This Climate Change Bulletin is part of a series that is prepared periodically by BLG's Climate Change Group to alert our clients of emerging issues and initiatives that are relevant to their businesses and strategic interests. Future Climate Change Bulletins and Legal Alerts will review and consider issues facing various provinces as well as different industrial sectors. Comments and questions are always welcome.
The Current Situation In Canada
The Provincial and Federal response to climate change is emerging piecemeal. For now, it remains largely incomplete. Over the last ten years we have seen a plethora of proposals appear, with details to be announced "later." Only recently in British Columbia has legislation been passed which might begin to come to grips with the challenge of reducing the absolute level of greenhouse gas emissions (GHGs) in that province. Meanwhile, the level of Canada's GHG emissions continues to rise. Among the G8 economies, Canada ranked highest in percentage increase (1990 – 2004). Among countries that track their emissions in detail, Canada's GHG growth was surpassed only by Portugal, Spain and Turkey.1
In addition to statements made by the Provinces and the Federal government, goals have been set by municipalities, businesses and not-for-profit organisations. Potentially, these individual players can fit within the interstices of a Federal-Provincial structure. However, this higher-level structure must be internally consistent and capable of responding to the climate change challenge by reducing GHGs, absolutely, over an acceptable timeframe.
Of the 758 megatonnes (mt) of Carbon Dioxide equivalent (CO2e) emitted across Canada in 2004, 620 mt (82%) came from the energy sector (stationary combustion sources, transportation and fugitive sources).2 Within the energy sector, 360 mt (58% of the energy total) is produced by electricity and heat generation.3 Inevitably, the electricity sector is at the heart of any realistic plan to reduce Canada's GHG emissions. How might this be done?
Approaches To GHG Reduction
Broadly speaking, there are four main approaches that may be considered for reducing harmful emissions to the air.
Until the mid-1990s, industrial countries relied on various command-and-control regulations which set allowable limits to emissions to be monitored and regulated by government inspectors.
In the 1990s, a new approach was introduced under the U.S. Clean Air Act to reduce acid rain through a cap-and-trade system for sulphur dioxide and nitrogen oxides. (Cap-and-trade was discussed in the previous newsletter in this series.) This approach uses market incentives to oblige industrial installations, such as power producers, to meet a gradually diminishing level of emissions by either physically reducing in-plant emissions or by buying credits from other participants in the capped system. The European Union Emissions Trading System now uses this approach to reduce emissions of carbon dioxide.
A third approach is a carbon tax which is applied to a range of fossil fuels at various points of use, usually on the final consumer, the individual or the household. This could appear as so many cents per litre on gasoline, or on household energy use for heating and cooling. It should be noted that the recent carbon tax proposal by the federal Liberal Party would not initially impose a tax at the pump for gasoline. Such a tax has been introduced in Québec and British Columbia. It is intended to work by making the more carbon intensive fuels more expensive relative to the less carbon intensive. As such, it could succeed (in terms of reducing GHGs) by working simultaneously on producers and consumers to select the lower carbon solution for space heating and cooling, personal mobility, etc. The lower carbon option would become more economic, and the consumer would make that choice. Carbon taxes can be made more attractive by promising that the proceeds will be paid into a low-carbon technology fund to stimulate innovations to accelerate the transition to a low-carbon economy.
There are several reasons why the carbon tax approach may be vulnerable to failure. First, it is impossible to calculate what size of tax would produce a specific GHG reduction over a defined period of time. Heroic assumptions can be made, but it is not possible to predict with any quantifiable level of confidence. There is evidence, from the UK's escalator tax on gasoline in the late 1990s, that public anger could crack politicians' resolve long before the target reductions are in sight. So, from both a political and an environmental perspective, the carbon tax does not look like a sturdy policy instrument on its own.
The best contribution that a modest carbon tax might make would be to provide revenue for a low-carbon technology fund. This would be relatively simple to administer, and it would be easy to monitor results. Not dramatic perhaps, but a useful contribution to a suite of low-carbon initiatives.
Lastly, there is the carbon intensity approach which has been adopted by the Alberta government and proposed by the Federal government. This approach sets targets for the amount of carbon used per unit of production. It will certainly lead to reductions in GHGs if the economy as a whole is either static or shrinking. Likewise, for sectoral goals, it will work if that sector (e.g. electricity) is either static or shrinking. If the economy (or sector) is expanding, assumptions may be made about how big a reduction in carbon intensity will produce what size of absolute GHG reduction over what period of time. This is what is being done in Alberta and is what Ottawa is proposing. However, the assumptions in the models may not be borne out by reality, and the absolute reduction targets may not be met. This is a far less predictable approach to GHG reduction than cap-and-trade.
What We Have In Canada Today
The move towards regulating greenhouse gas emissions is underway, albeit in its early stages. Some provinces have stated ambitious absolute reduction targets (respecting the Kyoto Protocol) without much detail of how they might be achieved. Alberta has (like the Federal government) based its strategy on intensity targets, rather than absolute reductions. On the other hand, Alberta is the first province to have a climate change act in force.
In the last few months, British Columbia has been putting a comprehensive strategy in place, based on absolute reductions (33% against 2007 levels to be reached by 2020). This includes a cap-and-trade system linked to both the Western Climate Initiative in the U.S. and to the International Carbon Action Plan, which aims to trade carbon offsets and carbon credits internationally. The BC model is the closest to the European Union Emissions Trading System (EU ETS) in structure and ambition. Interestingly, there is no technology fund escape clause for non-compliance. This may reflect the predominance of hydroelectric generation in that province.
Québec was the first North American jurisdiction to adopt a carbon tax, which came into force in October 2007. Québec plans to meet a Kyoto compliant reduction target by establishing voluntary, binding agreements on reductions with industry. Québec and Ontario recently signed an MOU to establish a joint cap-and-trade system. Finally, Ontario has announced that it expects to become the newest member of the Western Climate Initiative, a step up from its current observer status.
The Federal-Provincial legislative mosaic has so far produced something of everything – carbon intensity targets, cap-and-trade, a carbon tax, voluntary agreements, and so on. Alberta and the Federal government stand in the intensity corner – although their regimes are far from compatible with one another. BC is the most internationally committed to international cap-and-trade, with Québec and Ontario perhaps soon to move in that direction.
Conclusion – The Physical Bottom Line
To conclude, we should step outside the political and regulatory labyrinth to return to the broad issues involved in reducing GHG emissions in Canada. In terms of Canada's megatonnes of CO2 equivalent, the big provinces are Alberta and Ontario, each emitting over 200 mt. Three provinces emit between 70 and 100 mt – Québec, Saskatchewan and BC – while other provinces each emit less than 20 mt. The provinces with the fastest growth in emissions between 1990 and 2005 are Alberta and Saskatchewan, due mostly to the oil sands.
The big pieces of the GHG reduction challenge are the promised closure (by 2014) of coal-fired plants in Ontario and the successful application of carbon-capture-and-storage to the development of the oil sands. Reductions of GHG emissions by these and other necessary measures can best be achieved if there is a consistent approach to the problem by the Federal government and the provinces - most effectively based on cap-and-trade.
1. Statistics Canada, Human Activity and the Environment: Annual Statistics 2007 and 2008. Section 1. Climate Change in Canada
2. 'CO2 equivalent' includes all six greenhouse gases regulated by the Kyoto Protocol, with each gas weighted by its 'global warming potential' relative to CO2.
3. Government of Canada, 2006 Canada's Fourth National Report on Climate Change – Actions to Meet Commitments under the United Nations Framework Convention on Climate Change.
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.