On May 4, 2007 Working Group III (WG3) of the United Nations’ Intergovernmental Panel on Climate Change (IPCC) released its report, entitled Mitigation of Climate Change (Mitigation Report). This Update addresses the Mitigation Report and discusses its recommendations in the context of recent Canadian climate change policy initiatives.

IPCC Mitigation Report

The Mitigation Report is the WG3 contribution to the Fourth Assessment Report by the IPCC (the Third Assessment Report of the Intergovernmental Panel on Climate Change was published in 2001). The Mitigation Report is a product of a three-year process that focussed on new literature regarding the scientific, technological, environmental, economic and social aspects of mitigation of climate change. The IPCC was established by the World Meteorological Organization (WMO) and the United Nations Environment Programme in 1988. Open to all members of the WMO and the UN, the IPCC assess the risks, impacts and options for adaptation and mitigation of human-induced climate change primarily through peer-reviewed and published scientific and technical literature.

Two other well-publicised elements of the Fourth Assessment Report were released earlier in the year, including “Impacts, Adaptation and Vulnerability” and “The Physical Science Basis ”. The Impacts Report considered the ability of natural and human systems to adapt to climate change (e.g., ecosystems, food, industry and health). It did so based on the scientific conclusions of the Physical Science Report, which provided the IPCC’s strongest statements yet that climate change is occurring citing changes such as reduced ice and snow cover and changes in water temperature and flow quantities.

The Mitigation Report, which was approved line-by-line by all 180 IPCC member governments, is divided into six sections:

  • greenhouse gas (GHG) emission trends;
  • mitigation efforts across different economic sectors until 2030;
  • long-term mitigation efforts, beyond 2030;
  • policies and measures to mitigate climate change;
  • sustainable development and climate change mitigation; and
  • gaps in knowledge.

In the conclusions to the Mitigation Report, the authors noted that:

  • GHG emissions have grown significantly since pre-industrial times, with an increase of 70% taking place between 1970 and 2004;
  • Global GHG emissions will continue to grow over at least the next few decades;
  • There is substantial economic potential for the mitigation of global GHG emissions, which could offset the projected growth of global emissions or reduce emissions below current levels; and
  • “Worst case” projections predict that the growth in GHGs can be reduced at a cost equal to as much as 3% of global GDP; however, “best case” projections predict a small increase in GDP as a result of mitigation efforts. (Perhaps unsurprisingly, the majority of the predictions conclude that a reduction of GDP relative to the GDP baseline increases with the stringency of the stabilization target.)

The Mitigation Report touches on all aspects of the economy, including energy supply, transport, industry, agriculture, forestry and waste, and points to the building sector as a major potential driver of emissions reduction. The Mitigation Report lists a number of measures to reduce GHG emissions, including investments in renewable energy, reducing deforestation and improving energy efficiency. It is noteworthy that nuclear power (despite safety and proliferation concerns) and carbon capture and sequestration are viewed as critically important, while scant hope is held out for major reductions of GHG emissions in the transport sector.

The Mitigation Report also highlights that an essential incentive to reducing emissions would be achieved by placing a price or tax on carbon. In this regard, the following review of Canadian and international initiatives in respect of emissions trading may prove useful.

Intensity-based Systems: Canada and Alberta

The federal government recently released a technical paper, “Turning the Corner,” pursuant to its Notice of Intent to Develop and Implement Regulations and Other Measures to Reduce Air Emissions of October 19, 2006, which described a suite of emissions regulations, many of which will be implemented pursuant to the Canadian Environmental Protection Act, 1999. These regulations will target greenhouse gas as well as industrial emissions (e.g., sulphur dioxide and nitrous oxide). Facilities will be required to reduce their “emissions intensity” (emissions output per base economic unit of production) or face compliance measures. Environment Minister John Baird recently indicated to the press that the emissions exceedance penalty will be between $100 and $200 per tonne of GHG gas. The scheme aims to create an emissions trading regime by allowing the purchase of offsets and credits from emitters, although in the initial years, emitters may instead pay into a technology fund at a rate of $18/tonne of GHG.

Like the federal scheme, Alberta is putting in place an emissions intensity based reduction program. As currently envisaged in the Alberta regime (the previously circulated draft regulations have not yet been implemented), large final emitters will also be permitted to pay into a technology fund in lieu of actually reducing emissions, but at a price of $15/tonne of carbon dioxide equivalent gases (CO2e) emitted in excess of the facility’s baseline emissions intensity. The original exceedance penalty in the first draft of the regulations was $200/tonne of CO2e gas. Osler Updates of March 12 and April 30, 2007 provide detailed overviews of the new Alberta and federal schemes, respectively.

Presently, it is unclear if and how the two regimes will be harmonized. Both regimes have been criticized by environmental groups for implementing intensity-based reductions as opposed to absolute reductions. With intensity-based reductions, absolute emissions could continue to grow if the underlying production sufficiently increases. What seems to have been ignored is that if there is a reduction in production (due to a recession, for example), intensity-based reductions could be more stringent than absolute reductions.

