Canadian Energy Law : Lawyers & Attorneys for Environmental Energy Law

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.

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.

In Ontario, support for nuclear energy appears comparatively stable, if not untouched. The current Liberal government remains committed to the province’s nuclear portfolio which provides nearly 50% of the province’s energy. More interestingly, the opposition Progressive Conservatives appear equally supportive of existing nuclear infrastructure. Recently, Progressive Conservative Leader, Tim Hudak, has defended nuclear as “the workhorse of [Ontario’s] system”, characterizing it as “affordable” and “reliable”. Indeed, both parties endorse plans to build new reactors and refurbish ageing ones. Therefore, despite potential as a wedge issue in the upcoming provincial election, it would appear that nuclear energy’s future will continue unscathed in Ontario.   

            Globally, nuclear energy’s future remains uncertain as two questions loom. 

First, will others follow Merkel’s lead? The 2022 plan is merely a retraction of an earlier plan to extend the life of Germany’s aging plants. An industry analyst at TD Securities asserts, “Germany has long been regarded as ‘weak’ on nuclear power and was not expected to be a significant factor in reactor growth over the medium to longer term”. Former International Atomic Energy Agency head, Hans Blix has characterized the Fukushima tragedy as, “[a] bump in the road, but not the end of the road”. Nevertheless, Germany’s announcement has sent shockwaves through the nuclear industry as insiders await any indication that others may follow.

Second, how will this impact GHG reduction targets? Most experts agree that nuclear energy is a central element in the struggle to cut green-house gas emissions in half by 2050. The International Energy Agency has concluded that “nuclear’s share of the global power supply would have to grow to 24 per cent from 14 per cent currently to achieve that goal”. Some environmentalists tolerate nuclear’s role in GHG mitigation. However, most continue to oppose it due to safety and waste management concerns.

In Germany, the 2022 plan calls for increased reliance on renewable energy and stringent conservation measures. However, not everyone is convinced of the plans merits. Sweden’s Environmental Minister has written off the plan as “unrealistic”, asserting that it will result in greater dependence on imported coal and nuclear-generated electricity from France.

In the end, the nuclear energy has reached a cross-road. On the one hand nuclear’s future and its role in GHG mitigation appears secure, in Ontario and most other nuclear jurisdictions. On the other hand, Germany’s bold plan has the world watching to see if there will be any followers of Merkel’s lead. For the time being, commentators will wait to see if Fukushima is “a bump in the road” or “the end of the road” for nuclear energy’s global aspirations.        

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.

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.

Under the Agreement, countries have committed to looking at extending the Kyoto protocol with a new round of emission-reduction targets for the post 2012 period. However the heavy lifting of such negotiations have been left for subsequent COP summits in Durban, South Africa in 2011 and South Korea in 2012.

For its part, at COP16 Canada refused to provide a commitment to new Kyoto targets, preferring the more flexible Copenhagen approach. Canada also objected to the commitment for developed nations that are signatories of Kyoto to cut emissions by 25 to 40 percent from 1990 levels by 2020. As a result of its commitments under the Copenhagen Accord, the Government of Canada has pledged to reduce greenhouse gas emissions by 17 percent from 2005 levels by 2020, but only if the United States takes comparable action. These commitments have not changed as a result of COP16.

Following the Cancun summit Canada’s Environment Minister, the Hon. John Baird, described the Cancun Agreement as a modest step forward, noting “It’s a first step to a single, new, legally binding agreement”. Guy Saint-Jacques, Canada's Chief Negotiator and Ambassador for Climate Change noted “We have laid good groundwork for further progress in these complex negotiations.”
 

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.  

Further detail is available in the SEC news release.

In our December 2009 issue of the Emissions Trading and Climate Change Update we reviewed comparable efforts of the Ontario Securities Commission to establish guidance for climate change disclosure in Ontario. We will continue to follow the progress of the SEC and the OSC in establishing detailed guidance for climate change disclosure. Look for further analysis and observation in future bulletins.

The OSC embarked on a corporate sustainability reporting initiative earlier this year and on December 18, 2009, it publicized its escalating efforts on this front by issuing Staff Notice 51-717 Corporate Governance and Environmental Disclosure. Specifically, Staff Notice 51-717 details the OSC's plans to enhance the environmental and corporate governance disclosure requirements of reporting issuers (other than investment funds). As part of this initiative, the OSC agreed that it would make recommendations to the Minister of Finance by January 1, 2010 regarding potential next steps to enhance disclosure of environmental matters.

