Since the date of our last update (September 2008), a number of significant developments have taken place in the climate change world. At the centre of those changes for Canadians were two elections, the U.S. election which resulted in the selection of Barack Obama as the next president of the U.S., and the Canadian federal election which returned Stephen Harper's Conservatives with an increased minority government. The Canadian federal election included a rejection of the Liberal's Green Shift carbon tax proposal and was followed by the yet-to-beconcluded efforts of the "coalition" of Liberals and New Democrats, supported by the Bloc Quebecois, to replace the Harper government. Parallel to those elections, and of equal significance, is the economic crisis facing the U.S., Canada and the rest of the world, which calls into question all of the plans and arrangements contemplated by various parties in almost every aspect of life, including those relevant to climate change (see "Elections and Economy Influence North American GHG Policies" below by Mike Barrett).
The Bush administration's reluctance to proceed with climate change legislation or regulation in the U.S. resulted in the U.S. Supreme Court 2008 decision in Massachusetts v. EPA that greenhouse gases (GHGs) are pollutants subject to regulation under the Clean Air Act (CAA). In response, the Environmental Protection Agency (EPA) published its Advanced Notice of Proposed Rule Making (ANPR) setting out the manner in which GHGs could be regulated under the CAA but making clear that the EPA and other elements of the Bush administration were strongly of the view that using the CAA, as opposed to stand-alone special purpose legislation, was inappropriate. As public comment was requested, a group of Canadian companies organized around the Canadian Business Cross-Border Climate Advisory Group Inc. and its President, Andrei Marcu, the new Senior Climate Change and Emissions Trading Advisor to Bennett Jones LLP, provided input to the EPA on the ANPR, pointing out the close ties between the Canadian and U.S. economies and the need to consider the consequences for Canadian business of any move to regulate GHGs, using the CAA or otherwise (see "EPA Issues Regulatory Regime Advanced Notice" below by Hilary Stedwill).
On the international scene, the 14th Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) and the 4th Meeting of the Parties to the Kyoto Protocol (COP 14/CMP 4) took place in Poznan, Poland, in December 2008, with some progress, but without any dramatic breakthrough towards a resolution of the numerous pressing international issues related to climate change (see "Fourth Meeting of the Parties to the Kyoto Protocol" below by Andrei Marcu).
Although the Poznan COP 14/CMP 4 produced no significant progress, individual countries are increasingly moving towards GHG emission reduction targets which have been identifi ed as important if the GHG content in the atmosphere is to be stabilized at a level which may avoid some of the worst outcomes from climate change. For example, the United Kingdom passed a new law setting the stage for the establishment of a domestic emissions trading system to supplement the European Union Emissions Trading System and to achieve an 80 percent reduction in GHG emissions from 1990 levels by 2050 (see "UK Passes New Climate Change Law" below by Mike Barrett). Australia, which ratified the Kyoto Protocol as the first act of the new Labour Government in 2008, announced the basics of its program and its goals in December 2008 (see "Australia Announces Carbon Pollution Reduction Scheme" below by Kristen Read).
In the absence of federal regulation; provincial, regional and voluntary systems continued to develop in Canada and the U.S. In British Columbia, the Pacific Carbon Trust sent out a Request for Quotation, looking for off sets to meet its mandate to carbon-neutral all government operations commencing in 2010. As well, the carbon tax in B.C. will double as of July 1, 2009, leaving commentators wondering as to its political impact with the current Liberal government's falling in public support to almost even with the official opposition (see "RFQ for Pacifi c Carbon Trust and other BC Activities" below by Edyta Kowalewska).
In Alberta, the only functioning multisector greenhouse gas emissions reduction system in North America (the Regional Greenhouse Gas Initiative being limited to the electricity sector) reached the end of its second compliance period on December 31, 2008. Large Alberta GHG emitters are now faced with calculating emission reduction requirements for 2008 and satisfying their compliance obligations through internal abatement efforts and, if necessary, purchasing performance or certified off set credits or making contributions to Alberta's Climate Management and Technology Fund by March 31, 2009. An internal examination of the results from the first compliance period (July 1, 2007, to December 31, 2008) has been made and the provincial government announced a number of improvements (see "Alberta's Second Compliance Period" below by Andrew Lamb). The Alberta government also announced, as part of its energy strategy, its intention to increase the emissions intensity reduction requirement of the Alberta system and to raise the cost of compliance credits from Alberta's Climate Fund (see "Alberta Provincial Energy Strategy Synopsis" below by Duncan McPherson).
