary Herald, this could potentially have a strong ripple effect on the developing North American carbon trading industry. British Columbia, Ontario, Quebec and Manitoba plan to join California and several other states in the launch of the Western Climate Initiative cap-and-trade market in 2012. While many observers are confident that the program will proceed regardless of the outcome in California, there is concern that the loss of the group’s largest economy could hinder the market's liquidity and efficiency.

British Columbia adopts new GHG emission limits - WCI Partners release details of cap-and-trade program

On July 27, British Columbia, along with four other Canadian provinces and seven U.S. states that are members of the Western Climate Initiative (WCI), released details of a proposed cap-and-trade program – set to begin in January 2012 – and other strategies designed to reduce regional greenhouse gas (GHG) emissions to 15% below 2005 levels by 2020, create green jobs and stimulate development of clean-energy technologies.

Fossil fuel production and other industrial sources account for approximately 35% of British Columbia’s annual GHG emissions, but unlike the carbon “consumption tax” imposed on businesses and individuals who use or purchase fossil fuels in the province, to date industry has not been subject to a GHG emission reduction program. With the introduction of the WCI program, any industrial operation emitting more than 25,000 tonnes of GHG per year will be subject to the proposed emission limits and penalties.

Among the WCI’s Canadian partners, British Columbia, Ontario and Quebec have implemented or are in the process of developing legislation that would enable cap-and-trade systems in those provinces.

See also: “B.C. adopts new limits for greenhouse-gas emissions with new ‘cap and trade’ system”

Prentice and Doer speak to Calgary Chamber of Commerce on cap and trade, protectionism

Speaking at a Calgary Chamber of Commerce event last week, Federal Environment Minister and Calgary Centre-North MP Jim Prentice once again reiterated that Canada will not go forward with a cap-and-trade system on its own.

Commenting on the fading prospects that that a cap-and-trade law will emerge from the from the US Congress Prentice stated that:

The Canadian market is not large enough, and when we harmonize climate, environment and energy policies, we do not intend to bring in a policy of cap-and-trade in circumstances where the U.S. does not.

The Minister related his belief that cap-and-trade is unlikely to be part of any energy or climate bill that might be passed before November.  He suggested that the regulatory route is increasingly the one Ottawa will take as it tries to cut greenhouse gas emissions by 17% below 2005 level by 2020 in order to meet Canada’s commitments under the Copenhagen Agreement.

The Government of Canada is clearly moving ahead with a regulatory approach, dealing with the transportation sector, which is 27% of Canada’s emissions...The electricity sector is another 19%, so, essentially, in Canada we (now) have close to 50% of our emissions in regulatory harness.

Canada’s Ambassador to the U.S. and former Manitoba premier Gary Doer reflected on the situation in the U.S. and the uncertainty that it creates for Canada. He speculated that it is likely that some form of energy law will emerge from congress in the near future, and that any Environmental Protection Agency climate change regulation will likely end up before the Supreme Court.  Doer remained clear on one point however, that Canada will continue to object to the imposition of any border measures by the U.S that may affect Canada’s energy flow to the U.S., given our clear intent to harmonize climate change policies:

We're saying, don't introduce any border measures against a country like Canada that is committed to the same reduction targets that you are...Don't take border measures against Canada's energy when we have a harmonized reduction target that was agreed to in Copenhagen and signed by the prime minister and environment minister...Countries like Canada that have signed on to the same agreement should not have artificial border measures that (represent) a Trojan horse for the issue of trade and access to Canadian energy.

Carbon Capture and Storage - Identified challenges to implementation

Lanette Wilkinson

Carbon capture and storage (CCS) is interesting as a case study of a CO2 mitigation technology that maintains considerable political and fiscal support even though its long-term economic viability is dependent on high carbon prices and even though its implementation will in many cases require that U.S. states and Canadian provinces enact new legislation and regulations. This article considers the current legislative debate in the U.S. and examines the ways in which the absence of federal climate change legislation in the U.S. and Canada affects both the price of carbon and the implementation of carbon abatement technologies. It also identifies regulatory gaps that must be addressed before CCS can be widely implemented.
 

Introduction to CCS

CCS involves the capture, compression, transportation, and underground injection of high volumes of CO2 emissions, which would otherwise be released into the atmosphere by industrial greenhouse gas (GHG) emitters. CCS is a promising technology that may enable certain emissions-intensive industries to reduce CO2 emissions while still maintaining reliance on fossil-fuels or emissions-intensive processes. The North American oil and gas industry has captured and injected CO2 into existing reservoirs to displace oil and enhance recovery (known as enhanced oil recovery or EOR) since the 1970s, and also captures CO2 in connection with international natural gas processing, where the high pressure-produced acid gas must be stripped of contaminants to meet pipeline specifications. Higher cost opportunities also exist to capture CO2 from flue gas at refinery and petrochemical operations, and also in the steel, ammonia, and ethanol production industries. Finally, electricity generators have a stake in the success of CCS as they are major emitters and can incorporate CCS technologies into both existing and new coal-fired or gas-fired operations to reduce the release of CO2.

There has been substantial political support and fiscal incentives for multiple demonstration projects of CCS, and, in fact, this technology is widely recognized by governments, research institutions and industry as an essential tool for the reduction of GHG emissions and a cornerstone in climate change policy. As detailed in past ETCC Updates, Canadian governments have provided approximately $3 billion of funding for CCS in Canada, in connection with research, development, and demonstration of CCS. Nonetheless, there are several significant hurdles to the widespread implementation of CCS.

Part I: The Economic Viability of CCS and the Cost of Carbon

Cost is one hurdle to the widespread implementation of CCS. While not a legal issue per se, carbon pricing (and, by extension, the economic viability of CCS) is affected by legislative measures, e.g. cap-and-trade or a carbon tax. For CCS to be economically viable, the market price for carbon would need to exceed $90 per tonne1 of CO2, by some estimates, compared to a market price in compliance-based markets of around $20 per tonne in Europe and $8-13 (Cdn.) per tonne in Alberta (which is subject to a price cap of $15 per tonne). Without sufficiently high pricing, CCS will be dependent on subsidies. The International Energy Agency (IEA) has indicated that $20 billion of immediate support is required to establish CCS technologies within the next decade. Its Executive Director has also suggestedthat thirty new projects would need to be constructed annually to stabilize GHGs and that one quarter of global power generation would need to incorporate CCS by 2050 to meet reduction goals. A recent audit by the Global Carbon Capture and Storage Institute found that only 62 of 213 active or planned projects were fully integrated commercial-scale projects, of which only seven were actually operating. The scarcity of viable projects is largely attributable to high cost, even with subsidies. For example, in early March 2010, one of the largest electricity generators in the U.S. cited economics when it pulled out of a $700 million CCS project in Alabama that was earmarked for $295 million in federal funding.

Update on Proposed Federal Carbon Pricing Legislation in Canada and the United States

CANADA

In North America, the price of carbon is currently determined on voluntary markets, various exchanges, or by local compliance-based legislation. No federal legislative framework exists, such as emissions quota or a carbon tax, and it appears unlikely that any such framework will be developed this year. On February 1, 2010, Environment Minister Jim Prentice announced that Canada intends to harmonize its legislation and policies with those of the United States. Following the December 2009 global climate change talks in Copenhagen, Canada filed with the U.N. an emissions reduction target of 17% from 2005 levels by 2020, matching that of the United States. Canada's target had previously been to cut Canada's GHG emissions 20% by 2020 from 2006 levels. Minister Prentice further indicated that Canada would only be willing to implement cap-and-trade or a regulatory regime when the U.S. signalled that they would do the same.

UNITED STATES

As discussed in greater detail in our December 2009 update, recent months have seen considerable activity in the U.S. Congress on the climate change front. Several bills have been proposed, including two cap-and-trade bills (the Waxman-Markey bill and Kerry-Boxer bill) that have since failed to garner enough support to pass in the Senate. In response, Senators Joseph Lieberman, John Kerry and Lindsey Graham are developing a bipartisan climate change bill that would strike a compromise between existing approaches. The bill, which is intended to be released in mid-April, proposes a carbon tax on transportation fuels and cap-and-trade for electricity-generating utilities. On March 9, U.S. President Barack Obama met with key senators at the White House to discuss climate change efforts in the Senate and reemphasize its priority. Meanwhile, an effort is underway in the U.S. House of Representatives to delay or block the Environmental Protection Agency (EPA) from regulating GHGs. Reports indicate that executives and investors are increasingly questioning whether the U.S. climate change debate will be resolved this year.

Carbon Markets in the U.S. and Canada

Amid legislative uncertainty and the outcome of Copenhagen, confidence in the strength of the carbon market is eroding. Regional Greenhouse Gas Initiative (RGGI) permits auctioned in the RGGI March 10 quarterly auction sold at an average of $2.07 per tonne which, while up $0.02 from the record low in December 2009, is still ten times cheaper than in Europe. The low price has been attributed also to an oversupply of carbon allowances and reduced energy demand caused by the recession. Even the EU, with a compliance-based market, is struggling with reduced demand and an oversupply of carbon allowances. Industry insiders suggest that it is the U.S. and Australia's failure to commit to real reductions that has given the EU little incentive to tighten up emissions caps - an action that would increase the demand for offsets. With a soft and volatile carbon market and the absence of definitive climate change legislation, many investors in North America must rely on fiscal incentives, policy pronouncements, and provincial and state initiatives to guide investment.

