Canada: The American Power Act: A Canadian Perspective

The guiding principle behind the Harper government's climate change policy is to ensure comparable (though not necessarily identical) efforts with the United States, based on the assessment that "doing more" than the US will cause Canada economic pain for negligible environmental gain, while "doing less" would be environmentally irresponsible and raise the spectre of new American (and European) trade barriers. Critics disagree, asserting that the level and pace of Canadian GHG reductions should be based on "science" without regard to economic consequences.

Consistent with the principle of "comparable efforts", Canada has already aligned its 2020 GHG reduction targets with the American Copenhagen commitment, harmonized vehicle fuel efficiency standards for cars and light trucks (with heavy trucks to follow), developed a compatible Renewable Fuel Standard, and commenced a bilateral "clean energy dialogue" with the US to develop common smart grid and carbon capture and storage technical standards.

Additional American climate change measures could take one of two forms – either (i) a combination of regional "cap and trade" schemes, Federal "Clean Energy" initiatives and EPA regulations that will require stationary emitters to install "best available technologies" (beginning with larger American emitters in the first half of 2011); or (ii) new "comprehensive" national legislation covering both clean energy and climate change matters that will supersede both the looming EPA regulations and the various regional regulatory initiatives.

On May 12, US Senators Kerry (Dem-Mass) and Lieberman (Ind-Ct) , unveiled comprehensive climate change and energy legislation – the American Power Act. Noticeably absent from the sponsorship was Senator Graham (Rep-SC), who withdrew his sponsorship following a dispute with the Democratic leadership over legislative priorities.

The American Power Act is a compromise proposal eight months in the making. Containing widespread concessions to a variety of key interest groups (oil companies, utilities, heavy industry, unions etc) it has been described as the "last, best shot for climate change legislation this year". Indeed, should it fail to generate support notwithstanding these concessions, the arrival of EPA regulations in 2011 suggest the American Power Act could be the last shot taken at American climate change legislation for many years to come.

The legislation sets a 2020 GHG reduction target of 17% less than 2005 levels, rising to 80% in 2050, thereby matching the conditional commitments of the Obama administration (and the Government of Canada) made in the act of associating with the Copenhagen Accord. The 17% target also matches the 2020 reduction target for developed countries that was recommended by the International Energy Agency in its recently released "450 Scenario". (It is also not widely appreciated that the current EU 2020 target of "20% less than 1990 levels" translates into an effective 2020 target of only "14% less than 2005 levels", due to the substantial emission reductions that occurred prior to the 1997 Kyoto Accord as a result of the collapse of the communist-era economies in East Germany and Eastern Europe.)

The American Power Act contemplates a custom-tailored approach to three key sectors that combine to generate approximately ¾ of all GHG emissions in both the United States and Canada: thermal power generation; the production and consumption of fossil fuels; and so-called "energy-intensive, trade-exposed" (EITE) industries, such as steel, cement, petrochemicals and metals. There is also a marked shift towards

In the thermal power generation sector, Senators Kerry and Lieberman propose to create a "cap and trade" carbon emissions regime that will produce a price for carbon, while at the same time controlling the market price signal by imposing a minimum and maximum collar price. The floor price would start at $12/t in 2013, with the ceiling at $25/t, both rising at an "inflation-plus" rate thereafter. With this relatively low price falling well below the cost of abatement in most industries, key to compliance will be the ability of emitters to access both domestic offsets and a substantial amount of foreign credits.

This "managed" carbon market will be complemented by more stringent product and building efficiency standards, as well as a Renewable Power Standard that expands the definition of "qualified" renewable power to include not only low-impact renewables (like wind and solar power), but also advanced coal-fired facilities utilizing capture and storage (CCS) technologies and nuclear power. (It appears that the standard will continue to differentiate between qualified "small and old" and unqualified "new and big" sources of hydro power , arguably a violation of American WTO and NAFTA obligations to provide non-discriminatory treatment to "like goods" from Canada.) In addition, substantial financial assistance will be made available to utilities to deploy CCS technologies and to construct up to 12 new nuclear power plants.