The Western Climate Initiative (WCI), a coalition of seven U.S. states including California and four Canadian provinces (B.C., Manitoba, Ontario and Quebec), took significant steps in late 2008 toward their goal of a 15 percent reduction below 2005 emission levels by 2020 by formulating an outline of their proposed cap-and-trade system and commencing public discussion relating to those proposals (see "Western Climate Initiative Update" below by Mike Barrett). Activity around the California Air Resources Board's consideration of California's greenhouse gas emission reduction arrangements continues to be a signifi cant driver in the U.S. and North American climate change world.
Activity on exchanges in North America continues to be a source of interest. The Chicago Climate Exchange (CCX) produced record volumes of trades in its own specialized GHG-related instruments, commenced trading of instruments related to Certified Emission Reductions (CERs) under the Kyoto Protocol and announced an intention to begin trading in future contracts using U.S. compliance under the yet-tobe- developed U.S. cap-and-trade GHG system as the subject matter of the future contract (see"Carbon Exchanges Update" below by Adrienne Moore).
On the voluntary market side, a new version of the Voluntary Carbon Standard (VCS) was issued in November 2008 and concrete steps have been taken to ensure sufficient validators, verifiers and registries to make the VCS an operating entity with the potential to dominate the voluntary carbon market (see "Voluntary Market Growth and Developments in Voluntary Standards" below by Hugo Alves). The Canadian Standards Association's registries (CleanProjects and CleanStart) achieved new levels of maturity with the CleanProjects registry being adopted by Alberta as the official registry for off set credits usable in the Alberta system.
A continued focus on disclosure requests to satisfy investors in public companies was evident in the last quarter of 2008. The settlement by the Attorney-General of New York with Xcel Energy Inc. and Dynegy Inc. involving improved disclosure strengthened concern on the regulatory side of this issue. The Canadian Institute of Chartered Accountants published its guidance on climate disclosure included in the Management's Discussion and Analysis (MD&A) portion of Annual Information Forms (AIFs) while ASTM, a leading standards development organization, moved to vote on putting a standard entitled "Guide for Financial Disclosures Attributed to Climate Change" in place (see "Climate Change Disclosure Update" below by Frank Allen).
All of the foregoing played out against the background of the global economic crisis. Whether the economic situation will facilitate the development of schemes designed to mitigate climate change risks and adapt to climate changes through the growth of a green economy or will delay the same as a cost to be avoided is in some ways the fundamental climate change question for 2009. Watch for our further updates as the year unfolds.
Elections and Economy Infl uence North American GHG
The October 2008 re-election of the federal minority Conservative government appeared, at the time, to be another step toward implementing the Conservative's proposed GHG emission reduction plan - Turning the Corner: An Action Plan to Reduce Greenhouse Gases and Air Pollution, during 2009 with the initial compliance period expected to begin January 1, 2010. However, within weeks of the Canadian election, the U.S. picked Senator Barack Obama as its next president. President Obama's position on climate change represents a sea change in official U.S. views.
An early indicator of the President's expected course of action are his choices to fill offices highly influential of U.S. climate change policy. Mr. Steven Chu has been chosen to run the Department of Energy. Mr. John Holdren has been picked to be the President's Science Advisor. Ms. Jane Lubchenco has been chosen to lead the National Oceanic and Atmospheric Administration and President Obama created a new office - Energy Coordinator and pick Carol Browner, former head of the EPA to hold the office. All four picks have strongly and repeatedly argued for mandatory limits of GHG emissions. Immediately following the U.S. election, representatives of the minority Conservative federal government, including the Prime Minister, were reaching out to the President to off er to work with his administration on a North American climate change pact. It would appear that any proposed North American integrated GHG reduction regime will have to account for Canadian oil sands deposits in some manner. While some elements in the U.S. view oil extracted from oil sands deposits as "dirty oil" due to the heightened GHG emissions from its production, the close proximity and relative security of the oil sands presents the U.S. a means to achieve greater energy security. The proposal from the Canadian government to President Obama includes a request for special treatment for oil sands products entering the U.S. If the current intention of the Conservative government is to wait for U.S legislative efforts to be outlined in some detail, it would appear an initial compliance period beginning January 1, 2010, for Turning the Corner is very unlikely.
There is also the possibility that the entire Canadian effort might be abandoned to facilitate the coordination of Canada's GHG reduction regime with a Unites States' proposed fixed cap regime. The Canadian government's recent efforts to dovetail its current plans with proposed U.S. legislative efforts raises many questions, not the least of which is whether a regulatory regime built on emissions intensity reductions can work with a fixed cap regime.
