Dealing With Global Warming – The Latest Made-In-Canada Solution

Climate change is currently a hot issue in Canadian provincial and federal politics with increasing pressure being placed on the current minority federal government led by the Conservative Party ("Conservative Minority Government") to act to reduce greenhouse gas emissions ("GHG") and live up to its Kyoto commitments under the Kyoto Protocol¹. Under the Protocol certain industrialized countries, including Canada, have collectively agreed to cap their GHG emissions to 5.2 percent below 1990 levels during the first Kyoto Protocol commitment period (2008-2012)². Canada committed to reducing its GHG emissions to 6% below levels by 2012. To date, the Conservative Minority Government has indicated that Canada does not intend to meet its international commitments under the Kyoto Protocol. Since its January 2006 election, the Conservative Minority Government has promoted a "made in Canada" approach to climate change and have put forward a number of proposals, the most recent of which were announced on April 26, 2007. This article will provide a brief overview of the latest federal proposals for the regulation of GHG emissions which were announced on April 26, 2007.

In October 2006, the Conservative Minority Government published a Notice of Intent to develop and implement regulations and other measures to reduce air emissions³. At the same time, a new Canada Clean Air Act ("CCAA") and amendments to the Canada Environmental Protection Act, the Energy Efficiency Act, and the Motor Vehicle Fuel Consumption Standards Act were introduced in the federal House of Commons in the form of Bill 30 ("Bill 30")⁴.

Under Bill 30, the Conservative Minority Government committed to achieve a reduction of GHG emissions between 45% and 65% from 2003 levels by 2050 thus abandoning Canada’s international commitment under the Kyoto Protocol. Bill 30 contained no short-term targets for GHG reductions and postponed setting mandatory reduction targets until 2050. Bill proposed targets for three timelines. In the short term (2010-2015), the federal government intended to adopt a target-setting approach based on emissions intensity for GHG. For the medium term (2020 to 2025), the federal government intended to build upon the emissions intensity approach with intensity targets that lead to absolute reductions in emissions and thus support the establishment of a fixed cap on emissions during this period. For the long term (2050), the federal government committed to achieving an absolute reduction in GHG emissions between 45% and 65% from 2003 levels by 2050.

On March 30, 2007, the House of Commons legislative committee made up of the federal opposition parties, undertook the task of re-drafting Bill 30. Amendments made to Bill 30 by the committee required Canada to comply with its Kyoto Protocol obligations. These amendments provided for: (a) an amendment to the CCAA’s preamble to include references to Canada’s Kyoto Protocol obligations; (b) the introduction of an absolute cap on GHG emissions instead of intensity-based targets; (c) setting short-term targets for reducing GHG emissions to the levels agreed to under the Kyoto Protocol; (d) the introduction of a regulatory cap (as mandated by the Kyoto Protocol) on GHG emissions from heavy industry rather than intensity-based targets; and (e) setting the proposed carbon price charged on companies that are in excess of their caps at a high level ($30/tonne by 2011) with the intention of giving companies an incentive to make significant investments in GHG reduction technology. The amendments also provided for three methods for reaching targets: i) reduction of emissions on site, ii) investment in domestic emissions reductions off site, and iii) purchase of project-based credits under the Kyoto Protocol.

The Conservative Minority Government raised strong objections with respect to these amendments and comments from the federal government have indicated a strong probability that the amended CCAA will be abandoned in its entirety and replaced by the new April 2007 plan discussed further below.

On February 14, 2007, in an effort to force the Conservative Minority Government to honor Canada’s Kyoto obligations, the House of Commons led by the opposition parties passed Bill C-288⁵ ("Bill C-288"). Before it can become law, Bill C-288 must be passed by the Senate, Parliament’s Upper House. Bill C-288’s purpose is to legally require the federal government to comply with its international obligations under the Kyoto Protocol and to compel them to draw up a Kyoto implementing plan before any monies are spent. It provides that 60 days after the bill comes into force, and annually by May 31st the Minister shall prepare a Climate Change Plan that includes measures on how Canada will meet it’s obligations under the Kyoto Protocol.

The Conservative Minority Government officially responded to Bill C-288 with a notice on April 19, 2007 entitled "The Cost of Bill C-288 to Canadian Families and Business"⁶. The notice outlines the Conservative Minority Government’s position that complying with Bill C-288 would be expensive, negatively affect the Canadian economy and not meaningfully reduce GHGs. The notice states that any attempt to meet the Kyoto targets within the timeframe of the Protocol would require a broad carbon tax, a regulatory system and international trading and that it is not "realistic" to consider that all three could be set up within one year: "Cutting emissions by this amount in such a compressed period of time is unprecedented in the absence of a dramatic decline in economic output (for example, as occurred in several Eastern European countries after the collapse of the USSR)."

