Canada: A Bold Step Forward: What The Draft U.S. Clean Energy And Security Act Of 2009 Means For Canadian Industry

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Energy/Environmental Law/CleanTech, April 2009


Since the Obama administration has come into office, the energy and climate change files have remained top priorities despite the economic crisis. This is clear from President Obama's address to the Joint Session of Congress on February 24, 2009: "It begins with energy. We know the country that harnesses the power of clean, renewable energy will lead the 21st century ... to truly transform our economy, protect our security, and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy."

The United States took a bold step forward in the energy and climate discourse with the introduction on March 31, 2009 of the draft American Clean Energy and Security Act of 2009, also known as the Waxman-Markey bill. The 648-page draft bill requires U.S. greenhouse gas (GHG) emissions to be reduced 20% from 2005 levels by 2020, which is more ambitious than President Obama's call for a 14% reduction of GHG emissions by 2020. By 2050, the draft bill requires GHG emissions to be reduced by 80% from 2005 levels. The draft legislation addresses a number of issues including renewable energy, carbon capture technologies, low-carbon transportation, smart electricity grids, energy efficiency, emissions trading and green jobs. However, it does not address the thorny issue of how to allocate emission allowances to carbon-intensive industries under a future cap-and-trade system. It is anticipated that the issue of allocating emission allowances will be addressed when the draft bill is reviewed by the Energy and Commerce Committee, which is expected to complete its review by late May 2009.

Canadian industry, as well as both federal and provincial levels of government, have been watching climate change developments in the U.S with great interest. In recent months, the federal government made overtures to the Obama administration for a North American-wide cap-and-trade system. This represents a shift in policy for the federal government, given that Canada's emissions trading system as currently envisioned is intensity-based – a cap-and-trade approach necessarily means stricter targets. While the federal government and Obama administration have agreed to work together on developing clean energy technology, the Americans have shown little interest in developing a North American cap-and-trade system. This article will highlight some of the key provisions of the draft bill and will consider the potential impact of this legislation on Canadian industry, particularly on the energy sector and other companies that export goods to the U.S.

USCAP Blueprint for Legislative Action

The Waxman-Markey bill draws heavily from recommendations contained in the Blueprint for Legislative Action (the Blueprint), which was released by the United States Climate Action Partnership (USCAP) in January 2009. Founded in 2007, USCAP represents a coalition of industry and environmental groups. USCAP members include national environmental groups and over 30 leading corporations covering a broad range of industries including manufacturing, utilities, chemical production and automakers.

The Blueprint was two years in the making and sets out a framework for developing comprehensive legislation to address climate change and to facilitate the transition to a low-carbon economy. USCAP has been calling on Congress and the Obama administration to pass a cap-and-trade bill as soon as possible.

Highlights Of The Waxman-Markey Bill

The draft bill has four titles: (i) clean energy; (ii) energy efficiency; (iii) reducing global warming pollution; and (iv) transitioning to a clean energy economy.

Title I – Clean Energy

This section is designed to promote renewable sources of energy, carbon capture and sequestration (CCS) technologies and clean transportation:

  • Renewable Energy – Retail electricity suppliers would be required to meet a certain percentage of their load with electricity from renewable sources.
  • CCS – Incentives would be provided for the wide-scale deployment of CCS technologies.
  • Clean Transportation – A new low-carbon transportation fuel standard would be established to promote clean transportation fuels and infrastructure for hybrid and electric vehicles. Under the draft bill, refineries would be required to reduce the annual life cycle emissions from their fuels to 2005 levels between 2014 and 2022, and then reduce them by at least another 5% between 2023 and 2030. Beyond 2030, at least another 10% reduction would be required. A related provision would authorize financial assistance for car companies to retool their plants to build electric vehicles.

In addition, the draft legislation provides for the development of a smart grid and directs the Federal Energy Regulatory Commission (FERC) to provide for new transmission infrastructure to support electricity from renewable sources.

Title II – Energy Efficiency

This section is aimed at increasing energy efficiency across all sectors of the economy including industry, buildings, transportation and appliances:

  • Buildings – Funding for retrofitting existing residential and commercial buildings would be authorized.
  • Transportation Efficiency – The draft legislation calls for the harmonization of transportation standards and directs the EPA to set emissions standards for other mobile sources of pollution including locomotives and marine vessels.
  • Industrial Energy Efficiency – The Secretary of Energy would be required to establish standards for industrial energy efficiency. In addition, the draft bill would create a program to award innovation for increasing the efficiency of thermal electric generation processes.

Title III – Reducing Global Warming Pollution

This section amends the U.S. Clean Air Act and places limits on GHG emissions. The provisions under this section are based largely on USCAP's recommendations as set out in the Blueprint:

  • Global Warming Pollution Reduction Program – The draft bill proposes a market-based program for reducing GHG emissions from electric utilities, oil companies, large industrial sources and other regulated entities that are collectively responsible for 85% of GHG emissions in the U.S. Entities emitting more than 25,000 tons of carbon dioxide equivalent per year would be covered and those entities would be required to have tradable federal allowances for each ton of pollution emitted into the atmosphere. The proposed program reduces the number of allowances issued each year to ensure that aggregate emissions from regulated entities are reduced by 3% below 2005 levels in 2012, 20% below 2005 levels in 2020, 42% below 2005 levels in 2030 and 83% below 2005 levels in 2050.
  • Offsets – Regulated entities would be allowed to increase emissions above their allowances if they could obtain "offsets" at lower cost from other sources. The total quantity of offsets allowed in any year could not exceed two billion tons, split evenly between domestic and international offsets. Any regulated entities using offsets would be required to submit five tons of offset credits for every four tons of emissions being offset.