Another major influencer on the Conservative's GHG reduction plans is, of course, the current economic climate. The 2008 financial crisis and accompanying global economy contraction has caused many to take a hard look at the costs of implementing comprehensive GHG reduction regimes, and Canada is certainly no exception. In the weeks following the U.S. election and in the midst of a worsening economic environment, Canada's Environment Minster stated at the Bennett Jones LLP Lake Louise World Cup Business Forum in November 2008, "We will not – and let me be clear on this – we will not aggravate an already weakening economy in the name of environmental progress."
EPA Issues Regulatory Regime Advanced Notice
Hilary Robert Stedwill
In the summer of 2008, the U.S. Environmental Protection Agency (EPA) invited everyone to comment on the first example of how the U.S. may regulate greenhouse gas emissions. The EPA argued before the U.S. Supreme Court last year in Massachusetts v. EPA that the EPA was not authorized to regulate greenhouse gas emissions under the Clean Air Act (CAA). The EPA lost. Strictly speaking, the Supreme Court did not order the EPA to regulate greenhouse gases under the CAA. Nevertheless, the EPA issued the Advanced Notice of Proposed Rulemaking: Regulating Greenhouse Gas Emissions Under the Clean Air Act (ANPR) (United States Federal Register, (30 July, 2008) Volume 73, No. 147 at 44354).
The ANPR describes a regulatory regime that, if implemented, would regulate aspects of nearly every sector of the American economy. The ANPR along with its technical support documents is thousands of pages in length. The ANPR describes how the EPA would regulate the large emitters (e.g. electricity generators, cement kilns) as expected, but also some activities one would not necessarily expect in greenhouse gas emission regulations, such as the design of aircraft and management of air traffic (ordinarily the responsibility of the Federal Aviation Administration), and smaller machinery such as lawn mowers and forklifts. The bulk of these proposed rules would place energy efficiency improvements ahead of other public or private goals.
The ANPR is largely silent about its effects on other countries, including Canada (mentioned only twice and then with the EU, in the course of contrasting regulatory approaches of other jurisdictions). This is not surprising given that the CAA was designed largely for domestic application (in Massachusetts, this was one of EPA's arguments against using the CAA for regulating greenhouse gas emissions). The ANPR mentions some international concerns. In particular, the EPA and many other U.S. government departments seem especially concerned with "leakage", that is, companies choosing locations for greenhouse gas emitting facilities in countries with less strict (or no) greenhouse gas emission limits.
Bennett Jones is advising the Canadian Business Cross-Border Climate Advisory Group Inc. (CBCB), which is assisting certain Canadian companies and an industry association to stay on top of ANPR developments and be stakeholders in the ANPR comment and discussion process. Roger Martella, former general counsel to the EPA and now a Washington- based partner at Sidley Austin LLP, is advising the CBCB about the American aspects and strategies for engaging the EPA. The EPA sought commentary and input broadly from the public and invited comments on the ANPR until November 28, 2008. The CBCB submitted a comment letter on behalf of its clients.
The ANPR is likely the leading edge of greenhouse gas emission regulation in the U.S., with the pace likely to accelerate now that President Obama is in office. Some speculate that regulations for greenhouse gas emissions under the CAA are unlikely but the process commenced by the ANPR may be difficult to stop or even slow until the new administration and Congress are able to put alternative legislation in place. Moreover, much of the work done considering the ANPR will likely work its way into whatever regulatory scheme the U.S. ultimately adopts as it seems unlikely that the U.S. will continue without a federal GHG regulatory framework much longer.
Fourth Meeting of the Parties to the Kyoto
The Fourth Meeting of the Parties to the Kyoto Protocol (COP 14/CMP4) took place in Poznan, Poland on December 1-12, 2008, and marks the halfway point of the United Nations process to reach a post-2012 climate change agreement, which began in Bali at the end of 2007 and will end in Copenhagen in December 2009.
As it has evolved, the UNFCCC negotiating process has gotten more complex. The critical negotiating groups under the UNFCCC process are the so-called Ad Hoc Working Groups – particularly the Ad Hoc Working Group on Further Commitment for Annex 1 Parties under the Kyoto Protocol (AWG KP) whose mandate is to find acceptable new commitments for Annex I Parties under the Kyoto Protocol for the post- 2012 period; and the Ad Hoc Working Group for Long Term Cooperative Action, whose mandate is to produce an agreement in 2009 in Copenhagen in order to enhance implementation of the current UNFCCC, aiming to incentivize non-Kyoto developed countries and advanced developing countries to take further action.