The legislative void at the federal level has been filled to some extent by the more than twenty U.S. states and seven Canadian provinces that are either implementing or proposing climate change strategies locally, or are participating in or observing a regional trading system. In Canada, Alberta has implemented cap-and-trade, British Columbia and Quebec have implemented carbon taxes, and British Columbia, Manitoba, Ontario, and Quebec are committed to or are taking steps towards implementing cap-and-trade. As discussed in our December 2009 ETCC Update, British Columbia, Manitoba, Quebec, and Ontario are also parties to the Western Climate Initiative (WCI), a regional GHG cap-and-trade regime the first phase of which is to take effect in 2012. The WCI is expected to be four times bigger than the current RGGI, which is the only operational regional trading system in North America. Recent reports have indicated that members of the RGGI and WCI are in discussions regarding the feasibility of linking their regimes.

While regional initiatives may fill a gap, comprehensive federal legislation is still an important goal. In fact, two commonly identified structural impediments to CCS include the lack of a national strategy to control CO2 emissions and the need for coordinated efforts among federal and state or provincial governments. For one thing, the scope of implementation matters for pricing strategies like cap-and-trade or carbon taxes. In the case of cap-and-trade, especially, meaningful economy-wide compliance-based emissions caps and appropriate standards for what qualifies as abatement are required for an efficiently operating market. Whether the federal legislature adopts a carbon tax, cap-and-trade, cap-and-dividend, or a combination thereof will impact the pricing of carbon and will determine which kind of market-based incentives are available. Depending on the details of proposed federal legislation, its implementation may require the harmonization of existing rules across the provinces. Such harmonization may be resisted by provinces with local legislation, like Alberta, which may conflict with or may not be as stringent as proposed federal legislation. Nonetheless, the hope is that any harmonization associated with the introduction of federal legislation will provide administrative and legislative certainty to industry, which does not exist in today's regulatory patchwork.

Part II: Identified Regulatory Gaps

The other impediment to CCS that has been identified is the existence of significant regulatory gaps - CCS having consistently been identified as a technology where regulation is needed. The IEA, the Alberta Carbon Capture and Storage Development Council, and the U.S.-Canada Clean Energy Dialogue Action Plan, to name only a few, have identified the regulatory gap as an issue or offered guidance on how regulations should be designed. Additionally, in February 2010, President Obama released a Presidential Memorandum establishing an Interagency Task Force on Carbon Capture and Storage with the mandate of overcoming legal and other barriers to the widespread cost-effective deployment of CCS within 10 years. Despite this call for regulation, only a handful of jurisdictions are developing or have adopted CCS-specific regulations (notably Australia, several U.S. states and certain international treaties). In others, such as the EU and the U.S., guidelines of CCS regulation have been adopted or proposed, but no actual regulations have been implemented. It was expected that Alberta, which has five major CCS projects in the pipeline which are to be developed over the next several years and $2 billion committed to these projects, would release regulations on CCS last year. According to recent reports, however, the Government of Alberta will not confirm whether a bill is being prepared.

The bulk of regulatory work for low carbon technologies will have to occur at a local level. The federal government can set emissions pricing or targets, regulate those activities (including transportation) that occur on federal lands, inter-provincially or internationally, and establish minimum technical or performance standards. Provinces have the authority to regulate health and safety, sitting, permitting, property laws, and emissions legislation and will likely need to do the bulk of work relating to injection, monitoring, and verification. For the capture, transportation, and injection well components of CCS, existing regulations (such as regulations for acid gas and EOR) provide a natural framework on which regulation could be based. Storage, however, is a unique process in the sense that it is expected to be perpetual and every site is different. It has been recommended that specific regulations relating to property rights and liability at the storage site (both during injection and post-closure) be developed that attend to the long-term nature of the process and that are flexible enough to address site-specific characteristics, emerging technologies and new information.

Property Rights

Property rights should be formalized with respect to the storage site (i.e. subsurface and pore space property rights and liabilities) and the mechanisms by which the rights to CO2 are transferred throughout the supply chain. With respect to the ownership of CO2, it is necessary to determine whether the owner of the source of CO2 retains ownership, or whether it is transferred as a result of capture, transportation, and/or sequestration by the operator. With respect to rights to the storage site, it is necessary to contemplate the possible impacts of a CCS license on land title (especially that of First Nations), access rights, mineral rights and pore space ownership. Much of this will turn on whether CO2 becomes tied to the property into which it was injected or whether it retains a separate legal identity. For instance, where ownership of surface rights is divorced from the subsurface rights, third parties may be granted access rights to the lands or rights for mineral or petroleum licensing over the same property.

Liabilities

Potential liabilities at the storage site include harm to local environment or human health caused by leakage or common law liabilities, such as nuisance, negligence, or trespass. When operators are liable, they carry the risk of compensatory damages. Consequently, where regulation is uncertain, participants may be exposed to unlimited risk. This exposure is exacerbated by uncertainties such as the reliability of capture, the effectiveness of monitoring methodology and remediation techniques and physical site specific risks, including subsurface fractures, tectonics, well integrity and non-geologic operational risks. Regulators should assign clear responsibility for leaks or excursion outside of the area subject to a CCS license, expressly setting out liabilities and penalties and their scope (especially in respect of remediation) and requiring appropriate operational and corrective measures. One of the most important ways to manage long-term liabilities associated with CCS is through careful site selection. Stringent siting regulations can ensure that injection wells are not sited in areas that could potentially damage public and private property, such as population centres, areas in communication with subsurface resources, including water sources or minerals, or sensitive habitats. Additionally, regulators should review the design of the injection well, the quantities of CO2 that can be injected, and reservoir pressure limits.

One of the most the crucial issues for CCS projects is the assignment of long-term responsibility for sites, including post-closure. In many jurisdictions, the operator must post financial assurance and assume responsibility for monitoring and verification for a certain length of time, at which point the responsibility for sites will transfer to the public sector. It is therefore necessary for regulators to assign responsibility for long-term financing and management of the site, to determine when the public sector should assume responsibility for post-closure liabilities and remediation and to select the regulatory agency responsible for long-term stewardship of CCS sites.

Conclusion

CCS has gained momentum as a promising technology to facilitate GHG emissions reductions. Two commonly identified impediments to the widespread deployment of CCS include the cost of implementing CCS and a lack of regulation addressing unique CO2 storage issues. While CCS has enjoyed various financial incentives and political support, it is equally necessary to develop a comprehensive legislative framework to give potential investors regulatory certainty and stable market-based incentives. Comprehensive and broadly implemented legislation that puts a price on carbon would encourage investment in carbon abatement technologies and help offset the current cost disadvantage of CCS. The second major type of impediment - an unclear regulatory environment - creates a risk of unpredictable and un-measurable liability that impedes investment. Well-designed regulations would mitigate this risk by clearly identifying the ownership of CO2, the scope of associated potential liability and remediation obligations, and the long-term liability for CCS.


1 Unless otherwise noted, monetary amounts in this article are stated in U.S. dollars.  

Qu├ębec announces target to reduce greenhouse gas emissions by 20% below 1990 levels by 2020

Alix d'Anglejan-Chatillon and Jason Streicher

On November 23, 2009, Québec's Minister of Sustainable Development, Environment and Parks announced Québec's target to reduce greenhouse gas emissions (GHG) by 20% below 1990 levels by the year 2020. The Minister elaborated that "the reduction target will show flexibility from one economic activity sector to another in accordance with the reduction potential of each, international competitiveness, available technology and required transition measures."

In order to achieve the announced reduction target, the Minister suggested that Québec will make major investments in mass transit and will establish means to encourage the increased use of intermodal transportation of goods. This initiative is in addition to the previously announced introduction of a GHG emission standard for light-duty vehicles, equivalent to the California standard, and investments to encourage the use and development of Québec's expertise in the electric vehicles sector. Lastly, the Québec government has stated that in order to achieve its reduction target, a GHG cap and trade system will need to be implemented in 2012 and, to this end, Québec expects to participate in establishing the largest GHG cap and trade system in North America in conjunction with its partners in the Western Climate Initiative.

North America bets on carbon capture and storage

Bradley B. Grant and Matthew Synnott

As we move towards the United Nations conference on climate change in Copenhagen, Denmark from December 7 to 18, 2009, Canada is still without a definitive climate-change strategy. The Government of Canada has stated that the solution in Canada will ultimately depend on the approach taken in the U.S. Similarly, the approach adopted in Canada will impact those currently being implemented in Canadian provinces.

While no definitive federal policies are in place in the U.S. or in Canada, both governments appear to be looking to carbon capture and storage (CCS)-a process that captures carbon dioxide (CO2) emissions before they are released into the atmosphere and stores them in geological formations kilometres deep inside the earth-as an important part of the solution to the problem of reducing greenhouse gas (GHG) emissions. Canadian provinces (in particular, Alberta and Saskatchewan) are also investing heavily in CCS.