Meanwhile, in the US, the Securities and Exchange Commission (SEC) recently noted that it is taking a serious look at these matters. The SEC's actions follow requests by leading US and Canadian institutional investors responsible for trillions of dollars worth of assets for interpretive guidance on climate risk disclosure,¹ including physical and regulatory as well as litigation-related risks. Generally, investors are expressing concern that significant gaps exist between GHG and climate change disclosure among reporting issuers and insist that "reporting on climate risks is no longer a mere virtue, but a legal obligation and a necessity for investors." Investors have made it clear that valuable information reported in a clear and consistent manner is required in order to be able to make informed decisions about both climate risks and opportunities in their portfolios.

Similarly, in Ontario, the OSC is consulting with investors, climate change experts and other stakeholders as part of its corporate sustainability reporting initiative. Recently, James Turner, Vice-Chair of the OSC, stated that the OSC has heard support for more guidance to issuers on disclosure of climate change risk in order to improve the information disclosed to investors and the marketplace. Thus, the OSC intends to issue a notice by December 2010 that offers guidance on compliance with existing environmental disclosure requirements under National Instrument 51-102 Continuous Disclosure Obligations. Publication is planned for no later than December 2010 so that reporting issuers will have sufficient time to consider the guidance when preparing their 2010 annual continuous disclosure documents.

Companies in Canada and across North America are poised to prosper in an emerging clean energy economy, and investors want to know which companies are preparing to capitalize on this opportunity and which are trailing behind. Accordingly, regardless of whether or not they are subject to GHG or other environmental reporting requirements, issuers must seriously consider the effect of environmental matters and climate change on their business and ensure that such matters are adequately disclosed to investors.

We will continue to follow the progress of the OSC in establishing more detailed guidance for climate change disclosure. Look for further analysis and observation in future bulletins.

¹  Institutional Investors Group on Climate Change letter to the SEC; Investor Network on Climate Risk (a Ceres project) letter to the SEC; Ceres.
 

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.

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.

When adopted, Bill 42 will establish:

• the reporting of GHG emissions by certain categories of emitters determined by regulation, so that an inventory of GHG emissions may be taken and updated;
• the ability of the Québec Government to set by order GHG reduction targets using 1990 GHG emissions as the baseline. It is currently expected that reduction targets will be phased in from 2012 to 2015 for certain electricity-producing companies and other major industries that emit more than 25,000 tonnes of GHG a year, and after 2015 for other emitters;
• requirements for certain categories of emitters determined by regulation to cover their GHG emissions with an equivalent number of emission allowances, including emissions units, offset credits, early reduction credits and other specified emission allowances;
• a cap-and-trade system to assist emitters to achieve the GHG reduction targets and to mitigate the cost of reducing or limiting GHG emissions. It is expected that the cap-and-trade system will allow persons and municipalities to trade emission allowances;
• the ability of Québec's Minister of Sustainable Development, Environment and Parks to enter into agreements with foreign governments, international organizations and agencies for the harmonization and integration of cap-and-trade systems;
• that all funds collected by the Government under the legislation will be used to finance GHG reduction, limitation or avoidance measures, the mitigation of the economic and social impact of emission reduction efforts, public awareness campaigns and adaptation to global warming and climate change, or to finance the development of and Québec's participation in related regional and international partnerships.

It is currently expected that Bill 42 will be adopted by the end of June and that the first set of regulations under the legislation will be implemented in Fall 2009. It is also expected that emission credits will be traded on the Montreal Climate Exchange (MCex) that was launched last year.

The proposed reduction targets would apply to the following major industrial sectors:

• Iron and steel
• Electricity produced by combustion
• Oil and gas (including oil and gas, oil sands, and pipelines)
• Forest products (including pulp and paper, and wood products)
• Smelting and refining (including aluminium and base metal smelting)
• Cement, lime and chemicals production
• Some mining sectors (including iron-ore pelletizing and potash)

Facilities that existed in 2006 would be required to meet GHG reduction targets, while new facilities would receive a three-year grace period. Companies that took "verifiable" action to reduce GHGs between 1992 and 2006 would be eligible for a one-time "credit for early action." These credits would be capped at 15 megatonnes (5 megatonnes in any given year), with eligibility criteria to be developed. Companies could either apply the credits to meet their targets or trade them.

