Previously published in The 2008 Lexpert/ALM Guide to the Leading 500 Lawyers in Canada
In the past year, climate change has become among the most publicized issues in Canada and one of the main sources of debate in Canadian politics. Its global significance was reaffirmed in the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, which concluded that evidence of climate change is "unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level." On the basis of this science, the Canadian Council of Chief Executives, among others, has advocated aggressive global action, including government measures to raise the price of carbon-based energy. Similar calls by citizens, businesses, litigants and institutional investors have spurred Canadian federal and provincial governments to consider how best to mitigate the effects of global warming, at times turning to examples from our American neighbors. This article provides, first, a summary of the rapidly developing body of Canadian climate change regulation at both the federal and the provincial levels; and, second, a discussion of current trends.
Current Regulatory Climate
Conservative Government Proposal
Canada ratified the Kyoto Protocol on December 17, 2002, committing the country to reduce its greenhouse gas (GHG) emissions by 6 percent below 1990 levels between 2008 and 2012. So far, the federal government has not implemented the treaty, and the current Conservative government continues to characterize the economic consequences of complying with Kyoto as potentially disastrous. It has, instead, pursued an approach similar to that advocated recently by the Bush White House, one that would adopt flexible, domestic goals for emissions reductions. Indeed, although all of Canada’s other major federal parties now advocate a domestic carbon trading regime, only the current Conservative government has advocated a plan that would not comply with Kyoto.
To facilitate its alternative to Kyoto targets, the Conservative government initially tabled Bill C-30, Canada’s Clean Air and Climate Change Act. This bill was roundly criticized by the opposition parties and other groups, leading to its referral to a multiparty parliamentary committee. Under the influence of the opposition parties, the bill was drastically overhauled to incorporate Kyoto-compliant targets for industrial emitters. Perhaps not surprisingly, the Conservatives abandoned the revised bill and the idea of a stand-alone statute to regulate GHG emissions.
To fill the void, the government proposed a new plan for controlling industrial GHG emissions with sector-specific regulations made under Canada’s federal omnibus environmental statute, the Canadian Environmental Protection Act, 1999. Titled the "Regulatory Framework for Air Emissions" (the Framework), the Conservative’s new plan would reduce Canada’s total GHG emissions intensity by 20 percent below 2006 levels by 2020 – still a significantly less aggressive target than the country’s Kyoto commitment or, for example, the Lieberman-McCain proposed Climate Stewardship and Innovation Act of 2007 (S. 280), which would cap 2020 emissions at 1990 levels.
The sector-specific regulations are expected to be published in the spring of 2008 and to come into force in 2010; industry has already started preparing for the anticipated regime. The key features of this new Framework include the following:
- Regulated Emitters. Facilities in the following sectors would be required to meet published sector-specific targets: fossil fuel electricity generation; oil and gas; forest products; smelting and refining; iron and steel; iron ore palletizing; potash, cement, lime and chemicals production.
- Regulated Emission. The Framework would not require facilities to reduce fixed-process emissions – that is, emissions from a process such as calcination in lime production that produces an amount of GHGs that cannot be reduced by known techniques or technology.
- Emissions Intensity Targets. The targets would be based on intensity rather than absolute reductions, potentially allowing an increase in GHG emissions if production also increases. Facilities in regulated sectors with their first year of operation in 2003 or earlier would be required to reduce emissions intensity on average by 18 percent of 2006 levels by 2010, and by an additional 2 percent in every subsequent year until 2020. Newer facilities would not be required to reduce emissions in the first three years of operations; after that time, the facilities would be required to meet initial emissions intensity targets based on unspecified cleaner fuel standards, following which they would also have to make annual reductions of 2 percent until 2020.
- Technology Fund. Until 2018, regulated emitters would be able to get credit for a percentage of the required reductions by contributing to a technology fund at the rate of $15 per tonne (metric ton) of excess carbon dioxide equivalent (CO2e) from 2010 to 2012, rising to $20 per tonne in 2013 and escalating annually thereafter by the growth rate of Canada’s nominal gross domestic product. The technology fund would invest primarily in technology and infrastructure projects that are likely to reduce GHG emissions.
- Tradeable Emissions Credits. The federal government would also issue credits to each regulated party with emissions intensity below its limits for the same year. These credits could be banked for compliance in future years or sold to other regulated parties through an emissions trading market that the federal government has indicated it will leave the private sector to establish.
- Domestic Offset System. Regulated emitters would also be able to purchase domestic offset credits, each representing one tonne of verified CO2e reduction or removal achieved by a project not otherwise required to do so.
- Early Action Credits. The Framework would allow a small one-time allocation of credits for regulated parties that previously (between 1992 and 2006) reduced emissions.