The notice estimates that a meaningful carbon tax would have to be in the $195 per tonne range (generating on average $105 billion per year in revenue) and would necessarily be applied against all GHG producing activities by the industrial, commercial and household sectors. The tax would be payable by business and individuals at point of sale for fossil fuels and on emissions generated by industrials sectors. Such a carbon tax, according to the notice, could result in a decline of the gross domestic product ("GDP") of more than 6.5% relative to current projections for 2008 and a deep recession in 2008 akin to the recession in the post World War II period.

While the notice acknowledges that international trading could mitigate some of the domestic costs of compliance with Kyoto, it characterizes international emissions trading as coming with "economic and environmental risks and uncertainties." The notice views Clean Development Mechanism ("CDM") and Joint Implementation ("JI") projects as having "strong environmental credibility" and the resulting credits as useful but cautions that there is "considerable uncertainty about the volume of project-based credits available for purchase." The notice rejects purchasing assigned amount units ("AAUs") on the basis that the availability of these AAUs could be related to the economic collapse or falling production and not related to emission reductions.⁷

The notice questions the utility of international trading based on the fact that, even though there is no limit under the Protocol on the use of international credits, the Protocol requires that domestic action constitute a "significant element" of any country’s effort to meet its targets. This according to the notice creates "additional uncertainty" with respect to Canada’s ability to rely on international credit trading to meet its targets.

The notice concludes that international trading would not result in any incremental emission reduction globally, would inhibit the development of new technologies and would provide a disincentive for domestic investment in energy efficiency and that "environmental improvements (e.g. cleaner air) and associated health benefits, or the benefits of technological innovation" are "unlikely to materialize in this short period." The notice also concludes that "the real source of economic costs associated with Canada significantly reducing GHGs within the Kyoto period" is a "lack of time" and suggests that cooperation with the US federal government could "alleviate the competitiveness and economic restraints" of Canada acting alone in the North American context.

On April 26, 2007, Canada’s Environmental Minister John Baird announced Canada’s new plan to cut GHG emissions (the "Proposed Plan") re-confirming the federal government’s intention to disregard Canada’s current Kyoto target⁸. Because the Proposed Plan is regulation-based it does not require the support of the opposition parties for implementation. The legislative framework for the new Proposed Plan will likely be regulations enacted under the Canada Environmental Protection Act 1999. The Proposed Plan will also likely supplant the revised and amended Bill 30⁹.

The Proposed Plan provides for two other methods of meeting GHG targets in addition to reducing GHG emissions by investing in cleaner production: contribution to the Climate Change Technology Fund, and domestic emissions trading including a domestic offset system. The Proposed Plan also provides for a one time recognition of early action for regulated companies that took verified action between 1992-2006 to reduce GHG emissions.

The Proposed Plan is based on intensity-based targets as opposed to firm targets. Intensity-based targets allow industries to increase their carbon outputs as production is increased as long as the amount of emissions per unit of production is reduced. This differs from Kyoto Protocol, which mandates a total reduction of emissions. It is, however, very similar to the GHG reduction scheme in Alberta which comes into force in Alberta on June 1, 2007. Alberta’s scheme is discussed below.

The Proposed Plan targets an intensity-based emissions reduction of 26% from 2006 levels by 2015. The goal is to achieve GHG emissions reduction of 20% from 2006 levels by 2020. All six GHG are targeted. The industries subject to the Proposed Plan are in the electricity generating, oil and gas, forest products, smelting and refining, iron and steel, some mining, and cement, lime and chemical areas. There has been some suggestion that tar-sands development in Alberta will be exempted.

The Proposed Plan sets out different regimes for setting targets for existing and new facilities. The short-term mandatory GHG reduction target for existing facilities is 18% per unit of new production, based on 2006 emission levels. The objective is to reduce emissions by an average of 6% per unit of production for each year starting in 2007 to 2010 (reduction in aggregate), with a further reduction of emission intensity by 2% each year.

New facilities (i.e., those which commenced their operations in 2004 or later) will have a three-year grace period before they have to meet their intensity-based emission targets. Upon the expiration of the grace period, new facilities will become subject to the GHG emission-intensity target based on their emission-intensity performance and the application of a ‘cleaner fuel standard.’ As with existing facilities, new facilities will be required to improve their emission intensity by 2% each year.

The Climate Change Technology Fund (the "Fund") will be used primarily to finance investments in technology and infrastructure deployment that have a high likelihood of resulting in GHG emission reductions in the short term. GHG emitters will be able to contribute to the Fund in lieu of reducing their emissions. The rate of contribution for emissions beyond the set caps will be $15 per tonne of carbon dioxide equivalent from 2010 to 2012, and $20 per tonne beginning in 2013. Companies will not be able to contribute to the Fund for all their excess emissions. Contributions to the Fund will be capped at 70% of the total emission reductions in 2010, falling to 65% in 2011, 60% in 2012, 55% in 2013, 50% in 2014, 40% in 2015, 10% in 2016, in 2017, and 0% by 2018.

A smaller component of the Fund will be utilized to finance projects contributing to the development of new technologies that have the potential for significant reduction equivalent to 5 MT a year from 2010 to 2017.