The U.S. approach to CCS

The American Recovery and Reinvestment Act of 2009, which came into effect on February 17, 2009, provides $1.5 billion to fund carbon capture and energy efficiency improvement projects, out of the $77 billion in funding committed to clean energy and energy-efficiency programs. That legislation also amends certain tax provisions of the 2008 Emergency Economic Stabilization Act, such that a taxpayer that injects CO2 into secure geologic storage is eligible for $20 per tonne of CO2 provided that it would otherwise be emitted into the atmosphere, or $10 per tonne that is deposited as a tertiary injectant into an enhanced oil or natural gas recovery (EOR) project. Furthermore, the U.S. Department of Energy (DOE) sponsors several research-and-development initiatives to advance CCS technology, including the Carbon Sequestration Leadership Forum, the Carbon Sequestration Core Program and the Regional Carbon Sequestration Partnerships. In addition, the DOE has, among other things, announced an $8 billion federal loan-guarantee program for CCS, with $6 billion earmarked for projects incorporating CCS into industrial gasification, retrofitted and new coal-based power generation, and the remainder to coal gasification projects.

CCS is also an important component of the climate-change solutions put forward in two significant pieces of legislation currently proposed in the U.S. to address climate change. The Clean Energy Jobs and American Power Act, commonly known as the Kerry-Boxer Bill, currently under discussion in the U.S. Senate, provides for an incentive program for the deployment of CCS projects and the establishment of a per-ton incentive program for CCS projects that would be financed by allowances. Likewise, The American Clean Energy and Security Act of 2009 (ACES), narrowly passed by the U.S. House of Representatives on June 26, 2009, provides for a series of incentives around CCS that total an estimated $100 billion through 2030 and $240 billion through 2050 for use of CCS with coal-fired generation. Among other things, ACES (a) authorizes energy-industry participants to create a Carbon Storage Research Corporation that uses a small surcharge on fossil-fuel-generated electricity sales (with state approval) to produce approximately $1 billion per year for ten years to fund at least five large-scale CCS projects, (b) allocates 4% of cap-and-trade allowances to subsidize CCS deployment costs and (c) provides for additional bonus allowances for coal fired generation projects to adopt CCS projects.

The U.S. Department of Energy (DOE) has also invested almost $1.5 billion in CCS demonstration projects as part of its Clean Coal Power Initiative (CPPI). In July 2009, the DOE awarded $408 million to two projects. This past week, the DOE awarded another $979 million to three other projects. Each of these projects involves retrofitting flue gas streams at existing coal-fired power plants with different types of CCS technology and capturing at least 1 megatonne of CO2 emissions annually, with the captured CO2 then being sequestered in deep saline acquifers or used in EOR.

The Canadian approach to CCS

Since 2006, the Canadian federal government has provided $375 million to support the development of CCS technologies. In the 2009 federal budget, the government established an $850 million Clean Energy Fund to provide funding over five years for the demonstration of promising technologies, including large-scale CCS projects. The Clean Energy Fund also provides $150 million over five years for clean-energy research and development. An additional $125 million is available for CCS projects under the ecoENERGY Technology Initiative of Natural Resources Canada. The federal government is also considering providing favourable tax treatment to CCS projects through an accelerated capital-cost allowance for such projects.

Canada-wide potential for CCS may be as high as 600 megatonnes per year (roughly 40% of Canada's projected GHG emissions in 2050), but this potential resides primarily in western Canada. The geology of the Western Canadian Sedimentary Basin (WCSB) makes western Canada well suited for CCS projects, as it is estimated that the WCSB may be able to store up to several hundred years' worth of CO2 emissions.

CCS in Alberta

Nowhere is the development of CCS projects more important than in Alberta. The province has Canada's most carbon-intensive economy, due primarily to its reliance on coal-fired generation for its power and its energy industry, including the oil sands. In Alberta's 2008 Climate Change Strategy: Responsibility / Leadership / Action, the Government of Alberta committed to reducing its projected emissions for 2050 by 200 megatonnes of CO2 (or 14% below actual 2005 levels). The province proposes to achieve 70% of these reductions, or 139 megatonnes, through CCS. In the shorter term, Alberta has set a target of capturing 5 megatonnes by 2015.

In order to turn these goals into reality, in April 2008, Alberta established the Carbon Capture and Storage Development Council (CCS Council) and, in July 2008, announced that it would provide $2 billion in funding through a provincial CCS Fund to be administered by the CCS Council for three to five large-scale CCS projects. Projects are eligible to receive up to 75% of the project's total incremental cost to capture, transport and store CO2, with a maximum of 40% of approved funding distributed during design and construction stages, 20% at the outset of commercial operation and the remaining 40% paid during commercial operation over a maximum period of ten years.

To date, the Government of Alberta has announced agreements to fund four projects (Shell Quest, Project Pioneer and Alberta Carbon Trunk Line). Funds were also committed to a fifth project, the Alberta Saline Aquifer Project led by Enbridge, but the project was subsequently cancelled. The scale of each of these projects is significant:

  • For the Shell Quest CCS project (estimated to cost $1.35 billion), the Government of Alberta committed $745 million over fifteen years to Shell Canada Energy and its partners, Chevron Canada Ltd. and Marathon Oil Sands L.P., along with $120 million to be committed by the federal government from its Clean Energy Fund. It is anticipated that the Shell Quest CCS project will capture and store up to 1.2 megatonnes of CO2 per year from the Scotford Upgrader and the Scotford Upgrader Expansion.
     
  • Similarly, the Government of Alberta committed $436 million over fifteen years and the federal government committed $343 million from the Clean Energy Fund and the ecoENERGY Technology Initiative to the Project Pioneer CCS project, a partnership of TransAlta Corporation, Capital Power and Alstom, at TransAlta's Keephills 3 coal-fired power generation facility. The project will use a chilled-ammonia process to capture CO2 from the Keephills facility to be used for EOR in nearby conventional oil fields, and is expected to capture 1 megatonne of CO2 annually beginning in 2015. The Alberta Carbon Trunk Line proposed by Enhance Energy Inc., in partnership with North West Upgrading Inc., is a 240-kilometre pipeline that will transport CO2 supplied from the Agrium Redwater Complex and, once built, the Northwest Upgrader, for use in EOR elsewhere in Alberta.
     
  • The Government of Alberta has committed $495 million to the Alberta Gas Trunk Line, which is scheduled to start construction in 2011 and be in operation in 2012. It is anticipated that the line will transport 5,100 tonnes per day of compressed CO2 initially, increasing to 40,000 tonnes of CO2 per day in fifteen to twenty years.
     
  • Most recently, the Government of Alberta signed a Letter of Intent with Swan Hills Synfuels to invest $285 million in the Swan Hills In-Situ Coal Gasification (ISCG) Project. The Swan Hills ISCG Project will use ISCG to access coal seams located 1,400 metres underground, producing "syngas" that will be piped to Whitecourt, Alberta and used to fuel a new high-efficiency combined-cycle 300 MW power generator. Up to 1.3 megatonnes of CO2 created during the gasification process will be captured and used for EOR in the Swan Hills area. Construction is expected to begin in 2011, with CCS to start by 2015.

The federal government has also agreed to fund three other Alberta projects through its ecoENERGY Technology Initiative: (a) the Heartland Area Redwater Project (HARP), lead by ARC Resources, a project designed to demonstrate the feasibility of CO2 storage in the Redwater Leduc Reef - which is estimated to have a total storage capacity of one gigatonne of CO2 - north of Edmonton near an area of heavy industry and development; (b) the Integrated Carbon Capture and Enhanced Oil Recovery project, led by Enhance Energy, involving the capture of CO2 emissions from a large fertilizer plant and an upgrader located in the Alberta Industrial Heartland and transmission of the CO2 for EOR purposes or permanent sequestration; and (c) Husky Energy Inc.'s development of new knowledge and methods for EOR in heavy oil reservoirs, using CO2 as an injectant.

Activity is also occurring without government sponsorship. In 2006, Capital Reserve Canada Ltd. acquired mineral rights to approximately 2,000 acres of land in Two Hills, Alberta, located between Edmonton and Fort McMurray, with a view to constructing 250 salt caverns and the infrastructure to support the storage capacity of up to 113 megatonnes of CO2. Additionally, EOR operations have been under way in Alberta for a number of years, with increasing emphasis on reducing GHG emissions through the process. For example, Glencoe Resources Ltd. has partnered with MEG Global Canada Inc. and NOVA Chemicals Corporation, who sell CO2 to Glencoe from their petrochemical plants, to significantly increase recovery from declining oil fields while achieving annual CO2 emissions reductions of up to 220,000 tonnes.

CCS in other Canadian provinces

While CCS is of particular importance as a solution to reduction of GHG emissions in Alberta, a number of other provinces are also looking to CCS projects as part of their climate-change solution.

A successful CCS pilot project has been in operation in Saskatchewan since 2000. The Weyburn project, currently the world's largest operational CCS project, involves the capture of CO2 from a coal gasification plant in Beulah, North Dakota and transportation of the compressed CO2 by pipeline to oil fields in Weyburn, Saskatchewan, where EnCana runs a $1 billion commercial EOR operation and the Petroleum Technology Research Centre runs a research project that now includes monitoring at Apache Canada's Midale field. It has been reported that, since 2000, more than 13 megatonnes of CO2 have been injected without any leaks being detected by scientists after extensive monitoring of the project.

