Canada: Back On The International Stage – Spotlight On Climate Change Policy, The Paris Agreement, And Carbon Pricing Mechanisms

Over the years, climate change policy has experienced its ebbs and flows. Climate change landed on the international stage at the Rio Earth Summit in 1992, where 154 countries signed the United Nations Framework Convention on Climate Change (UNFCCC) to stabilize atmospheric concentrations of greenhouse gas (GHG) emissions at a level to prevent "dangerous anthropogenic interference with the climate system." The UNFCCC came into force on March 21, 1994 and, to date, has been ratified by 195 countries. Subsequent international negotiations led to the Kyoto Protocol, an international treaty which extends the UNFCCC and commits its signatories to reduce GHG emissions. The Kyoto Protocol was adopted in December 1997 and came into force on February 16, 2005. There are currently 192 signatories to the Kyoto Protocol. While Canada withdrew from the Kyoto Protocol effective December 2012, a newly elected federal government has indicated its willingness to re-engage in international eff orts to implement a new global climate change treaty for the post-Kyoto era.

Following the anticlimactic outcome of the 15th session of the Conference of the Parties to the UNFCCC (COP 15), which produced the non-legally binding Copenhagen Accord in 2009, there was cautious expectation of a legally binding successor agreement to the Kyoto Protocol as countries convened in Paris for the latest round of international climate change talks held from November 30 to December 11, 2015 (COP 21). After marathon negotiations and compromises on all sides, COP 21 reached a successful conclusion on December 12, 2015 with the adoption of the Paris Agreement by 195 member nations of the UNFCCC.

Paris Agreement – Key Provisions

The Paris Agreement, which contains both binding and non-binding commitments, will come into force 30 days after the date on which at least 55 parties to the UNFCCC, accounting for at least 55% of total global GHG emissions, deposit their instruments of ratification, acceptance, approval or accession. The Paris Agreement aims to hold the increase in global average temperature to well below 2°C above pre-industrial levels, while countries pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels. In addition, the Paris Agreement articulates a series of global goals to enhance climate adaptation efforts and build capacity, as well as strengthen resilience and reduce vulnerability to climate change. Beyond the temperature limit, the Paris Agreement also establishes a long-term emissions goal of peaking global GHG emissions as soon as possible, with a view to achieving net-zero emissions — i.e. a balance between anthropogenic emissions by sources and removals of GHG emissions by sinks — in the second half of this century. In 2018, member parties will convene a facilitative dialogue to assess their collective efforts in relation to their progress towards the long-term goal. The outcomes of this dialogue will likely inform future climate policies and actions.

Since national pledges to reduce emissions are voluntary, the success of the pact in achieving meaningful GHG emissions reduction will likely turn on the willingness of future governments to take action as well as global peer pressure. Ahead of COP 21, countries were invited to submit their Intended Nationally Determined Contributions (INDCs), which set out what post- 2020 climate actions they intend to take under a new international climate agreement. As of December 12, 2015, 187 parties to the UNFCCC had formally submitted INDCs, covering approximately 94% of global emissions in 2010 and 97% of global population. There is wide variation among national plans in terms of scope and ambition. Member nations are required to put forward a plan, but as noted above, the pledges by countries to reduce emissions are voluntary and there are no legal requirements around how — or how much — countries should reduce emissions. That said, negotiators have built certain legally binding commitments into the Paris Agreement, including a requirement that countries present updated plans every five years (starting in 2020) with ever-tightening emissions reduction targets. Countries will also be required to undertake a global review in 2023 (and every five years thereafter) to assess their collective progress toward achieving the goals of the Paris Agreement. Further, they will be required to monitor and report on their national GHG inventories based on standardized requirements. Developed countries have been called on to mobilize financial resources to assist developing countries with respect to both mitigation and adaptation, and other parties are encouraged to provide or continue to provide such support voluntarily.

The adoption of the Paris Agreement marks the start of a renaissance period for climate change policy, one that represents a global paradigm shift towards a lower-carbon economy. The process for renewing Canada's climate action plan is only just starting now, but Canada has already expressed its support for more ambitious climate action by endorsing the global goal of keeping rising average temperatures to within 1.5°C above pre-industrial levels. How this ambition will translate into federal, provincial and municipal climate action remains to be seen. One thing is clear: in 2016, policy-makers, businesses, non-governmental organizations and individuals will come together in a collective conversation about the kinds of policies and actions that will be needed to bring Canada closer to meeting its commitments under the Paris Agreement.

Climate Change Policy in Canada

In May 2015, Canada submitted its INDC to the UNFCCC Secretariat, pledging a 30% reduction from 2005 levels — approximately 523 megatonnes (Mt) — by 2030. In its Sixth National Report on Climate Change, Environment Canada projected Canada's emissions to be 815 Mt of carbon dioxide equivalent, or 11% above 2005 levels, with current measures in place. Given the overall increase in Canada's emissions over the past two decades and continuing upwards trajectory, achieving Canada's INDC will require ambitious federal and provincial policies. The new federal Liberal government is expected to update Canada's emissions reduction targets following COP 21 and further consultation with the provinces and territories, which was confirmed by Canada's Environment Minister in November 2015 when she stated that the current INDC will be considered a floor for future action. As a result, it is widely expected that a new federal climate change strategy will call for more stringent targets and actions. In advance of COP 21, the federal Liberal government announced that Canada would contribute an additional $2.65 billion over five years to the international Green Climate Fund, which is looking to raise US $100 billion annually by 2020 to help developing countries adapt to the impacts of climate change.