While the Proposed Plan contemplates an unlimited domestic emissions trading system where regulated companies could buy and sell credits amongst themselves based on a ‘baseline-and-credit’ system for GHG, the details are lacking of how such a system would operate. Similarly, details of the domestic offset system are lacking, other than the proposed offset system would allow regulated companies to invest in emission reduction projects outside of the regulated system and to trade or use the credits for compliance purposes.

Few details have been released as to the extent of international including North American emissions trading. The Proposed Plan provides the following on the issue of linkages with international markets:

• Canadian companies will only have increased access to "international trading markets" which are characterized as "fragmented and in [their] infancy" as those markets become more "mature and … more global in nature, with robust emission reduction verification systems;"

• regulated companies will have limited access to certain types of credits from the Kyoto Protocol’s CDM. The federal government will determine which types of Kyoto credits can be used by Canadian companies for compliance purposes. Canadian firms will not be allowed to use "hot air" credits which do not represent real emission reductions. For each regulated entity, access to CDMs as a compliance tool will be limited to 10% of the entity’s total target; and

• the Conservative Minority Government is considering potential linkages with a number of emissions trading systems in the United States (e.g., Western Regional Climate Action Initiative and the Regional Greenhouse Gas Initiative) and will also "actively explore cooperation on emission trading with Mexico."¹⁰

Alberta will become the first province in Canada to implement carbon emissions legislation when Bill 3, Climate Change and Emissions Management Amendment Act¹¹ ("Bill 3") comes into force on June 1, 2007. Alberta’s Bill 3 mandates that companies that emit more than 100,000 tonnes of GHG per year must reduce their emission intensity by 12% starting July 2007. This means that they have to reduce any new emissions generated over their current level by 12%. Bill is accompanied by The Specified Gas Emitters Regulation, which details how companies operating in Alberta can reduce their emissions intensity.

Compliance options include: (a) making operating improvements to reduce emissions; (b) buying Alberta-based offset credits to apply towards regulated entities’ emissions reductions targets. The offset option allows large emitters to invest in projects outside their regulated operations that reduce, or ‘offset’ emissions on their behalf. The projects must be Alberta-based and the offset reductions offered must be verified by a third party; and (c) contributing to the Alberta Technology Fund, a new government fund that will invest in technology to reduce GHG emissions in Alberta. The Alberta Technology Fund will be used to develop infrastructure to reduce emissions and to support research into innovative climate change solutions. Large emitters will be required to pay $15 per tonne to the Alberta Technology Fund for every tonne above the 12 percent target. The eligible projects must be located in Alberta and spending from the fund should occur in the province.

The most recent proposals by the Conservative Minority Government represent a further step in the development of its "Made in Canada" approach to dealing with climate change. It also represents a further distancing of Canada from its GHG emissions reductions commitments under the Kyoto Protocol. Pressed for action by the Canadian public, the Conservative Minority Government has chosen a less intrusive model in the form of the Proposed Plan and has released a framework for its future operations. In conclusion, Canadian policy is ever changing on the issue of climate change and it is likely to remain in flux for the foreseeable future.

1. The United Nations Framework Convention on Climate Change. Retrieved on November 15, 2005. (Article 2)
2. The goal is to lower the overall emissions of carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorcarbons (HFC) and perfluorocarbons (PFC).
3. Canada Gazette, Part I, October 21, 2006, Vol. 140, No. 42 at page 3351,
   www.ec.gc.ca/ceparegistry/documents/notices/g1-14042_n1.pdf
4. Bill C-30, An Act to Amend the Canadian Environmental Protection Act, 1999, the Energy Efficiency Act and the Motor Vehicle Fuel Consumption Standards Act (Canada’s Clean Air Act), 1st Sess., 39th Parl., 2006-2007.
5. Bill C-288, An Act to ensure Canada meets its global climate change obligations under the Kyoto Protocol, 1st Sess., 39th Parl., 2007 (as passed by the House of Commons February 14, 2007).
6. "The Cost of Bill C-288 to Canadian Families and Business" Environment Canada (19 April 2007) online: Environment Canada http://www.ec.gc.ca/doc/media/m_123/c8_eng.html.
7. AAUs are emission allowance limits granted to each Annex 1 country according to their respective target of GHG emissions under the Kyoto Protocol.
8. "Regulatory Framework for Air Emissions" Environment Canada (24 April 2007) online: Environment Canada
   http://www.ec.gc.ca/doc/media/m_124/toc_eng.htm.
9. Under the Proposed Plan, there would also be a cap-and-trade emissions trading system for SOx and NOx with separate credits and compliance procedures for SOx and NOx emissions.
10. A number of Canadian provinces - British Columbia, Manitoba, Ontario and New Brunswick - are meeting with U.S. state officials to develop cross-border emissions trading markets.
11. Bill 3, Climate Change and Emissions Management Amendment Act, 3rd Sess., 26th Legislature, Alberta, 2007.

© Copyright 2007 McMillan Binch Mendelsohn LLP