The 2008 federal budget included $240 million in new federal funding for a major CCS project in Saskatchewan. A portion of these funds is currently being used to offset the Boundary Dam project development costs. The Boundary Dam project, led by SaskPower in partnership with the federal and Saskatchewan governments, is a seven-year, $1.4-billion government-industry partnership to rebuild and then re-power a major coal-fired power generation unit at Boundary Dam. When fully operational in 2013, the 115 to 120 megawatt (estimated) demonstration project would capture approximately one megatonne of CO2 annually for use in EOR projects in Saskatchewan.

Spectra Energy has plans to develop a large-scale integrated CCS project in northeastern British Columbia, near Spectra's Fort Nelson natural-gas plant. Spectra is proceeding with a feasibility assessment for the project, which previously received $3.4 million in support from the B.C. government. The project is also supported by the ecoENERGY Technology Initiative and the U.S. DOE's National Energy Technology Laboratory, through the Energy & Environmental Research Center's Plains CO2 Reduction Partnership.

Challenges ahead

While a number of CCS projects received government support in Canada, significant challenges remain to their further development.

The most significant challenge is likely to be financial, with some estimates marking the cost of CCS at over $100 per tonne of sequestered CO2. This makes CCS very expensive (particularly compared to the $15 per tonne cap currently in place in Alberta and the $11 per ton to $28 per ton price proposed in the Kerry-Boxer bill in the U.S.). However, CCS is still in its infancy and it is anticipated that CCS will become much more economic over time, as technology improves and more commercial-scale projects are developed. Proponents have also taken the position that the cost of CCS is comparable to available alternatives that can reduce GHG emissions on a large scale. For example, a study by the International Energy Association found that without Carbon Capture and Storage, the world's overall costs to reduce emissions to 2005 levels by 2050 would increase by 70%. That study suggests that total investment in CCS needs to be $3.5 trillion to $4 trillion up to 2050.

There are also significant areas of regulatory uncertainty with respect to CCS in most jurisdictions, including Alberta. This uncertainty includes pore tenure (i.e. who owns the right to inject and store CO2 in the underground pore spaces) and long-term monitoring and liability obligations. The Government of Alberta has previously indicated that it would release regulations addressing these matters by the end of this year. In the U.S., both the Kerry Boxer bill and ACES propose to direct the Environmental Protection Agency to develop and implement regulations dealing with CCS.

Notwithstanding these (and other) challenges, governments in Canada and the U.S. appear committed to forging ahead with CCS projects, since they see few viable alternatives that will meet energy needs while satisfying GHG emissions goals. The Government of Alberta appears particularly committed, given its access to cheap coal, its high demand for energy at the oil sands, its available storage caverns and its current levels of GHG emissions. No doubt global collaboration will be required if CCS is to become truly feasible, and huge opportunities await those who are able to make CCS more cost-effective, ensure the security of storage, develop CO2 source clusters and pipeline networks and address the concerns of local communities. Only time will tell if CCS will be the solution to the climate change problem in Alberta and an important part of the solution elsewhere in Canada and the U.S.

Canadian Implications of U.S. Climate Change Regulation - Part II

Kerry-Boxer Bill Introduced in the Senate

Jason Kroft, Ruth Elnekave and Michael Lees

On September 30, 2009, Senators John Kerry (D-MA), Chairman of the Committee on Foreign Relations, and Barbara Boxer (D-CA), Chairman of the Committee on Environment and Public Works, introduced the Clean Energy Jobs and American Power Act ("Kerry-Boxer", or the "Bill"). The stated purpose of the Bill is to "create clean energy jobs, promote energy independence, reduce global warming pollution, and transition to a clean energy economy." The Bill, the main feature of which is an economy-wide cap-and-trade regime to reduce greenhouse gas (GHG) creation, is closely modelled on its House of Representatives predecessor, the American Clean Energy and Security Act (ACES), which was passed on June 26, 2009.1

These U.S. developments have considerable significance for Canada. While the federal Minister of the Environment, Jim Prentice, suggested several times this year that the government intended to publish comprehensive climate change regulations prior to the United Nations climate change conference in Copenhagen (December 7-18), Canada seems to have determined that domestic action in advance of an international and U.S. framework would be too risky. As Minister Prentice recently explained: "it is in our interest as Canadians to ensure that we know what the international framework is going to look like. Our continental framework needs to be consistent with that. And our domestic policies need to be consistent with that." The result (in addition to a perception that climate change momentum north of the border has stalled) is that it may be several years before Canada tables regulations aimed at cutting GHG emissions and - perhaps most significantly - that the form and content of those regulations is likely to be heavily influenced by the legislation that emerges from the U.S. Congress.

Cap-and-Trade Provisions in Kerry-Boxer and ACES:
Key Differences and Canadian Impact

GHG Cap

Both bills establish a cap-and-trade regime that would require GHG emission reductions of 83% below 2005 levels by 2050; a 42% reduction below 2005 levels by 2030; and a 3% reduction from 2005 levels by 2012. Kerry-Boxer, however, would reduce emissions 20% below 2005 levels by 2020 - three percentage points more than the corresponding ACES target.

Canada's Turning the Corner climate change plan, which was originally scheduled to take effect in 2011, is based on an intensity-based rather than an absolute emissions cap, as contained in both Kerry-Boxer and ACES. An intensity-based cap, preferred by large emitters such as Alberta oil sands producers, would be less of an impediment on economic growth than an absolute cap. However, in light of Canada's desire for cross-border harmonization of GHG reduction regimes, U.S. targets will surely set a benchmark for those under Canadian GHG regulations in any future climate change regime.

The White House recently clarified its stance, announcing that in Copenhagen, the U.S. will pledge to cut its GHG emissions by 17% below 2005 levels by 2020, in line with the reductions proposed in ACES rather than its successor Bill. Minister Prentice has stated that the White House proposal is almost identical to Canada's stated target to reduce GHG emissions by 20% below 2006 levels by 2020, considering the different base year used as a measure, and Prime Minister Harper has echoed this thought, adding that Canada may only "make some minor adjustments".

Trade

Manufacturers, unions and lawmakers in states that produce energy-intensive products such as steel, cement and glass have called for tariffs on imports from countries that the U.S. perceives as being weak on cutting GHG emissions.

Under ACES, such tariffs would be imposed on certain goods imported from countries that have not instituted sufficiently strong GHG reduction plans. This trade provision would require the purchase of "international reserve allowances" for energy intensive imports.

While Kerry-Boxer includes the title "International Trade", there are no provisions included under it at this time. The Bill does, however, include placeholder language that reads:

It is the sense of the Senate that this Act will contain a trade title that will include a border measure that is consistent with our international obligations and designed to work in conjunction with provisions that allocate allowances to energy-intensive and trade-exposed industries.

The section on international trade has been intentionally left blank due to divisions among the lawmakers who drafted the Bill, and the resulting potential for the issue to be used as a bargaining tool to gain consent from dissenting senators. Indeed, Senator Sherrod Brown (D-OH) and nine of his Democratic colleagues in the Senate have warned they will oppose any climate change bill that does not include such a provision. Conversely, Senator John McCain (R-AZ) has indicated that he is in opposition to any form of carbon tariff, stating that such a tariff is "protectionism and it's going to be passed on right to the consumer."

There have also been calls for the United Nations to create an international body to impose carbon tariffs. Senator Ben Cardin (D-MD), who sits on both the Senate Foreign Relations and Environment and Public Works Committees, proposed that such a body be created in order to take pressure off of U.S. trade officials, who may be wary of imposing tariffs on carbon-intensive goods for the fear of spawning a trade war.

Despite limited opposition to a carbon tariff or its equivalent, the majority of U.S. lawmakers are in support of some form of border adjustment. To be sure, some believe that the tariffs are important if the Bill is to win the votes required to pass in the Senate. While it is trade relations with developing countries that would be primarily complicated by carbon tariffs, such measure would undoubtedly serve as an additional impetus for Canada to institute GHG regulations of a similar stringency to those adopted by the U.S.

International Offsets

Both ACES and Kerry-Boxer allow two billion tons of offsets to be used by capped entities annually to meet their compliance obligations. Under ACES, those entities are allowed to source up to 50% of carbon offsets internationally, while requiring at least 50% to be sourced domestically. If domestic offsets are not available to meet the 50% domestic requirement, then another 500 million tons of international offsets will be allowed. However, Kerry-Boxer differs in that it allows a maximum of 25% to be sourced internationally. Under the Bill, an additional 750 million tons of offsets will be permitted in the event that the domestic offset supply is insufficient to meet the required threshold.

At first glance, this appears to limit the potential for a Canadian export-economy in carbon offsets. However, it should be recognized that such an export-economy may not be a potential reality at all. The Canadian government has called for a 20% reduction in GHGs below 2006 levels by 2020. While Canadian GHG emitters will necessarily have to offset their own GHG emissions in order to maintain their current levels of output without undergoing drastic changes to their current methods of production, many warn that the domestic supply will not be able to meet demand.

Gerry Ertel, manager of regulatory affairs at Royal Dutch Shell, has said that Canadian businesses will only be able to meet approximately half of the proposed target without using offsets. Ertel also noted that Canada does not have enough domestic offset production capability to meet demand, making the inclusion of an international offset regime necessary for compliance.