Provincial and territorial leaders have taken a leadership role on the climate change file and have recognized the importance of joint action to adapt to and combat climate change. At the Québec Summit on Climate Change held in April 2015, all of the provinces and territories issued a joint declaration in which they committed to foster the transition to a lower-carbon economy and increase adaptation initiatives to build resiliency. A more detailed look at each of the climate change programs of each province and territory is set out in McCarthy Tétrault LLP's Climate Change Essentials guide.

The Role of Carbon Pricing Mechanisms

Carbon pricing is increasingly seen as the key mechanism by which meaningful GHG emissions reduction can be achieved. As a result, there has been growing pressure on governments to account for the societal costs of climate change and put a price on carbon. A price on carbon looks to capture what are referred to as the external costs of carbon emissions, i.e. costs that the public pays for indirectly, such as damage to crops and damage to property as a result of flooding. By placing a monetary value on carbon, governments, business and individuals will have an incentive to change their behaviour to less carbon intensive alternatives.

Market instruments are perceived as providing more cost efficient and flexible compliance mechanisms, so governments are now looking to the market for solutions. There are two main types of carbon pricing mechanisms available to policymakers:

  • Emissions trading systems (ETS): ETS is a market-based approach used to manage GHG emissions by providing economic incentives for participants to reduce emissions. While emissions trading systems tend to be complex, the economic concept behind it is straightforward: since climate change is a shared global burden and the environmental impact of reducing emissions is the same wherever the reductions take place, it makes economic sense to reduce emissions where the cost is lowest. Under an ETS, an annual limit or cap is set on the amount of GHG emissions that can be emitted by certain industries. Regulated entities are then required to hold a number of emissions allowances equivalent to their emissions. Regulated entities that reduce their GHG emissions below their target will require fewer allowances and can sell any surplus allowances to generate revenue. Regulated entities that are unable to reduce their emissions can purchase allowances to comply with their target. By creating demand and supply for emissions allowances, an ETS establishes a market price for GHG emissions. In order to achieve absolute reductions in GHG emissions, the limit or cap is gradually lowered over time.
  • Carbon taxes: A carbon tax puts a price on each tonne of GHG emissions generated from the combustion of fossil fuels. The idea is that over time, the carbon price will elicit a market response from all sectors of the economy, i.e. consumers and businesses will choose less carbon intensive alternatives, thus resulting in reduced emissions. The design and implementation of carbon taxes varies widely across jurisdictions. Design aspects such as the scope of coverage, point of application, and tax rate will depend on the jurisdiction's energy mix, composition of its economy, existing tax burdens, existence of complementary environmental policies, and political considerations. With respect to scope, some jurisdictions have focused on a narrow category of energy users and large emitters, while others such as British Columbia have adopted a broader scope where the carbon tax covers GHG emissions from the combustion of all fossil fuels. According to the Institute for European Environmental Policy, there are currently no schemes that cover all GHG emissions in a given jurisdiction.

There are some key differences between the mechanisms. With an ETS, the quantity of emissions reduction is known, but the price is uncertain, whereas with a carbon tax, the price is known, but the quantity of emissions reduction is uncertain. A tax requires decisions on the scope and rate of the tax, while within a trading system, a firm can acquire or bank emissions allowances over multiple years depending on the program. Therefore, emissions trading offers a broader range of compliance options, thus increasing flexibility for participants and potentially lowering compliance costs. Both carbon pricing mechanisms can generate revenue that can be used to lower other taxes or invest in "green" initiatives. Both mechanisms also have related monitoring, reporting, verification and compliance obligations, and both need special provisions to minimize the effects on certain energy intensive, trade exposed industries. The choice of the instrument will depend on each jurisdiction's national and economic circumstances. There are also more indirect carbon pricing tools, such as fuel taxes, the elimination of fossil fuel subsidies, and regulations that incorporate a social cost of carbon.

In its report, State and Trends in Carbon Pricing 2015, the World Bank and Ecofys estimate that almost 40 countries and more than 20 cities, states and provinces currently use carbon pricing mechanisms or are planning to implement them. These jurisdictions are responsible for more than 22% of global emissions. Others are developing or considering systems that will put a price on carbon in the future. Altogether, these actions will encompass almost half of global carbon dioxide emissions. While climate policy in jurisdictions around the world tended to lag early on, recent developments have signaled a general move towards cap-and-trade as the preferred market tool for addressing climate change. In North America, both Québec and California launched cap-and-trade systems in January 2013 and linked their programs one year later, creating North America's largest carbon market. Ontario's cap-and-trade program is expected to come online in 2017, which will link to the existing programs in Québec and California. In January 2009, the Regional Greenhouse Gas Initiative (comprising nine states in the U.S. Northeast) began operating the first market-based regulatory program in the United States to cap and reduce carbon dioxide emissions from the power sector.

Industry Leads the Way

In recent years, companies have been working hard to reduce their carbon footprints and signal corporate support for the transition to a lower-carbon economy. In particular, an increasing number of companies are setting emissions reduction targets and taking action to address climate change impacts in both their own operations and their supply chain. Since many companies operate in jurisdictions where GHG emissions are subject to mandatory reduction programs or carbon taxes, they are well attuned to carbon pricing issues as a response to the regulatory environments in which they operate. However, given the diversity in scope and timing of climate policies, companies are faced with having to consider multiple carbon compliance costs in their business decisions. As a result, there have been increasing calls from the private sector for governments to establish clear pricing and regulatory certainty to support climate-related investments and climate risk assessment efforts. In the meantime, companies have been managing their emissions, assessing risk and developing business plans based on a real or internal carbon price that is incorporated into their planning and investment decisions. This means that companies worldwide are already advanced in their use of carbon pricing and in planning for climate change risks, costs and opportunities.

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