Canada moves forward on domestic emissions trading market

March 24, 2008

On March 10, 2008, the Government of Canada released much anticipated details of its Regulatory Framework for Industrial Greenhouse Gas Emissions, part of its Turning the Corner climate change plan first announced in April 2007. The framework document and accompanying policy documents (the Framework) set out mandatory intensity-based (i.e., per unit of production) reduction targets, details of certain compliance mechanisms, and new measures to address Canada's leading industrial greenhouse gas (GHG) emitting sectors: electricity and oil and gas. A significant aspect of the Government's announcement is its emphasis on carbon capture and storage (CCS) technology as a key solution to reduce emissions - not surprising in light of the $250 million for CCS announced in the Government's February Budget Plan.

Under the Framework, the Government intends to establish a market price for carbon and set up a compliance-based emissions trading market. Sixteen major industrial sectors would be required to reduce their emissions intensity by 18% from 2006 levels by 2010, with 2% continuous improvement in each subsequent year. The Government says it will reduce Canada's GHG emissions by 20% (approximately 165 megatonnes (Mt)) from 2006 levels by 2020. These targets will not make Canada compliant with its obligations under the Kyoto Protocol.

The Government plans to transition from an emission-intensity based target system to a fixed emissions cap system in the 2020-2025 period. It has indicated that in determining the level of the cap, particular consideration will be given to climate change-related regulatory developments in the U.S., with the aim of establishing a North America-wide emissions trading system.

In addition to emissions trading between regulated companies, the Framework also elaborates on some of the voluntary reduction compliance mechanisms available to meet the targets. These include:

  • Domestic offset system: credits would be issued for incremental, real, verified domestic reductions or removals of GHG emissions. Functional details of the system, including verification of reductions and issuance and use of offset credits, are set out in the Framework. The Government has also indicated that consideration would be given to reductions originating in the U.S. once the U.S. has a regulatory system in place and compliance-based cross-border emissions trading is feasible.
  • Credit for Early Action Program: companies that took verified early action to reduce emissions would be eligible for a one-time allocation of 15 Mt in bankable, tradable credits. In addition, firms with eligible reductions above that amount would be allocated credits based on each firm's proportional contribution to the total emission reduction achieved. To qualify, reductions must have been the result of an incremental process change or facility improvement (i.e., they cannot have been the result of business as usual conditions).
  • Technology Fund: companies would be able to contribute to a fund that would invest in a range of clean technology development projects in exchange for credits that could initially be used to comply with up to 70% of their regulatory obligations. This contribution rate would decline through 2018, at which time this mechanism would be phased out and replaced by other measures, including internal abatement actions and carbon trading. Contributions to other funds that meet the necessary requirements could potentially also be recognized under this compliance mechanism (e.g., provincial funds).

Additions to the April 2007 framework include:

  • Pre-certified Investments: companies would also have the compliance option of investing directly in pre-certified large-scale projects (e.g., CCS projects). As an added incentive for participation, firms in the oil sands, electricity, chemicals, fertilizers and petroleum refining sectors could be credited for their investments up to 100% of their regulatory obligation through 2018 (in contrast to the limited, declining contribution limit under the Technology Fund mechanism).
  • Oil sands upgraders, in-situ plants (i.e., on-site soil remediation facilities) and coal-fired electricity plants that come into operation in 2012 or later would be obliged to comply with targets described as "tough" by the Government, which will provide incentive for facilities to be built carbon-capture ready. These targets are expected to generate an additional 30 Mt in reductions in 2020.
  • The electricity sector, Canada's top emitting industrial sector, would face an 18% reduction target at the facility level and a task force will be established to work with the provinces and industry to explore ways to meet an additional 25-30 Mt reduction goal from the electricity sector by 2020.

The Government calls the Framework "one of the toughest regulatory regimes in the world to cut GHG emissions", but reaction has been mixed. Certain affected industries expressed cautious approval of the Framework, while federal opposition parties and environmental groups were critical of its use of intensity-based targets (rather than absolute reductions) and its emphasis on CCS technology rather than energy efficiency, or more proven technologies. Ontario and Quebec expressed disappointment over the lack of recognition for companies that have taken early measures to cut emissions. Further, some said that provincial green plans and provincially-driven efforts to establish an inter-provincial cap-and-trade system (perhaps linked with the U.S.) would have a more immediate impact than the Framework.

Business and environmental groups alike have repeatedly called for a uniform approach to carbon regulation in Canada. Industry has expressed concern that the growing regulatory patchwork of federal and provincial schemes, if not harmonized, will result in increased costs, confusion, and decreased investment. While British Columbia, Quebec and Alberta already have regulatory schemes in place, the draft federal GHG regulations are expected in fall 2008. The final federal regulations are expected to be released in fall 2009, with the GHG provisions of the regulations coming into force on January 1, 2010. However, experts predict that the new U.S. administration will establish a national cap-and-trade system and that Canada will be forced to follow suit. Accordingly, while the Government is moving forward with its plans, the state of carbon regulation in Canada remains in flux.

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