If Canadian emitters were forced to rely heavily on offsets sourced internationally, the majority of such offsets would arguably come from low-cost producers in developing countries. Yet, such scenario is cause for concern, as the UN's clean development mechanism, a program designed to produce carbon offsets in developing countries for industrialized nations subject to the Kyoto regime, has only produced 340 million credits in the past four years.

Accordingly, as offsets produced in the U.S. will surely be consumed domestically and the ability for Canadian emitters to rely on developing countries as a supply of offsets is limited, any cap-and-trade regime in Canada will need to facilitate the domestic production of offset credits.

Pre-emption of State-level GHG Cap-and-Trade Programs

Under Kerry-Boxer, provided that the federal cap-and-trade program holds its first auction of allowances by March 31, 2011, no state may implement or enforce a comprehensive GHG limitation program that covers any capped emissions during the years 2012 through 2017. If the initial auction is delayed, then state pre-emption would not begin for at least 9 months after the date of that auction. While ACES also has a pre-emption provision, the House bill does not provide for the postponement of pre-emption if the initial federal auction is delayed. It should be noted that these provisions do not pre-empt states from instituting command-and-control regulations such as targeted efficiency standards.

This pre-emption is significant for Canadian provinces because several (British Columbia, Quebec and Ontario) are party to the Western Climate Initiative (WCI), a regional GHG cap-and-trade regime that would be affected by the pre-emption. WCI would cover nearly 90% of GHG emissions in WCI states and provinces upon its complete proposed implementation in 2015. However, reliance on WCI by Canadian jurisdictions may be in jeopardy if the program cannot remain viable without a U.S. membership base. Consequently, pre-emption of state-level cap-and-trade programs may force Canadian legislators to accelerate the creation of a federal or provincial cap-and-trade regime in Canada, as there may not be a cross-border regional substitute available.

Going Forward

The road ahead for passage of Kerry-Boxer is not without obstacles. Senator Boxer recently announced that the Bill, which cleared a controversial Environment Committee vote in early November, will not be debated and amended in the Finance Committee (one of numerous committees that must still weigh in before the Bill goes to the Senate floor) until early 2010. Similarly, Senate Majority Leader Harry Reid announced that the full Senate may vote on climate change legislation some time in the spring, ending hopes that the U.S. would pass meaningful legislation before Copenhagen. Moreover, while similar to ACES in many respects, Kerry-Boxer will likely be more difficult to pass, as it requires a Senate supermajority of 60 votes rather than the simple majority required in the House.

If and when U.S. climate change legislation will pass is therefore still unclear. What is certain, however, is that any progress south of the border will have a very significant effect on developments in Canada. While not necessarily the final word, Kerry-Boxer is a key step in the development of a U.S. contribution to an international framework that - in the words of Minister Prentice - "all needs to knit together".


 

1 For a description of ACES, please refer to the following Stikeman Elliott Emissions Trading and Climate Change Update: "Canadian implications of U.S. climate change regulation: U.S. House passes American Clean Energy and Security Act", dated September 2009.

 

 

The taxation of tradable permits

Douglas Richardson and Julie D'Avignon

With the development of cap-and-trade regimes and the recent attention given to them in North America and abroad, the issues arising in this context have come under careful consideration by environmental and commercial lawyers for some time. However, the national and international tax consequences of trading in emission allowances (or tradable permits) have been largely ignored in the analysis and the political developments that have preceded the United Nations Conference on Climate Change in Copenhagen from December 7 - 18, 2009. The importance of these consequences should not be underestimated, since any tax regime that results in "tax friction" costs may impede the efficacy of a domestic cap-and-trade system and negate the natural flow of such instruments across international borders. These issues and others were recently identified and addressed in submissions made by the Business and Industry Advisory Council (BIAC) of the Organisation for Economic Co-operation and Development (OECD).

Trading in emission allowances creates numerous tax issues encompassing a variety of matters, including: (i) the national and international tax consequences of trading, surrendering and disposing of tradable permits; (ii) the application of value-added taxes to transactions involving tradable permits; (iii) the treatment of offset arrangements; and (iv) the consequences of tradable permits being treated as financial instruments. For example, when a tradable permit is acquired, does it matter whether the permit was freely allocated or purchased? Is the acquisition of a permit on income or capital account? If the acquisition of the permit is on capital account, is the permit depreciable property or intangible property? Even if the nature of the permit can be determined, what is the timing in respect of income realized and expenses incurred by a permit-holder? In the event that these issues differ between jurisdictions, the possibility of double taxation or tax arbitrage may exist.

Characterization of tradable permits

In order to provide a coherent and comprehensive explanation of the many tax issues arising from the acquisition and disposition of tradable permits, it is necessary to determine the characterization of a tradable permit. However, characterizing a permit will depend, in large part, on the principles used in the analysis. The choices articulated to date include using: (i) international accounting standards; (ii) existing domestic law; or (iii) existing domestic law combined with selected statutory amendments and clarifications where appropriate.

In those jurisdictions where accounting standards have been used to deal with the taxation of tradable permits, the results are mixed, and issues have arisen in areas not limited to the characterization of the tradable permits. Indeed, since accounting standards are used to measure income for financial reporting purposes, it has long been the case in Canada that such standards have been considered incapable of conclusively determining the taxable income of a taxpayer. Similar concerns arise in the context of tradable permits, and therefore it is unlikely that accounting standards will be widely adopted, either to determine the nature of a tradable permit or the treatment of expenses incurred or gains realized in respect of a tradable permit.

Most jurisdictions would prefer to use existing tax principles to determine the nature of a tradable permit and that could well be the widely adopted approach. However, even under existing law the characterization of a permit is far from certain. In some instances, the cost of acquiring a permit will be considered a deductible business expense if the permit is held for surrender and no property is acquired (e.g., Australia and New Zealand). In other circumstances, the permit is treated as intangible property, the cost of which is on account of capital, on the basis that it has a benefit beyond the current year. In many jurisdictions (such as Canada and the United States) the cost of intangible capital property that is not depreciable property is amortized over a period of years.

The U.S. has characterized tradable permits as intangible property in the context of their regime for taxing the passive income of controlled foreign corporations. In a recently issued advance tax ruling, the Internal Revenue Service considered a situation where an affiliate of a U.S. taxpayer was granted allowances under the European Union Emissions Trading Scheme and sold its surplus allowances. The Internal Revenue Service ruled that the taxpayer did not have to treat the income from those sales as subject to current taxation under the rules applicable to U.S. shareholders of controlled foreign corporations, on the basis that the allowances were intangible property held for use in a trade or business. The Internal Revenue Service was careful to limit the characterization of the permit to the facts of the ruling and therefore, it is unclear whether a similar characterization would be applied to taxpayers whose participation in the carbon markets arises for different business reasons.

Recognition of income and expenditures

One of the more controversial issues in a cap-and-trade system is how to deal with freely allocated permits. Although many jurisdictions want to move to an auction system for allocating permits, at the moment many permits either have been, or will be, freely allocated. For instance, the European Union, New Zealand, Australia and certain industry groups in the U.S. have provided permits at no cost to participants. Although the U.S. has excluded the value of these permits from gross income, preferring to realize income on the surrender or disposition of the permit, other jurisdictions treat the allocation as being akin to a government subsidy. In Canada, a freely allocated permit would appear to create an immediate income inclusion, which raises the possibility of "phantom income" - that is, taxable income without a corresponding amount of cash to pay the tax liability in respect of the income. This issue is alleviated in part by permitting a taxpayer to elect to reduce the amount of an outlay or the cost of property acquired. Although late-filed elections are permitted in some circumstances, failure to file an election in a timely manner will result in an immediate income inclusion. This is especially problematic if the freely allocated permit is treated as intangible capital property. In these circumstances the value of the permit may be included in income immediately, even though the cost of the permit would be amortized over a period of years at an effective rate of 5.25% per annum on a declining-balance basis.

The issuance of freely allocated permits also raises questions with respect to the measurement of income. For example, let's assume that a taxpayer receives 100 freely allocated permits on January 1 of a particular year, the cost of which is not included in income because the taxpayer has elected to reduce the cost of the permits. On March 1, the taxpayer purchases an additional 100 permits for $5 per permit in circumstances where the purchase price is included in the cost of property. If the taxpayer disposes of 100 permits on July 1 for $10, what is the taxpayer's income inclusion? Although the Canada Revenue Agency has not issued any definitive statement in this context, some jurisdictions allocate the cost of freely allocated permits over the course of the year on the basis that the cost relates to emissions throughout the year. This approach results in fifty freely allocated permits and fifty permits acquired at a cost of $5 being treated as the cost of the permits sold (i.e., an income inclusion of $1000 $250 = $750). The outstanding issue is the treatment of the remaining 100 permits held at year end. For instance, if the permits are considered financial instruments, there may be an issue as to whether they should be subject to mark-to-market reporting for either accounting or tax purposes.

Climate change funds and penalties

The treatment of contributions to climate-change funds will also need to be considered. In the case of a climate-change fund in Alberta or otherwise, the issue will be whether these payments are merely remedial payments or whether they constitute non-deductible punitive payments. Generally, remedial payments will restore property to the condition it was in, prior to any work being undertaken on the property. Payments over and above a remedial payment could be considered a non-deductible punitive payment. Although contributions to climate-change funds are generally based on excess omissions, computed by reference to emissions in excess of permissible levels, and stated in $/ton, the difficulty is determining whether those costs are remedial or punitive. For instance, what is the remedial cost of an excess emission where the cost is not referable with respect to remediation of any specific property? It is our understanding that the Department of Finance has been prepared to allow a deduction for contributions to the Alberta Climate Change Fund, in part on the basis that the Alberta legislation contains other specific provisions that are intended to be punitive in nature.

