Climate change remains among the most topical issues in Canada and has now become one of the country’s main sources of political debate. In the 2008 federal election, a revenue-neutral carbon tax was central to the Liberal Party’s platform, while the Conservative Party, which was re-elected as a minority government (with a greater number of seats than previously held), advocated the continued development of its intensitybased cap-and-trade regime, scheduled to come into force in 2010. Animating this debate were calls by citizens, businesses, litigants and institutional investors, urging government to take action to mitigate and adapt to the effects of global warming. This article summarizes the rapidly developing body of Canadian climate change regulation, with a particular focus on current trends.
Current Regulatory Climate
Federal Government Proposal
The recently re-elected Conservative federal government continues to characterize the economic consequences of complying with Canada’s binding greenhouse gas (GHG) reduction target under the Kyoto Protocol as potentially disastrous. It instead advocates flexible, domestic and long-term goals for emissions reduction.
To facilitate an alternative, in the spring of 2007, the Conservative government proposed a plan for controlling industrial GHG emissions that would include sector-specific regulations made under Canada’s federal omnibus environmental statute, the Canadian Environmental Protection Act, 1999.Titled the “Regulatory Framework for Air Emissions” (the Framework), the plan promises to reduce Canada’s total GHG emissions by 20 per cent below 2006 levels by 2020, a significantly less aggressive target than the country’s Kyoto commitment of six per cent below 1990 levels between 2008 and 2012. In the longer term, the government has proposed unspecified intensity-based targets between 2020 and 2025, followed by an absolute cap of between 45 and 65 per cent of 2003 emissions by 2050.
In the spring of 2008, the government released its plan, Turning the Corner, which adds further detail to the Framework, elaborating in particular on previous descriptions of the way baseline emissions intensities for regulated facilities would be calculated; how the government would calculate the initial intensity-reduction targets for certain “new” facilities; and how regulated facilities could use certain compliance mechanisms to meet their emissions-intensity-reduction targets.
The government has indicated that draft regulations will be out for comment in the first quarter of 2009, and final regulations are expected to come into force in January 2010.The key features of the Framework include the following:
- Regulated Emitters. Facilities in the major industrial sectors would be required to meet published GHG emissions reduction targets, provided that their emissions exceed certain thresholds.
- Regulated Emissions. The Framework would require reductions in the six GHGs identified in the Kyoto Protocol. It would not require facilities to reduce fixed-process emissions — that is, emissions from a process such as calcination in lime production that produces an amount of GHGs that cannot be reduced by known techniques or technology.
- Emissions-Intensity Targets. The targets would be based on intensity (or reductions per unit of production) rather than absolute reductions, potentially allowing an increase in GHG emissions if production also increases. Facilities in regulated sectors with a first year of operation in 2003 or earlier would be required to reduce emissions intensity on average by 18 per cent of 2006 levels by 2010, and by an additional two per cent in every subsequent year until 2020. Depending on the sector, the regulated facility’s 2006 baseline emissions intensity would be calculated (1) on a facility-by-facility basis; (2) on a sectorby- sector basis ; or (3) on a company-by-company basis.
- New Facilities. Facilities that began operation after 2003 and existing facilities that underwent a major expansion or transformation would not be required to reduce emissions in the first three years of operation, transformation or expansion; after that time, most of these facilities would be required to meet relatively stringent initial emissions-intensity targets based on sector-specific “cleaner fuel” standards, such as natural gas combined cycle technology for gas-fired generation facilities. In some cases, new facilities that are built ready for carbon capture and storage would have targets based on the facility-specific emissions intensity rather than on a cleaner fuel standard. Following these initial targets, new facilities would also have to make annual reductions of two per cent until 2020.
- Technology Fund and Pre-certified Investments. Until 2018, regulated emitters would be able to get credit for a percentage of the required reductions by contributing to a technology fund at the rate of C$15 per tonne of excess carbon dioxide equivalent (CO2e) from 2010 to 2012, rising to C$20 per tonne in 2013 and escalating annually thereafter by the growth rate of Canada’s nominal gross domestic product. The technology fund would invest primarily in technology and infrastructure projects that are likely to reduce GHG emissions. As an alternative to contributing to the Technology Fund, regulated emitters would be eligible to receive credits for investing directly in large-scale and transformative projects, including their own or joint-venture projects, that have been pre-certified by the federal government. Contributions to precertified investments could be made at the same rate as to the Technology Fund.