Under the proposed regulations, various tools would be available to help regulated companies meet their reduction targets, including:

• Participating in domestic emissions trading - in a Canada-wide, market-driven "inter-firm trading" system for GHGs, nitrogen oxides (NOx) and sulphur oxides (SOx). Companies that meet their prescribed targets would receive credits they could sell to other companies that exceed their targets. Alternately, credits could be banked for future use.
• Purchasing offsets - by buying credits from projects that result in verified emissions reductions. These credits could be sold to companies to help them meet their targets. The plan contemplates that the offset system would begin "as soon as possible."
• Purchasing credits under the Kyoto Protocol's Clean Development Mechanism (CDM) - by investing in CDM projects in the developing world. Only certain CDM credits (called Certified Emission Reductions) would qualify and they could be applied against up to 10% of a company's total target.
• Making in-house reductions - of up to 5 megatonnes per year during the 2010-2017 period, through improved technology or reduced energy use.
• Contributing to a technology fund - at a starting rate of $15 per tonne of "carbon dioxide equivalent." This could be used to meet up to 70% of a company's target starting in 2010, with the percentage then progressively lowered to only 10% by 2017. The government will also "explore" the idea of "providing credits for certified project investments by individual companies in transformative technology to reduce future emissions."

Significantly, the proposed regulations would not allow Canadian companies to participate in international emissions trading. The Conservative government is opposed to international emissions trading, having repeatedly stated that it amounts to "sending Canadian dollars overseas to buy hot air on the international market." However, opposition parties and many in business favour international trading.

In the coming months, the government plans to meet with its provincial and territorial counterparts, each affected industry sector and other stakeholders to discuss key elements of the proposed regulations. The plan was immediately rejected by the opposition parties and with no significant political support, the content and fate of the proposed regulations are far from certain. However, support from the opposition is not required because the plan would be implemented through regulatory changes only. The government hopes to finalize the air pollutant regulatory framework by fall 2007 and finalize all regulations by 2010.

In addition, it is open to provincial governments to opt for stricter reduction targets. Indeed, it has been reported that Ontario will announce its own green plan on June 11. That plan is widely expected to include stricter GHG reduction targets than the federal plan and to provide support for renewable energy projects. Ontario Premier Dalton McGuinty also recently announced his interest in rallying Canadian provinces to agree on their own national plan to reduce GHGs and to set up an inter-provincial GHG emissions cap-and-trade system.

The Notice of Intent also outlines some of the actions the government intends to implement under the new legislation to meet its goals, including measures to:

• reduce air pollutants and greenhouse gases from key industrial sectors, including fossil fuel-fired electricity generation, upstream oil and gas and downstream petroleum;
• identify indoor air issues that are national in scope and develop measures for improving indoor air quality, including the regulation of products that could result in degradation of indoor air quality;
• strengthen energy-efficiency standards and labelling requirements for consumer and commercial products, including products that may not themselves contain pollutants but whose use or existence may cause air emissions; and
• regulate the fuel consumption of road motor vehicles starting in the 2011 model year and use the government's existing authority to regulate emissions of pollutants in the areas of shipping, railways and aviation.

In the next twelve months, the federal government intends to continue the process of harmonizing Canadian vehicle emission standards with those of the United States and to initiate discussions with the Americans on a coordinated approach to administering cleaner vehicles. Another stated goal for the next year is to align Canadian standards for volatile organic compound emissions from architectural, industrial and maintenance coatings, consumer products, and automobile refinishing coatings with the generally more stringent standards that are in place in the United States.

In addition to advice from NRTEE, the federal government will also consult with stakeholders on the development of proposed regulations to reduce air emissions in key industrial sectors using a three-phase process:

• during fall 2006 and spring 2007, the federal government will consult on the overall regulatory framework that will guide the development of industrial sector regulations, including proposed short-term targets for air pollutants and greenhouse gases, to be reflected in the proposed regulations to come into effect in the 2010-2015 period;
• beginning in summer 2007 and continuing until the end of 2008, the federal government will engage in detailed consultations on the proposed regulations that will apply to individual sectors, including defining sectoral obligations and timelines; and
• in the final phase, the proposed regulations will be approved and published with the initial provisions coming into force by the end of 2010 and the balance of the provisions to follow.

The aim of the consultation process is to set realistic targets and timelines for emission reduction, to identify cost-effective compliance options to meet those targets, and to develop a one-window regulatory tool for compliance assessment, monitoring and reporting to ensure that industry is on track to meet its regulatory obligations.

The proposed legislation promises to be controversial and it will no doubt be a hot topic of debate on Parliament hill. It is unclear at this time if the federal government will be able to muster the necessary support in Parliament to pass the proposed legislation into law in its current form. On November 1, 2006, the federal government announced that it was willing to send the Bill to a special legislative committee to be deliberated on by Members of Parliament from all federal political parties.