International issues and intragroup transfers

While the preceding discussion has focused principally on the domestic tax issues that taxpayers will need to confront, a similar number of issues arise where trading and other activities occur across international borders. Questions that arise in the international context include the following:

  • Will a tradable permit constitute an interest in real property in the relevant jurisdiction?
     
  • How will income and gain from the disposition of a tradable permit be characterized for tax-treaty purposes?
     
  • What are the withholding-tax implications in the case of payments that cross national borders?
     
  • Is there a risk of double taxation where transactions involve two or more jurisdictions?
     
  • Will work undertaken in a foreign jurisdiction by one entity for a related party create either permanent establishment or transfer pricing issues?
     
  • Will profits that arise in a foreign subsidiary be attributed to a Canadian parent company?
     
  • What treatment will be accorded to permit trading under the value-added tax regimes in various countries?

This bulletin discussed some of the key tax issues that arise with respect to tradable permits under a cap-and-trade system. As cap-and-trade regimes are developed both domestically and internationally, all taxpayers will need to deal with the multitude of tax issues in this area, particularly publicly traded corporations that must address these and other issues for financial reporting and disclosure purposes.

The EU Emissions Trading Scheme and the UK Climate Change Act: a UK Perspective

Jonathan Deverill

The European Union Emissions Trading Scheme (EU ETS), the largest emissions cap-and-trade scheme in the world, commenced on January 1, 2005. In addition, the United Kingdom's Climate Change Act 2008 has established the world's first legally binding emissions-reduction target, which requires at least an 80% reduction on 1990 emissions levels in the United Kingdom by 2050. The following article gives a brief overview of the EU ETS and of some of the steps being taken to reach the 80% reduction target under the Climate Change Act 2008.

The EU ETS, entered into under the provisions of the European Union (EU) Emissions Trading Directive, represents one of the steps taken by the EU to meet its greenhouse-gas-emissions reduction target under the Kyoto Protocol. In accordance with the Kyoto Protocol, the EU is aiming to attain an 8% reduction on 1990 emissions levels during the Protocol's first "commitment period" (2008-2012), while the UK itself is seeking to achieve a 12.5% reduction in that period. The EU ETS is being rolled out in phases, the first of which ran from 2005 to 2007 and the second of which is running from 2008 until 2012. In preparation for the third phase, commencing in 2013, the EU is reviewing the Emissions Trading Directive.

In connection with the 80% reduction target under the Climate Change Act 2008, the United Kingdom government intends to publish, with the advice of the Committee on Climate Change, a series of five-year "carbon budgets," the first of which covers the first Kyoto Protocol "commitment period" (2008-2012). The government has also produced the UK Low Carbon Transition Plan, describing how the United Kingdom will meet the cut in emissions set out in the budget, which requires a reduction of 34% on 1990 levels by 2020. A key objective of the United Kingdom's low-carbon industrial strategy is to try to ensure that British businesses and workers are equipped to maximise the economic opportunities and minimise the costs involved in moving to a low-carbon economy.

Currently, the EU ETS applies to four areas of industrial activity: energy activities (including, in particular, electricity generation); production and processing of ferrous metals; mineral industries; and pulp-and-paper industries. It is currently expected that aviation will be added to the list beginning in 2012. UK law requires all installations carrying out any of the above activities to hold a Greenhouse Gas Emissions Permit and to monitor and report emissions.

EU Member State governments are required to set emissions limits for all installations in their country covered by the scheme, and each installation is then allocated allowances equal to that cap for the phase in question. Under the current UK National Allocation Plan, the Government allocated most of the emissions allowances among the installations affected by the scheme without charge, but 7% of the allowances - which would in the main have gone to large electricity producers - were auctioned. It is currently expected that the percentage of total emissions allowances to be auctioned will increase over time. Allowances in the EU ETS are held in electronically registered accounts , overseen by a central EU administrator.

As with other cap-and-trade schemes, the broad objective of the EU ETS is to provide an incentive-based system that will trigger investment in future energy efficiency and cleaner technology. Under the scheme, installations can meet their cap either by reducing their emissions below the cap - in which case, they are then free to sell any surplus - or, to the extent their emissions exceed their cap, by buying emissions allowances from others (including certain carbon credits derived from certain international climate-change projects) to cover the difference. As a result, a secondary market in allowances has developed.

British Columbia's Carbon Trust delivers first offsets

Ruth Elnekave

The Pacific Carbon Trust has delivered its first 34,370 tonnes of emissions offsets to the provincial government through investments in new energy technologies.
The Trust, a Crown corporation established in 2008 as part of the province's Climate Action Plan, purchases carbon offsets on behalf of public-sector organizations and other clients, including businesses and individuals. Under the Plan, all public-sector organizations are required to achieve carbon neutrality by 2010.

Offsets purchased by the Trust must be generated through B.C.-based activities that demonstrate real GHG emission reductions or removals that would not have occurred without the revenue from the purchases, and reductions must be verified by an objective third party.

The Trust has a goal of acquiring over 700,000 tonnes of offsets annually by 2011. To date, it has agreed to acquire offsets from fifteen facilities, including greenhouses, a cement plant and a developer of hybrid heating systems.

VCS streamlines offset approval for Canadian projects

Ruth Elnekave

On July 23, 2009, the Voluntary Carbon Standard (VCS) Association announced that it will no longer require projects located in Canada to demonstrate that Voluntary Carbon Units (VCUs) issued to the project would cancel out a corresponding number of compliance units under the Kyoto Protocol, known as Assigned Amount Units (AAUs). This requirement eliminates the risk of double counting that occurs when a project in a particular country sells emission reductions and thus "frees up" AAUs that the government can then sell.

"The VCS Board concluded that this requirement is not applicable to Canada because there is no regulatory framework to implement the Kyoto Protocol, none is likely to emerge, and the country is unlikely to achieve its Kyoto Protocol reduction commitment," the VCS reported.

To date, Canadian projects have not been able to generate VCUs. The action is expected to enhance access to global carbon finance markets and provide incentives for the development of, and investment in, GHG reduction and removal projects in Canada.

The VCS is an internationally recognized standard for voluntary carbon offsets, providing a framework with additionality and baseline-setting requirements, as well as a registry system for buyers and sellers to track VCUs.

Ottawa unveils carbon-offset system

Ruth Elnekave

On June 10, 2009, the Government of Canada announced the release of two draft "Program Guides" for the creation of Canada's Offset System for Greenhouse Gases (Offset System). The Offset System is an important step in the creation of a carbon market in Canada, establishing tradable credits for greenhouse gas (GHG) reductions that will work in conjunction with the planned federal GHG regulatory regime. Under that regime, the Government will place a cap on GHG emissions and allow firms that do not meet set targets to buy credits from those with a surplus as an alternative to reducing their emissions. The creation of a carbon market is part of the Government's commitment to reducing total GHG emissions by 20% below 2006 levels by 2020.

The Program Rules and Guidance for Project Proponents provides the rules, requirements and processes for offset credit creation, addressing registration of eligible projects right through to the issuance of credits and requirements after issuance. The Program Rules for Verification and Guidance for Verification Bodiessets out the rules for processes to verify the eligible GHG reductions or removals achieved from a registered project. The two Program Guides, together with the Guide for Protocol Developers (released August 2008), form the basis of Canada's Offset System.

The draft Program Guides are available on the Environment Canada website and were announced in the June 13, 2009 Canada Gazette. They are open for a 60-day public comment period ending August 12, 2009. After the comment period, final versions of the Guides will be prepared for expected release in the fall of 2009.

Overview

The Offset System will be a voluntary program administered under the Canadian Environmental Protection Act, 1999. Overall responsibility for the design and operation of the system will be granted to the Minister of the Environment, including establishment of the Offset System program rules; approving protocols used to quantify GHG reductions; registration of projects; and issuance of offset credits to eligible projects.

Each offset credit developed under the Offset System will represent one tonne of GHG (CO2 equivalent) that has been reduced or removed. Credits will be both tradable and bankable, and the system will include and a procedure for tracking all offset credits from issuance to retirement.

Key Elements

Program Rules and Guidance for Project Proponents

Registration

  • A proponent can apply to register a single project or an aggregated or bundled project.
  • The registration period is effective for eight years. An offset project may apply for re-registration one time only, for a second eight-year period, and registration periods must be contiguous (an exception to this rule is agricultural and forestry sink projects, which may register for three and five registration periods respectively).

Eligibility

  • In order to be eligible to receive offset credits, projects must be within the scope of the Offset System and achieve quantifiable, real, incremental, verifiable and unique GHG reductions.
  • Offset credits will only be available to projects that lead to reductions in Canada.

Claiming Offset Credits

  • Offset credits will only be issued after an eligible verification body has verified the project proponent's GHG reduction claim.
  • The Minister of Environment is responsible for the certification and issuance of all credits. Issued credits will be deposited in the project proponent's account in the tracking system.