The second major source of GHG emissions covered in the legislation is the production and consumption of liquid fossil fuels. The American Power Act proposes a regulatory regime in the oil and gas sector that is effectively a wholesale carbon tax on each tonne of emissions generated (apparently) through the complete lifecycle (ie through the combustion) of fossil fuels. As such, the scheme will be tantamount to a buried low carbon fuel standard, with oil companies able to lower their "tax burden" by lowering the carbon intensity of their fuel supply through a greater use of bio-fuels, CCS technology etc. The emissions allowance "fee" will be payable by refiners and/or importers, with the allowance price to reflect the recent price of allowances in the thermal power plant emissions market (ie starting at a min. $12/t and max. $25/t in 2013, which translates into about a 6¢/litre tax on gasoline.

The bill also introduces incentives for heavy truckers to move from diesel fuel to natural gas, financial support for "clean car" technology development; and measures to encourage offshore drilling for additional American oil. The these concessions to the oil industry are likely to prove controversial in light of BP's Gulf of Mexico oil spill, a proposed opt-out provision giving states an effective veto over drilling within 75 miles of their shore could blunt much of the criticism.

To offset higher prices for gasoline and heating fuel, the legislation proposes to return approximately ¾ of the allowance proceeds to (lower and middle income) consumers - essentially, the "cap and dividend" idea championed by Senator Cantwell et al.

In the Energy-intensive, trade-exposed sectors such as steel, petrochemicals, cement, and metals, the American Power Act proposes to:

  • delay regulating the EITE industries until 2016, while protecting firms from rising input fuel and power costs in the years prior;
  • encourage and support the installation of clean technologies;
  • introduce community and/or industrial adjustment policies; and
  • put in place border adjustment measures to take effect in 2019 in the event nations fail to negotiate an "equitable" new multilateral climate change arrangement, so that exporting nations have not taken on similar emission reduction burdens.

The world will soon know if the American Power Act has a fighting chance to run the American legislative and political gauntlet in 2010, or if the legislation is effectively "dead on arrival". While many observers are pessimistic, and Senate Majority Leader Reid has already indicated that a "Clean Energy-only" bill stripped of the "Climate Change" sections may be a more palatable option prior to the mid-term elections in late 2010, passage of the American Power Act this year (likely with even more compromises) remains a very real possibility. The oil and power industries prefer the Kerry-Lieberman scheme to the looming EPA regulations. Influential unions like the idea of delaying regulations in the EITE industries until 2016, and support the border (and industrial) adjustment concepts. At the same time, many environmental organizations have made the political calculation that the Kerry- Lieberman legislation is "better than nothing". In short, this could be a prime example that "Politics makes strange bedfellows".

From a Canadian political perspective, matching the Kerry-Lieberman effort should be a relatively easy task for the Harper government. Indeed, the legislation represents a move toward the longstanding Canadian emphasis on investment in clean energy supply. Ironically, a strong case can be made that of all the proposals made during the last decade, the regulatory system that best balanced political/economic viability and environmental effectiveness was the "Baseline and Credit" regime proposed by Environment Canada (under both Liberal and Conservative governments) that sought reductions in carbon intensity based on the use of best available technologies.

In the thermal power plant sector, Environment Minister Prentice is now poised to surpass the American effort through the imposition of a globally unprecedented "Clean or Close" regime. Canada intends to require existing thermal power plants to either meet a new low carbon power standard through the installation of CCS technology, or close at the end of their economic life. Some form of intensity-based carbon tax is the preference of many in the oil & gas industry, while regulating both upstream and downstream fossil fuel emissions would increase the effectiveness of the system and promote regional fairness. "Special" (ie deferred) treatment for EITE industries (most located in Ontario and Quebec) should blunt criticism from these provincial governments about special treatment for the oil industry. Meanwhile, implementing "comparable efforts" will alleviate concerns among Canadian e xporters about new American protectionism.

For Canada, the devil will lie in the details of the American Power Act, particularly the as-yet undrafted regulations dealing with issues like the measurement of carbon content in various transportation fuels. Hopefully, the ongoing "Clean Energy Dialogue" and other channels of communication will ensure that Canadian views on specific issues are taken into account.

Canada is a land of hockey players and curlers. Environment Minister Jim Prentice has been "ragging the puck" in a manner worthy of the son of Doc Prentice and nephew of Dean. Prime Minister Harper has been "holding the hammer", determined to keep last rock advantage. With the American situation likely to clarify over the next few months, they have put themselves in a position to introduce a Canadian "Climate Action Plan" this fall that could leave the Conservatives well-positioned for the next federal election.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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