In addition, the draft legislation provides for unlimited banking of allowances for use during future compliance years and the establishment of a "strategic reserve" of approximately 2.5 billion allowances that will effectively create a cushion in case prices rise faster than expected. FERC would be responsible for regulating the cash market in emission allowances and offsets, while the regulation of the derivatives market would be delegated to an appropriate agency.

Title IV– Transitioning to a Clean Energy Economy

This section is designed to protect U.S. consumers and industry, while promoting "green" jobs during the transition to a clean energy economy:

  • Domestic Competitiveness – To ensure that U.S. manufacturers are not put at a disadvantage relative to overseas competitors, certain industrial sectors (i.e., energy-intensive sectors that produce commodities for global consumption) would be eligible for rebates to compensate for additional costs incurred under the Global Warming Pollution Reduction Program. If the rebate provisions are not sufficient to correct any competitive imbalances, a "border adjustment" program could be established that would require foreign manufacturers and importers to pay for special allowances to account for the carbon contained in U.S.-bound products.
  • Export of Clean Technology – The draft legislation contains provisions that will enable the U.S. to deploy clean technologies to developing countries that have ratified an international treaty and undertaken mitigation activities to achieve substantial GHG reductions.

Assessing the Potential Impacts on Canadian Industry

With the interests of so many industries at stake, there is no doubt that the stage is now set for an intense debate over the allocation of responsibility and costs for GHG reductions. This debate has potentially significant consequences for Canadian industry, particularly for those in the energy and manufacturing sectors. However, this legislation also represents potential opportunities for Canadian companies. These potential impacts can be described as follows:

  • restrictions on the type of fuels that can be exported the U.S. as a result of the low-carbon fuel standard;
  • additional costs to Canadian manufacturers and exporters as a consequence of the "rebate" and "border adjustment" provisions; and
  • potential opportunities for Canadian companies to export clean power clean technologies to the U.S.

According to the U.S. Department of Energy, Canada is a top exporter of petroleum products to the U.S. (in January 2009, Canada was cited as the largest exporter of petroleum to the U.S., having exported 2.544 million barrels per day to the U.S.). The low-carbon fuel standard in the draft bill is modelled after California's proposed low-carbon fuel standard, which takes into consideration the entire GHG life cycle of fuel. The notion of a GHG life cycle for fuel stands to have repercussions in Canada, particularly for fuel derived from the Alberta oil sands. This is because oil produced from oil sands emits between three and five times more GHGs than oil produced by conventional means. While the low-carbon fuel standard does not prohibit fuel from derived from the oil sands, it does act as a disincentive.

The "rebate" and "border adjustment" provisions in the draft bill to keep U.S. companies competitive will likely cause controversy by creating additional costs for Canadian manufacturers and exporters. Indeed, these measures may be seen as protectionist in nature. As companies look for ways to remain competitive, Canadian businesses will increasingly need to consider the carbon footprint of their products and services, particularly if they do business in the U.S.

The draft bill contains a number of measures to promote renewable energy and energy efficiency. This will create potential opportunities for Canadian companies to export electricity generated by renewable sources to the U.S. Canada is a major supplier of electricity to the U.S. and the two countries are becoming increasingly interconnected. For example, the Montana-Alberta Tie Line (MATL) is expected to come into service in mid-2010 and will connect the electricity markets of Alberta and Montana. MATL will support the development of wind energy in Alberta and Montana by providing additional transmission capacity for wind projects. Furthermore, Canadian companies with innovative technologies aimed at energy efficiency and clean transportation will have potentially significant opportunities to market their technologies to willing customers south of the border. Finally, the proposed cap-and-trade system will create opportunities for Canadian project proponents to generate offsets for sale to regulated entities that need to comply with emission reduction obligations.

Meeting the Global Climate Challenge

President Obama has asked Congress to pass energy and climate change legislation before the end of 2009. The proposed cap-and-trade program plays a key role in the Obama administration's long-term deficit reduction goals as the program is anticipated to raise US$650-billion over the next 10 years through the sale of emission allowances. There is also pressure on the U.S. to pass climate change legislation before the next major international climate change conference scheduled to take place in Copenhagen in December 2009. Without the backing of Congress, it will be difficult for President Obama to sign a new international climate treaty to replace the Kyoto Protocol (which expires in 2012).

Certain issues could derail the draft bill's progress through Congress. One is the need for the Obama administration to focus on the economy in the near-term. This focus will likely overshadow climate change until 2010, meaning that Congress will not be interested in working out the finer details of a cap-and-trade system until the economy starts to recover. Also, there is concern that the targets are too low and that the legislation should aim for emission reductions of 80% below 1990 levels by 2050, as called for by the Intergovernmental Panel on Climate Change. Finally, the mechanism for allocating emission allowances under a cap-and-trade system will no doubt be intensely debated by various stakeholders. However, the agenda for energy and climate change issues continues to move forward and the Waxman-Markey bill is a sign of things to come. Stay tuned for more developments.

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.

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