As recommended in the IPCC report, both the federal and Alberta governments are considering the construction of nuclear power plants in Alberta and support the development of an extensive, multi-sector carbon capture and sequestration project. The federal government announced $156 million of direct funding for the latter on March 8, 2007, and each government has identified such a project as a potential target for their respective climate change technology funds.

Cap-and-Trade Systems: Ontario Proposal, the US RGGI and the EU Market

At the Council of the Federation of Provincial Premiers in May 2007, the Premier of Ontario proposed preliminary discussions amongst the provinces to institute an inter-provincial cap-and-trade emissions trading scheme (Ontario Proposal). Working committees within the Council of the Federation have been collecting data and presenting draft papers on climate change, energy transmission and efficiency and renewable energy. While the Ontario-proposed inter-provincial trading scheme – few details of which have been made public – would work alongside the recently announced federal program, it has received a mixed response. British Columbia and Québec have expressed support, but most others have been non-committal. Alberta, which has already enacted but not implemented its own Climate Change and Emissions Management Act, rejected the Ontario Proposal outright, citing the need to direct offset dollars only to within the province.

Ontario has also suggested that it will join the Regional Greenhouse Gas Initiative (RGGI), which is comprised of ten North-eastern U.S. states - involved in a state level cap-and-trade carbon dioxide emissions program. Presently the Eastern Canadian Premiers Secretariat and the Province of New Brunswick are participating as observers. Launched in January 2007, the first step in the RGGI market-based emissions trading process will be to implement a regional plan to reduce carbon dioxide emissions solely from power plants by way of a cap-and-trade system. If successful, the program will be expanded to include other emitters.

Regional emitters would be subject to emissions targets determined based on the total emissions cap targeted for the region. Emitters would be required to meet their targets through operational investments or by purchasing surplus permits from other emitters. Failure to meet targets would result in hefty fines. In 2006, the RGGI published a model rule to solicit comments from the public, which has since been extensively revised. The model rule will form the basis for the implementation of the cap-and-trade program by the individual states.

The proposed system is broadly similar to the present European Union trading system, in which each member state receives a total “allowance” of CO2e gases and then divides that target by assigning each subject emitter an individual allowance.

Other Jurisdictions: British Columbia, the WRCAI and Québec

On February 27, 2007 British Columbia released its Energy Plan, targeting energy self-sufficiency, a reduction of greenhouse gas emissions and improved energy conservation by providing incentives and setting targets in 55 areas. Of note are a target of no net greenhouse gas emissions for electricity generation and the elimination of all oil and gas industry flaring, both by 2016, as well as targeting biomass-generated electricity. The province will also undertake an ambitious program of improving energy efficiency standards. The collective goal of the various initiatives is to reduce greenhouse gas emissions to 10% below 1990 levels by 2020, which represents a reduction of 33% from present rates.

On April 24, 2007 British Columbia announced that it had joined the Western Regional Climate Action Initiative (WRCAI). Comprised of five U.S. states, the purpose of the WRCAI is to develop and evaluate collaborative methods to reduce greenhouse gas emissions within member states and to achieve related benefits, with a particular focus on a common market-based mechanism to achieve a regional emissions goal and an inter-jurisdictional cross-border greenhouse gas registry. The preliminary deadline for establishing the WRCAI’s emissions goal is August 2007, with the emissions trading mechanism design to be announced by August 2008.

Additionally, on May 8, 2007 31 U.S. states announced the formation of the Climate Registry, which will measure, verify and publicly report greenhouse gas emissions across borders and industries. The formation of the Climate Registry is said to represent a necessary first step in developing GHG emission reduction programs. The Registry will use internationally recognized measurement. British Columbia and Manitoba have both indicated that they will participate in the Climate Registry.

In 2006, Québec announced a 2006-2012 Action Plan against climate change. With the objective of meeting its Kyoto Protocol targets, the Québec government proposes to focus on reducing emissions in the transportation and building sectors. The target proposed for 2012 is to reduce GHG emissions to 1.5% under 1993 levels. Québec’s action plan includes:

  • heavy investments in renewable energy and energy efficiency;
  • changes to building codes;
  • investments in public transit;
  • extensive energy efficiency measures in the transport sector; and
  • a range of incentives and disincentives in industrial sectors and in agriculture.

The government of Québec is actively considering its options with respect to emissions trading, which may include joining the RGGI (as described above) or a Canadian federal or inter-provincial scheme, should one emerge. Under the federal Canada ecoTrust for Clean Air and Climate Change initiative, which provides funding to provincial governments to implement climate change plans, Québec has received $350 million to help implement its action plan.

Conclusion 

Carbon credit trading seems likely to be a necessary compliance tool for industry operating in major North American jurisdictions if GHG reduction systems are implemented. Furthermore, nascent market mechanisms may provide business opportunities for early movers in the field. However compliance will be achieved, industry should be provided with adequate lead time to take the necessary actions to achieve compliance. Osler has significant experience in all regulatory and transactional aspects of the clean air and emissions trading regimes in Canada. For specific questions related to your business, please contact either of the Co-Chairs of the Environmental Law Group -- Shawn Denstedt in Calgary and Dan Kirby in Toronto.