These features reflect what the Conservative government describes as its "made in Canada" approach to emissions reduction. And the government has proposed linking the Canadian regime to others only where doing so would not bind Canada to any external commitments. For example, the Framework would allow regulated companies to purchase Certified Emissions Reductions generated by Clean Development Mechanism projects undertaken in the developing world under the Kyoto Protocol, but only to meet up to 10 percent of emissions intensity limits; and domestic emissions credits would not be deemed Assigned Amount Units for the purposes of the Protocol. On the other hand, the Conservatives have indicated a willingness to work with US actors to explore opportunities to link a Canadian regime with any regional, state and federal emissions trading systems in the United States that become operational.
Existing Federal Regulation
Because the Conservative government only has a minority government, the opposition parties have significant influence. When sufficient members of Parliament (MPs) of the opposition parties (and like-minded Conservative party MPs) can agree on an issue, they can form a majority in the House of Commons with the power to pass binding legislation on that issue. Such agreement was reached to pass a private member’s bill called the Kyoto Protocol Implementation Act (the Implementation Act), which came into force on June 22, 2007. The Implementation Act requires the federal government to take actions designed to ensure that Canada meets its obligations under the Kyoto Protocol. Notably, it requires the Minister of the Environment to prepare and report on the implementation of a climate change plan that describes how the government will ensure that Canada reduces its emissions by 6 percent below 1990 levels between 2008 and 2012. The Implementation Act also requires the government to ensure that its Kyoto obligations are being fully met, authorizing it to limit GHG emissions and establish a trading regime.
On August 21, 2007, the government released its Climate Change Plan through Environment Canada, as required by the Implementation Act. Although the Plan highlights Canada’s compliance with various requirements under the Kyoto Protocol, such as providing financial assistance to developing countries and submitting national reports to the UNFCCC, it also reiterates the Conservative government’s view that achieving the country’s Kyoto targets through domestic reductions would have grave economic consequences and that purchasing international credits would not necessarily promote real, verifiable and incremental reductions to global emissions.
The federal government has not been the only jurisdiction to consider GHG regulation. The Canadian Constitution does not specifically assign the authority to regulate climate change matters to either the federal Parliament or the provincial legislatures. Accordingly, regulation can take place at both the federal and the provincial levels as well as at a more micro level – the municipal level. In fact, the province of Alberta was the first to set regulatory limits on GHG emissions in Canada, in part to fill this regulatory space before the federal government attempts to limit the emissions of the province’s carbon-intensive oil sands projects.
It is unclear how overlapping federal, provincial and other initiatives will coexist. Industry, though, uniformly dislikes the uncertainty of a patchwork approach. To alleviate that anxiety to some extent, the federal Conservatives have proposed entering into equivalency agreements with provinces that choose, like Alberta, to establish a regulatory regime that is not inconsistent with the federal plan.
In Alberta, the province’s Specified Gas Emitters Regulation (the Regulation) came into force in summer 2007. Like the federal Framework, it employs an emissions intensity approach: every facility that emits more than 100,000 tonnes of CO2e per year must reduce its GHG emissions intensity by up to 12 percent of its average 2003–2005 emissions between July 1 and December 31, 2007, depending on the age of the facility. For example, new facilities are required to start reducing emissions intensity by 2 percent per year only after their third year of operation. The Regulation also employs some other features found in the federal Framework:
- Technology Fund. Regulated facilities can pay $15 for every tonne of CO2e emitted in excess of compliance targets.
- Tradeable Emissions Credits. Facilities with actual emissions that are below specified targets can earn emissions performance credits, which can then be sold to others.
- Domestic Offset Credits. Parties may purchase offset credits generated by projects in Alberta that are independently verified as having reduced GHG emissions after 2002 when not otherwise required to do so.
The province of Québec has taken a distinctly different approach to Alberta’s to deal with the issue, becoming the first Canadian province to enact a carbon tax on energy producers. The tax is expected to raise $200 million (obviously with the potential to escalate over time) in annual tax revenues for the province’s Green Fund, which was established in 2006 to help fund reductions in GHG emissions and improvements to public transportation. The tax will apply to approximately 50 companies that sell hydrocarbon products in bulk to retailers that operate in Québec and that use a significant amount of hydrocarbons. The rate will vary for each fuel, depending on the amount of carbon that it produces during combustion: 0.8 cents per liter of gasoline sold in bulk to retailers in Québec; 0.9 cents for diesel fuel; 0.96 cents for light heating oil; 0.5 cents for propane; and $8.00 per tonne for coal.
Most of the other provinces have also adopted GHG reduction targets; although some have taken steps to achieve these targets, none are as concrete as those in Alberta. Some provinces, content to let the federal government regulate industrial GHG emissions, have concentrated instead on energy efficiency and renewable energy portfolios. As many of these initiatives are still in their infancy, the regulatory climate is rapidly changing.