- Tradable Emissions Credits. The government would also issue credits to each regulated party with emissions intensity below its limits for the same year. Parties would be able to bank these credits for compliance in future years or sell them to other regulated parties, including on an emissions trading market that the federal government has indicated it will leave the private sector to establish. In that respect, the Montréal Climate Exchange, a joint venture between the Montréal Exchange and the Chicago Climate Exchange, launched trading of physically settled futures contracts with respect to Canadian CO2e units on May 30, 2008. Canadian CO2e units under the Framework that would be eligible for physical delivery would include both credits issued to regulated entities and domestic offset credits (the latter is described below).
- Domestic Offset System. Regulated emitters would also be able to purchase domestic offset credits, each representing one tonne of verified CO2e reduction or removal achieved by a project not otherwise required to do so by regulations under the Framework.To be eligible for offset credits, projects must fall into a category of activity approved by the federal government and measure their emissions reductions under a protocol developed for that activity (a quantification protocol). On August 9, 2008, Environment Canada released a draft document titled “Canada’s Offset System: Guide for Protocol Developers,” which provides guidance to those parties wishing to develop quantification protocols for offset project types.
- Early Action Credits. The Framework would allow a small one-time allocation of credits for regulated parties that previously (between 1992 and 2006) reduced emissions. Under Phase I of the Early Action Program, facilities wishing to earn early action credits were required to submit by September 1, 2008, an estimate of the total amount of reductions for which they are claiming eligibility. In Phase II, facilities that participated in Phase I will be allowed to submit a final estimate of potentially eligible emissions in order to receive an allocation of early action credits, likely in 2009.
These features reflect what the Conservative government has described as its “Made in Canada” approach to emissions reduction. The government has also, however, indicated a willingness to work across the border to explore opportunities to link a Canadian regime with any regional, state and federal emissions trading systems in the United States that become operational.
Existing Federal Regulation
Because Canada has a minority government, the three federal opposition parties can work together to have considerable influence over Parliament — if sufficient opposition members can agree on an issue, they can form a majority with the power to pass binding legislation. For example, in the last Parliament, the Opposition passed a private member’s bill called the Kyoto Protocol Implementation Act (the Implementation Act), which came into force on June 22, 2007, and which requires the federal government to take action designed to ensure that Canada meets its obligations under the Kyoto Protocol.Notably, it requires the Minister of the Environment to prepare and report on the implementation of periodic climate change plans that describe how the government will ensure that Canada reduces its emissions by six per cent below 1990 levels between 2008 and 2012.
On August 21, 2007 and May 31, 2008, the government released Climate Change Plans through Environment Canada, as required by the Implementation Act. Although these Plans highlight Canada’s compliance with various requirements under the Kyoto Protocol, such as providing financial assistance to developing countries and submitting national reports to the United Nations Framework Convention on Climate Change, it also reiterates the Conservative government’s view that achieving the country’s Kyoto targets through domestic reductions would have grave economic consequences and that purchasing international credits would not necessarily promote real, verifiable and incremental reductions to global emissions.
In a similar move, the Opposition also passed the Climate Change Accountability Act on June 4, 2008. Although it must be passed by the Senate in order to come into force, this Act purports to require Canada to reduce its GHG emissions by 25 per cent below 1990 levels by 2020 and 80 per cent below 1990 levels by 2050. It would also require the federal government to establish interim targets for every fifth year between 2015 and 2045.
Despite the apparent binding nature of these statutes, there is some question whether and how they can be enforced in the face of a sitting government with a very clear contrary policy stance. That issue came squarely before the Federal Court of Canada in the context of an application for judicial review brought by the environmental organization Friends of the Earth Canada with respect to whether the government’s first Climate Change Plan complied with the requirements of the Implementation Act. On October 20, 2008, the Court dismissed the application on the grounds that the reasonableness of the government’s response to its Kyoto obligations was not a justiciable issue. Even if it found otherwise, the Court concluded that it would decline to make an order, as “such an order would be so devoid of meaningful content and the nature of any response to it so legally intangible that the exercise would be meaningless in practical terms.”
So far the most concrete initiatives on GHG regulation have been taken by Canada’s provinces. Alberta was the first jurisdiction in North America to set regulatory limits on GHG emissions. The province’s Specified Gas Emitters Regulation came into force in July 2007, and like the federal Framework, it employs an emissions-intensity approach: depending on its age, every facility that emits more than 100,000 tonnes of CO2e per year must reduce its GHG emissions intensity by up to 12 per cent of its average 2003-2005 emissions between July 1 and December 31, 2007, and maintain these reductions in subsequent years. New facilities are required to start reducing emissions intensity by two per cent per year only after the third year of operation. This regulation also uses some other features found in the federal Framework:
- Climate Change and Emissions Management Fund. Regulated facilities can pay C$15 for every tonne of CO2e emitted in excess of compliance targets to the province’s Climate Change and Emissions Management Fund. In the initial compliance period ( July 1, 2007 to December 31, 2007), this option accounted for approximately 68 per cent of the reductions required for regulated emitters to meet their emissions-intensity targets.