Program Rules and Verification and Guidance for Verification Bodies

Verification Body Eligibility

  • Verification activities for projects in the Offset System must be conducted by an accredited verification body.

Verification Standard

  • All credit verifications for the Offset System must be conducted in accordance with the National Standard of Canada CAN/CSA-ISO 14064-3, Specification with Guidance for the Validation and Verification of Greenhouse Gas Assertion.

Conflict of Interest Assessment

  • To ensure that verification is conducted by a third-party verifier, the proposed verification body must complete a conflict of interest assessment prior to agreeing with a project proponent to act as a verifier.

What's Next

The Government has indicated that it will continue to monitor developments in the U.S. before finalizing certain aspects of the Offset System (such as project eligibility criteria), so as not to disadvantage Canadian project proponents. However, the manner in which the Offset System will interact with other carbon trading programs, including the Western Climate Initiative, British Columbia's carbon trading system, proposed systems being developed in Ontario and Quebec, and even a future North American program, remains unclear.

On a broader scale, Canada will surely continue to keep a close eye on U.S. policy and legislative developments relating to cap-and-trade. The Hon. Jim Prentice, Minister of the Environment, has stated that as Canada's economy is deeply integrated with that of the U.S., with which we share the same environmental space, the two countries must work toward the same climate change objectives.

The author wishes to thank Annie Pyke, Student-at-law at Stikeman Elliott, for her valuable contribution.

Ontario introduces cap-and-trade legislation

Ruth Elnekave

On May 27, 2009, the Government of Ontario introduced legislation to enable the creation of a "cap-and-trade" system in the province. If passed, Bill 185 - the full name of which is the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), 2009 - would amend existing legislation to establish a system with hard caps on the absolute level of permitted emissions. This is expected to help the province meet its commitment to reduce greenhouse gas (GHG) emissions to 6% below 1990 levels by 2015 and 15% by 2020.

In developing Bill 185, the Government has consulted with environmental groups, as well as with nine industrial sectors expected to be involved in cap-and-trade that collectively represent approximately 40% of Ontario's total 2007 emissions1. While the Bill sketches the broad outlines of the province's commitment to cap-and-trade as a strategy in the fight against climate change, much of the detail of the province's plan is still to be worked out in forthcoming regulations. To this end, the Government has produced a discussion paper that presents design issues and options for the key elements of a cap-and-trade system. It is seeking stakeholder comments to be used in the development of the proposed regulations. The discussion paper has been posted on the Environmental Registry for a 60-day public comment period ending July 26, 2009.

Key elements of Bill 185

Ontario's Environmental Protection Act (EPA) provides the Government with broad authority to implement emissions trading systems for contaminants (authority that has previously been used to establish cap-and-trade programs for nitrogen oxides and sulphur dioxide). In providing for the development of a GHG cap-and-trade system, Bill 185 deals with a number of key issues, including:

  • Greenhouse gases: the Bill adds a definition of GHGs to the EPA, adding within its purview of contaminants gases including carbon dioxide, methane, and nitrous oxide.
  • Market-based approaches: the Bill sets forth regulation-making powers with respect to establishing the scope of a cap-and-trade system, the persons and facilities to which such system would apply as well as monitoring and reporting requirements.
  • Allowances and credits: the Bill includes regulation-making power with respect to the establishment of allowances and offset credits and well as the distribution, use, trading and retirement of such credits.
  • Regional linkages: the Bill explicitly contemplates integration with other cap-and-trade systems, and further notes in its preamble that such linkages can provide emissions reductions at a lower cost, while improving the pace of innovation and allowing for larger trading volumes and improved liquidity. Significant action on this front has already been taken. In June 2008, the Governments of Ontario and Quebec signed a Memorandum of Understanding to collaborate on a GHG cap-and-trade initiative, while in July 2008, Ontario joined the Western Climate Initiative (WCI), a multi-sector trading program which includes British Columbia, Quebec and Manitoba and seven U.S. states. As noted below, it is also possible that Ontario would link to a future North America-wide trading system if and when such a system is developed.

Next steps

Bill 185 leaves numerous regulatory details to be determined, including whether allowances will be auctioned, sold or distributed free of charge, as well as the exact nature of the emission caps and to whom the legislation would apply. As noted above, the province has posted a discussion paper which incorporates feedback received from stakeholders to date, and is seeking further public comment until July 26, 2009 as it develops proposed regulations.

Ontario would be the third province to adopt a GHG cap-and-trade system, after British Columbia and Quebec. On May 12, 2009, Quebec introduced Bill 42 to create a cap-and-trade system in the province. Ontario Premier McGuinty recently commented that Ontario and Quebec have a responsibility to "put in place a carbon-exchange register" that will "serve as kind of a pilot project" in other jurisdictions. The manner in which these two jurisdictions plan to harmonize their approaches is something else to look out for in the coming months.

Finally, the province anticipates that a North American cap-and-trade plan could be in place as early as 2012 - another development that will undoubtedly be the subject of future updates.

Ontario and Quebec announce plans to create interprovincial cap and trade system

Amy Hu and Kirsten Iler

At a joint cabinet meeting held in Quebec City in early June, Ontario Premier Dalton McGuinty and Quebec Premier Jean Charest signed a Memorandum of Understanding with respect to a provincial and territorial cap and trade initiative. The accord sets out the two provinces' plans to create an interprovincial cap and trade system for the trading of emissions credits, which could be implemented as early as 2010.

The accord explicitly rejects the use of the intensity-based targets (i.e., per unit of production) such as those used in the federal government's green plan called Turning the Corner. Instead, like the Kyoto Protocol, the system proposed by the two Premiers would set caps based on absolute greenhouse gas reductions using a 1990 baseline.  The federal framework uses 2006 as its baseline year and, as noted, rejects hard caps on emissions in favour of intensity-based reduction targets.

The accord invites other provinces and territories to sign on and "work together collaboratively on the cap and trade initiative". Further, the Ontario and Quebec Premiers have stated that they hope their system, once implemented, could become the foundation for a national cap and trade system. However, news of the Premiers' plans drew immediate criticism from federal Environment Minister John Baird, as well as Prime Minister Stephen Harper, who accused the Premiers of "political posturing" and suggested that the federal plan would be more aggressive and get underway sooner.

In addition, the accord contemplates forming linkages with other North American and international trading schemes, as well as working with "broader regional trading initiatives already under development". This could presumably include linking with the cap and trade scheme currently under development by the Western Climate Initiative (WCI), an alliance of seven American states and three Canadian provinces (Quebec, Manitoba, and British Columbia) that is jointly developing regional strategies to address climate change. Ontario has observer status with the WCI.

Canada moves forward on domestic emissions trading market

Kirsten Iler and Ruth Elnekave

On March 10, 2008, the Government of Canada released much anticipated details of its Regulatory Framework for Industrial Greenhouse Gas Emissions, part of its Turning the Corner climate change plan first announced in April 2007. The framework document and accompanying policy documents (the Framework) set out mandatory intensity-based (i.e., per unit of production) reduction targets, details of certain compliance mechanisms, and new measures to address Canada's leading industrial greenhouse gas (GHG) emitting sectors: electricity and oil and gas. A significant aspect of the Government's announcement is its emphasis on carbon capture and storage (CCS) technology as a key solution to reduce emissions - not surprising in light of the $250 million for CCS announced in the Government's February Budget Plan.

Under the Framework, the Government intends to establish a market price for carbon and set up a compliance-based emissions trading market. Sixteen major industrial sectors would be required to reduce their emissions intensity by 18% from 2006 levels by 2010, with 2% continuous improvement in each subsequent year. The Government says it will reduce Canada's GHG emissions by 20% (approximately 165 megatonnes (Mt)) from 2006 levels by 2020. These targets will not make Canada compliant with its obligations under the Kyoto Protocol.

The Government plans to transition from an emission-intensity based target system to a fixed emissions cap system in the 2020-2025 period. It has indicated that in determining the level of the cap, particular consideration will be given to climate change-related regulatory developments in the U.S., with the aim of establishing a North America-wide emissions trading system.

In addition to emissions trading between regulated companies, the Framework also elaborates on some of the voluntary reduction compliance mechanisms available to meet the targets. These include:

  • Domestic offset system: credits would be issued for incremental, real, verified domestic reductions or removals of GHG emissions. Functional details of the system, including verification of reductions and issuance and use of offset credits, are set out in the Framework. The Government has also indicated that consideration would be given to reductions originating in the U.S. once the U.S. has a regulatory system in place and compliance-based cross-border emissions trading is feasible.
     
  • Credit for Early Action Program: companies that took verified early action to reduce emissions would be eligible for a one-time allocation of 15 Mt in bankable, tradable credits. In addition, firms with eligible reductions above that amount would be allocated credits based on each firm's proportional contribution to the total emission reduction achieved. To qualify, reductions must have been the result of an incremental process change or facility improvement (i.e., they cannot have been the result of business as usual conditions).
     
  • Technology Fund: companies would be able to contribute to a fund that would invest in a range of clean technology development projects in exchange for credits that could initially be used to comply with up to 70% of their regulatory obligations. This contribution rate would decline through 2018, at which time this mechanism would be phased out and replaced by other measures, including internal abatement actions and carbon trading. Contributions to other funds that meet the necessary requirements could potentially also be recognized under this compliance mechanism (e.g., provincial funds).