The Changing Climate
The Federal Opposition
Canada’s major federal parties remain divided, with the Conservative government clearly rejecting Kyoto and all the opposition parties supporting it. The strongest opposition party, the Liberals, continue to advocate Kyoto compliance by 2012 and emissions reductions of 20 percent below 1990 levels by 2020 and 60 to 80 percent below 1990 levels by 2050. But the Conservative government, led by Prime Minister Stephen Harper, is holding firm. It has indicated that Canada will join Asian Pacific Partnership on Clean Development and Climate (ACP), a group that the United States (under the influence of the Bush administration) already belongs to and that advocates voluntary, non-legally binding targets to reduce greenhouse gas emissions rather than the binding reduction obligations of the Kyoto Protocol.
Because of the divergence among the principal parties, the path that Canada will ultimately take remains unclear, especially in the context of the Implementation Act and the possibility of a change in government brought about by the inherent instability of a minority. On September 19, 2007, Friends of the Earth Canada (Friends) also formally weighed in by filing an application for judicial review with the Federal Court of Canada. The application seeks a declaration that the federal government is not complying with the Implementation Act and a court order requiring the Minister of the Environment to do so. According to the application, the Conservative’s Climate Change Plan is aimed at avoiding Canada’s Kyoto commitments and therefore does not conform to the requirements of the legislation.
The Friends’ earlier application for judicial review approached the same goal from a different angle in alleging that federal administrators have failed in their regulatory duties under a federal statute – namely, the Canadian Environmental Protection Act, 1999 (CEPA). In a similar recent US case, Massachusetts v. Environmental Protection Agency, the US Supreme Court ruled that the Environmental Protection Agency (EPA) must regulate GHG emissions from new motor vehicles or provide a reasonable explanation of its failure to do so. In Canada, CEPA requires the Minister of the Environment to take certain actions if the release of a substance into the air from Canada may reasonably be anticipated to contribute to air pollution in another country or to air pollution in violation of Canada’s international treaty obligations. The applicants, citing data that shows that Canada’s GHG emissions are about 30 percent above 1990 levels and still rising, argued that Canada will not have taken control of these emissions by 2012, and consequently is likely to violate its international treaty obligations. The applicants have asked the court to make a declaration to that effect and to order the government to comply with these terms of CEPA. The threshold that an applicant must meet in judicial applications is high, but if the challenge is successful, it could well influence the direction of Canadian climate change policy.
Another significant source of pressure comes from regional North American efforts to mitigate global warming. Even though the federal Conservatives have been reticent binding extrajurisdictional commitments, several provincial governments have become increasingly interested in North American regional initiatives. The provinces of Ontario and New Brunswick, for example, have expressed interest in partnering with the Regional Greenhouse Gas Initiative (RGGI), the cooperative effort by northeastern and mid-Atlantic states to reduce carbon dioxide emissions. New Brunswick and the Secretariat of Eastern Canadian Provinces are already participating in this initiative as observers. British Columbia and Manitoba, meanwhile, are members of the Western Climate Initiative (WCI), the western version of RGGI, with Ontario, Saskatchewan and Québec participating as observers. Partnering with their American neighbors, Québec and the Atlantic provinces have also set emissions reduction targets together with the New England states. Such regional integration is growing as more provinces acknowledge the necessity, and even the benefits, of a multijurisdictional approach to mitigating climate change.
British Columbia, in particular, is working closely with California to implement vehicle emissions standards, having agreed to develop an equivalent Low Carbon Fuel Standard that will require the carbon intensity of transportation fuels sold in the province to be reduced by at least 10 percent by 2020. Also influenced by California’s Global Warming Solutions Act of 2006 (AB 32), BC premier Gordon Campbell has promised to reduce the province’s GHG emissions by 33 percent below current levels by 2020. To help achieve this target, the BC government has said that it will introduce new legislation in spring 2008 that would implement absolute emissions caps as part of a cap-and-trade regime that WCI is likely to develop by August 2008. BC also plans to require electricity produced in the province to have zero GHG emissions by 2016.