The meeting in Poznan was a tactical meeting where some progress was made, however, there were some disappointments, including the fact that there was no progress in securing commitments of parties under the AWG KP for Kyoto post-2012, the scuttling of an important agreement to reform CDM governance, and the fact that no progress was reached on including carbon capture and storage in the CDM. It must be remembered that this is a complex negotiating process and no party (with the exception of the European Union's 20 percent by 2020, or 30 percent if there is an international agreement) is ready to put anything on the table until the new U.S. Administration starts signaling its stand.
UK Passes New Climate Change Law
On November 26, 2008, the United Kingdom passed the Climate Change Act 2008 into law. The Climate Change Act commits the United Kingdom to at least a 26 percent reduction in domestic GHG emissions from 1990 levels during the 2018 to 2022 period and at least an 80 percent reduction by 2050. Under the new law, domestic fixed caps for each of the 2008-2012, 2013-2017 and 2018-2022 periods must be established by June 1, 2009. The new law also mandates the creation of a new, independent, expert body, the Committee on Climate Change, to advise the United Kingdom government on the specific features a domestic carbon regime should include. A key issue to be considered by the Committee on Climate Change is the extent to which credits from non-United Kingdom jurisdictions will be available to domestic regulated entities to meet domestic compliance requirements.
Australia announces Carbon Pollution Reduction
Kristen L. Read
The Australian government released a White Paper on December 15, 2008. The paper outlines the final design of the Carbon Pollution Reduction Scheme (Scheme), and follows the Green Paper, released in July 2008, which discussed options on the design of the scheme. The White Paper sets out: (1) a medium-term target range for national emissions; (2) the final design of the scheme; and (3) a range of complementary and supporting measures for households and industry. Although the White Paper provides additional guidance related to the proposed scheme, draft legislation, to be released in early 2009, will provide clearer guidelines and compliment the White Paper.
The Australian government has decided on a medium-term target range to reduce emissions by between five and 15 percent below 2000 levels by 2020; a five percent reduction is unconditional but a greater reduction of up to 15 percent is to occur only if major economies commit to substantially restrain emissions and advanced economies take on reductions comparable to Australia.
The Carbon Pollution Reduction Scheme employs a cap-and-trade emissions trading mechanism to limit greenhouse gas emissions. The cap sets a limit on the aggregate annual emissions from all the covered types and sources of emissions. The scheme will cover around 75 percent of Australia's emissions and involve mandatory obligations for approximately 1,000 entities. The Scheme will cover all six greenhouse gases that are covered under the Kyoto Protocol and will have broad sectoral coverage. However, the Scheme will not initially cover emissions from agriculture and the Australian government does not propose to include deforestation in it. Off set credits could potentially be created by those sectors not covered by the Scheme.
The number of tradable carbon pollution permits will be equal to the Scheme cap. If the cap were to limit emissions to 100 million tonnes of carbon dioxide equivalent in a particular year, 100 million emissions permits would be issued for that year. Carbon pollution permits will be created as personal property and the legislation implementing the Scheme will not provide any power to extinguish these permits without compensation (except in the case of misrepresentation or fraud). To ensure appropriate regulatory oversight is provided, the Australian Securities and Investments Commission will be given the necessary legal power to investigate and prosecute market manipulation in the carbon market with both carbon pollution permits and Kyoto Protocol units being designated as financial products for this purpose. The price of carbon will be determined by the balance of supply and demand for permits, subject to a price cap of AUS$40 per tonne for the first five years, increasing by fi ve percent per annum.
In regard to household and business assistance, amounts raised by the government under the Scheme will be used to help households and businesses adjust to the Scheme and to invest in clean energy options. The Australian government will provide assistance to income support recipients, seniors, low- and middle-income families, emissions-intensive, trade-exposed industries including some coal-fired electricity generators. The Climate Change Action Fund will be established to: (1) provide information to businesses and community service organizations; (2) make rebates for low-emission investments; (3) structural adjustment assistance for disproportionately affected workers and communities; and (4) provide assistance for coal mines with high fugitive emissions.
On a going forward basis, the Government will create an Australian Climate Change Regulatory Authority, which would make independent decisions based on rules set in legislation. Such draft legislation is to be released early 2009, which will then be introduced to Parliament in May 2009. Following successful passage of the legislation, the Carbon Pollution Reduction Scheme is expected to start on July 1, 2010.
Additionally, a December 23, 2008, press release stated that Australia's Kyoto-compliant emission trading registry is online and linked to the United Nations International Transactions Log, thereby meeting an important Kyoto milestone. crisis turns around.
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