Additions to the April 2007 framework include:

  • Pre-certified Investments: companies would also have the compliance option of investing directly in pre-certified large-scale projects (e.g., CCS projects). As an added incentive for participation, firms in the oil sands, electricity, chemicals, fertilizers and petroleum refining sectors could be credited for their investments up to 100% of their regulatory obligation through 2018 (in contrast to the limited, declining contribution limit under the Technology Fund mechanism).
     
  • Oil sands upgraders, in-situ plants (i.e., on-site soil remediation facilities) and coal-fired electricity plants that come into operation in 2012 or later would be obliged to comply with targets described as "tough" by the Government, which will provide incentive for facilities to be built carbon-capture ready. These targets are expected to generate an additional 30 Mt in reductions in 2020.
     
  • The electricity sector, Canada's top emitting industrial sector, would face an 18% reduction target at the facility level and a task force will be established to work with the provinces and industry to explore ways to meet an additional 25-30 Mt reduction goal from the electricity sector by 2020.

The Government calls the Framework "one of the toughest regulatory regimes in the world to cut GHG emissions", but reaction has been mixed. Certain affected industries expressed cautious approval of the Framework, while federal opposition parties and environmental groups were critical of its use of intensity-based targets (rather than absolute reductions) and its emphasis on CCS technology rather than energy efficiency, or more proven technologies. Ontario and Quebec expressed disappointment over the lack of recognition for companies that have taken early measures to cut emissions. Further, some said that provincial green plans and provincially-driven efforts to establish an inter-provincial cap-and-trade system (perhaps linked with the U.S.) would have a more immediate impact than the Framework.

Business and environmental groups alike have repeatedly called for a uniform approach to carbon regulation in Canada. Industry has expressed concern that the growing regulatory patchwork of federal and provincial schemes, if not harmonized, will result in increased costs, confusion, and decreased investment. While British Columbia, Quebec and Alberta already have regulatory schemes in place, the draft federal GHG regulations are expected in fall 2008. The final federal regulations are expected to be released in fall 2009, with the GHG provisions of the regulations coming into force on January 1, 2010. However, experts predict that the new U.S. administration will establish a national cap-and-trade system and that Canada will be forced to follow suit. Accordingly, while the Government is moving forward with its plans, the state of carbon regulation in Canada remains in flux.

Proposed launch date for trading of CO2e futures in Canada

Alix d'Anglejan-Chatillon and Jason Streicher

The Montreal Climate Exchange (MCeX) recently announced that, subject to regulatory approval, on May 30, 2008 it plans to launch trading of its first environmental product, namely futures contracts on Canada carbon dioxide equivalent (CO2e) units. The MCeX set the launch date after the federal government's March 10, 2008 release of further details of its greenhouse gas emissions regulations.

It is expected that the emissions reductions credits and offset credits under the federal government's proposed greenhouse gas regulatory scheme will be the two sources for futures contracts on Canada CO2e units. Units of each of these two types of domestic credits (which will represent an equivalent emission of one metric tonne of CO2e) will be the underlying interest of the CO2e futures contracts traded on the MCeX.

The MCeX was created in 2006 through a joint venture between Montreal Exchange and the Chicago Climate Exchange. The MCeX aims to become the leading market for publicly-traded environmental products in Canada. In October 2007, the MCeX filed an application with its lead regulator, the Autorité des marchés financiers (AMF), requesting approval of market rules designed to govern the trading of MCeX environmental products on its electronic trading platform SOLA®. A decision on its AMF application is expected in the near future.

The MCeX has cited World Bank estimates to the effect that the world market for carbon amounts to about US$100 billion and that trading activity on public carbon markets has grown rapidly in recent years to reach US$30 billion in 2006.

B.C.'s green plan combines carbon trading and carbon tax

Phil Griffin

In November 2007, the British Columbia (B.C.) Legislature enacted initial legislation respecting the reduction of greenhouse gas (GHG) emissions. The Greenhouse Gas Reduction Targets Act, which came into force on January 1, 2008, establishes targets of a 33% reduction below 2007 GHG emission levels by 2020, and an 80% reduction below 2007 emission levels by 2050. It also requires that realistic, economically viable interim targets for 2012 and 2016 be established by the Minister of Environment by the end of 2008, and that the provincial government itself become carbon neutral by 2010.
 

The B.C. government has also announced that additional legislation will be introduced this year to regulate emissions from different sectors. The proposed legislation would establish a cap-and-trade system for large emitters, which would include firm caps on the allowable emissions from large sources, and provide for participation in emissions trading systems. The new legislation would also adopt California tailpipe standards for new vehicles, introduce low-carbon standards for fuels, and provide authority for the regulation and capture of landfill gases.

In February 2008, the B.C. government introduced a provincial budget that included Canada's first broad-reaching carbon tax. The tax, which will come into effect on July 1, 2008, will apply to virtually all fossil fuels, including gasoline, diesel, natural gas, home-heating fuel and coal. It will be phased in over a five-year period at rates based initially on $10 per tonne of carbon emissions and escalating to $30 per tonne by 2012. The carbon tax rate for gasoline will be 2.41 cents per litre effective July 1, 2008 and will increase to 7.24 cents per litre by July 1, 2012. For natural gas, the initial carbon tax rate will be 49.88 cents per gigajoule, increasing to 149.64 cents per gigajoule by 2012. According to the B.C. Minister of Finance, the tax is "revenue neutral" since all revenues will be returned to individual taxpayers and businesses in the form of reductions in other taxes.

B.C.'s Premier Campbell has also been aggressively promoting the development of cross-border cap-and-trade emissions trading. Along with Manitoba, B.C. is a member of the Western Climate Initiative, an alliance of U.S. states that seeks to establish a common cap on GHG emissions and implement a regional emissions trading scheme. The Premier also signed on to the International Carbon Action Partnership at its launch in Lisbon last fall.

Interest in emissions trading soars as Canada prepares to confront climate change

Harold Andersen and Kirsten Iler

There is an emerging Canadian consensus that carbon regulation is inevitable, and with it, a growing sense that future policies for addressing climate change will include market-based mechanisms such as emissions trading. In early October, the Canadian Council of Chief Executives released a declaration calling climate change the "most pressing" issue today and calling for "aggressive" action and "absolute" emissions reductions. The CEOs also acknowledged that government regulation - including emissions trading, technology investment and environmental taxation - would be required in order to reduce greenhouse gas (GHG) emissions.

While Quebec recently implemented a carbon tax on fuel, other Canadian provinces are opting for market-based approaches. Ontario is in favour of a national GHG cap-and-trade scheme (i.e. the trading of emission allowances where the total allowance is strictly limited or "capped"). It has also professed interest in participating in the Western Climate Initiative (WCI), a U.S. state-level organization aimed at cutting GHGs using market-based tools such as cap-and-trade. British Columbia (BC) and Manitoba have already joined the WCI. Plus, the Premier of BC has announced that BC will soon become the first province to legislate binding caps on GHG emissions, including a one-third reduction by 2020. B.C. also recently signed the Climate Action Charter, whereby the province, the Union of BC Municipalities and over sixty local governments committed to becoming carbon neutral by 2012.

Alberta now has its own GHG emissions reduction regime which became effective July 1, 2007. The regime does not impose a hard cap on emissions; instead GHG emissions intensity (i.e. per unit of production) levels must be reduced to 50% of 1990 levels by December 31, 2020. To achieve this, the regime imposes yearly emissions reduction obligations on large industrial emitters (facilities with annual GHG emissions exceeding 100,000 tonnes of carbon) and provides three ways for these emitters to achieve their reduction obligations: (1) improve the facility's efficiency and achieve actual emissions reductions; (2) acquire fund credits which cost $15 per tonne and are paid into an Alberta-based climate change technology fund; and (3) acquire and use emissions offsets from verified, Alberta-based projects. The regulatory framework for offset verification and credit trading is still in development. The regime also imposes certain reporting obligations. Large industrial emitters have until December 31, 2007 to establish their baseline emissions intensity figures.

Announced last April, the Canadian government's proposed green plan, if implemented, would establish Canada's first federally regulated, market-driven emissions trading system. A domestic "inter-firm" trading scheme would allow regulated emitters to buy and sell emission credits among themselves, using a baseline-and-credit model. In the short term, the plan would not set hard caps on emissions but instead use intensity-based targets or "baselines." The plan would also include an offset program allowing emitters to purchase credits to help meet their targets. Ontario recently announced that it will help develop protocols in support of the federal offset program.

These developments in Canada reflect similar developments in the U.S. In early October, the U.S. House of Representatives released a white paper outlining plans for broad climate change legislation, the "cornerstone" of which would be cap-and-trade. Also, a group of the world's most powerful banks have been lobbying the U.S. and other industrialized nations to set up a regulated cap-and-trade system rather than imposing carbon taxes. CIBC World Markets' chief economist Jeff Rubin recently predicted that the next U.S. administration will follow through with adopting green policies that would include "firm and hard emissions reduction targets" and a national cap-and-trade scheme. Rubin further forecasted that Canada would be expected to follow suit.

While the regulatory landscape in Canada remains a patchwork, in light of the soaring interest in emissions trading, it appears likely that emissions trading will form a key component of any comprehensive climate-change legislation implemented in Canada in the future.