To reduce GHG emissions, many states and provinces are encouraging a transition to lower carbon or carbon neutral energy sources. In the Powering the Plains policy directive, certain Upper Midwest states are aiming to achieve a carbon-neutral infrastructure by 2055. Meanwhile, 26 states, including Connecticut, New Jersey, California and Texas, have adopted some form of renewable portfolio standards. More Canadian provinces have also adopted this approach to GHG reductions. Notably, the Ontario government plans to increase its renewable energy capacity to help achieve its aggressive GHG reduction targets of 6 percent below 1990 levels by 2014; 15 percent below 1990 levels by 2020; and 80 percent below 1990 levels by 2050. In particular, the Ontario government plans to retire all of the province’s coalfired generation plants by 2014, require a certain percentage of ethanol content in gasoline, ensure that new renewable energy projects account for 10 percent of Ontario’s capacity by 2010, and enter into more standard offer contracts for cogeneration and renewable energy generation. These initiatives will account for approximately half of the targeted reductions for 2014. Power plant emissions, in particular, are expected to drop by 85 percent by 2014, the regulatory deadline for the closure of the province’s coal-fired plants. This expectation assumes that the province can meet its deadline, which will require sourcing sufficient new generation capacity in time (a goal that many believe to be unrealistic).
Encouraged by the push for more renewable and low carbon energy, a number of Canadian environmental groups and municipalities filed a petition with the US EPA in November 2006 to reduce emissions from approximately 150 coal-fired power plants in seven US midwestern states. The petition relies on paragraphs 115(a), 302(g) and 302(h) of the US Clean Air Act, which combine to require the EPA to take action to reduce US emissions that may reasonably be anticipated to endanger public health or welfare in a foreign country. The petition is similar to the application made on behalf of Friends of the Earth under CEPA; both essentially demand that government fulfil its regulatory duty to reduce cross-border air pollution.
Meanwhile, institutional investors and capital markets commentators are increasingly examining how climate change regulation and the physical effects of global warming could affect their investments. Many Canadian investors have urged companies to disclose the business risks and opportunities that climate change presents, backing voluntary reporting mechanisms such as the Carbon Disclosure Project, whose signatories include major Canadian financial institutions and pension plans.
Canada has already developed avenues for reporting GHG emissions. In March 2007, the federal government announced that any person who operates a facility that has GHG emissions equivalent to 100,000 tonnes or more of carbon dioxide during the 2007 calendar year must report to the Minister, by June 1, 2008, the total quantity and source of these emissions in 2007.
Furthermore, current disclosure requirements for publicly traded issuers are being re-examined in the context of climate change. In this light, Canadian securities laws (like Regulation S-K in the United States) require that management’s discussion and analysis disclose any known trends, demands, commitments, events or uncertainties that are reasonably likely to have an effect on the company’s business or that will materially affect the company’s performance. Arguably, for certain issuers, this requirement captures risks related to climate change and climate change regulation. In a 2005 discussion brief entitled "MD&A Disclosure about the Financial Impact of Climate Change and Other Environmental Issues," the Canadian Institute for Chartered Accountants commented that issuers will need to account for assets and liabilities related to carbon transactions in their financial statements and notes; the Institute then went on to suggest best practices for climate risk disclosure.
In the context of climate change, the Canadian disclosure rules may also require a public issuer’s Annual Information Form (analogous to a 10-K report) to discuss the financial and any operational effects of environmental protection requirements on the capital expenditure, earnings and competitive position of the company in the current financial year and the expected effect in future years; environmental policies fundamental to a company’s operations and the steps taken to implement them; and risk factors and regulatory constraints that would be likely to influence investor decision-making.
Mindful of the limits of existing disclosure requirements, institutional investors in North America are calling for securities regulators to require increased reporting of climate change risks. In the United States, a broad coalition of investors, state officials and environmental groups petitioned the Securities and Exchange Commission on September 18, 2007 to issue an interpretive clause clarifying that material climate-related information must be included in disclosure under existing reporting requirements – that is, to require publicly traded issuers to assess and fully disclose their financial risks from climate change.
In Canada, the continuous disclosure review team of a major provincial Canadian securities regulator has publicly affirmed its view that "environmental issues" is an area that needs better disclosure by public issuers. So encouraged, an increasing number of Canadian companies and regulators have begun to re-examine voluntary carbon disclosure. It remains to be seen whether Canadian securities regulators will also require more specific climate change disclosure.
As in the United States, Canadian climate change regulation is expanding rapidly, with almost weekly announcements of new initiatives and developments. While the Canadian federal government prepares to set domestic GHG reduction targets, opposition parties are exerting their influence to press the government to meet its Kyoto commitments, and environmental groups are doing the same through judicial process. Moreover, various investors and concerned citizens are increasingly urging government to consider new regulations requiring companies to disclose the impact of climate change on their businesses and to help mitigate effects on the global climate.
Governments are responding to these calls – especially in the provinces, which are experimenting with a variety of initiatives, from clean energy standards in BC to a carbon tax in Québec. With numerous new initiatives springing up south of the border as well, and with the tendency of Canadian jurisdictions to favor regional integration, the only thing that is certain is that the regulatory climate will continue to change rapidly.