- Tradable Emissions Performance Credits. Regulated facilities with actual emissions intensities that are below their specified targets can earn emissions performance credits, which can then be sold to others. In the initial compliance period, most companies earning these credits did so through engaging in cogeneration initiatives rather than making actual improvements to emissions intensities.
- Domestic Offset Credits. Regulated parties may also purchase offset credits generated by projects in Alberta that are independently verified as having reduced GHG emissions after January 1, 2002 when not otherwise required by law to do so. In the initial compliance period, offset credits accounted for approximately 25 per cent of the reductions required for regulated emitters. Trading of credits is occurring over the counter and through electronic trading systems.
According to the provincial government, regulated emitters in Alberta bought 2.6 million offset credits and paid C$40 million into Alberta’s Technology Fund to meet their obligations in the initial compliance period.
Other Canadian provinces have also taken initial steps toward implementing cap-and-trade regimes, particularly those provinces that have joined the Western Climate Initiative (WCI), an initiative of several US states and some Canadian provinces — including British Columbia, Manitoba, Ontario and Québec — to reduce regional GHG emissions of, at first, large industrial emitters and, later, certain other smaller residential, commercial, industrial and transportation sources. According to the “Design Recommendations for the WCI Regional Cap-and-Trade Program,” released in September 2008, each WCI partner will be allocated emissions allowances (an allowance budget), calculated with reference to the state or province’s population growth, economic activity, electricity consumption and other factors.WCI partners would then have significant flexibility in distributing these allowances to regulated entities within their jurisdictions. Although allowance budgets for WCI partners have not yet been set, the regional cap would be lowered between 2012 and 2020, in three-year compliance periods, so that by 2020 regional emissions would have been reduced by 15 per cent below 2005 levels.
On May 28, 2008, British Columbia passed its Greenhouse Gas Reduction (Cap and Trade) Act to facilitate its participation in the WCI regime. Although the Act will only come into force on a date yet to be announced by regulation, when it does, it will provide the framework for a provincial cap-and-trade regime that can be integrated with other similar regimes in other jurisdictions. Under the Act, regulated emitters could comply with their emissions caps by making actual GHG emissions reductions; by purchasing credits from other emitters whose actual GHG emissions were less than their prescribed limits; by purchasing credits from certain offset projects; and by purchasing certain approved credits from other jurisdictions. Future regulations under the Act will set exact caps, based on the allowance budget the province receives under the WCI.
Ontario and Québec have also begun to facilitate their own WCI participation: on June 2, 2008, they signed a Memorandum of Understanding (MOU) committing to establish a joint GHG emissions cap-and-trade regime.The MOU contemplates a 1990 baseline year for calculating reduction targets, emphasizes Ontario and Québec’s desire to link their regime with others in North America and abroad, and notes that the provinces will seek to harmonize their GHG emissions reporting requirements with those of other jurisdictions.
It is unclear how overlapping federal, provincial and other initiatives will coexist. To alleviate industry anxiety over a regulatory patchwork, the federal government has proposed entering into equivalency agreements with certain provinces, which would allow provincial regulatory regimes that are not inconsistent with the federal laws in the area.
British Columbia and Québec have also implemented another market-based mechanism designed to mitigate GHG emissions, becoming the first two jurisdictions in Canada to introduce a tax on carbon-based fuels. In October 2007, Québec imposed a socalled carbon tax on approximately 50 companies that sell hydrocarbon products in bulk to retailers operating in Québec and using a significant amount of hydrocarbons. The tax rate will vary for each fuel, depending on the amount of carbon that it produces during combustion. The carbon tax is expected to raise C$200 million (obviously with the potential to escalate over time) in annual tax revenues for the province’s Green Fund, which was established in 2006 to help fund reductions in GHG emissions and improvements to public transportation.
British Columbia implemented its own,much broader carbon tax on July 1, 2008.This tax applies to the purchase and use in BC of gasoline, diesel fuel, natural gas, home heating fuel, propane, coal and other fossil fuels. It also applies to certain transfers of fuels into the province or into ships, trains and airplanes. Designed to be revenue neutral, the tax is being phased in, starting at a rate of C$10 per tonne of CO2e emissions released from the burning of each particular fossil fuel, with the revenue being distributed to BC citizens through a variety of tax cuts, rebates and other programs. Although the initial price per tonne of CO2e is lower than that advocated in many jurisdictions, the tax rate will increase to C$15 per tonne on July 1, 2009; C$20 per tonne on July 1, 2010; C$25 per tonne on July 1, 2011; and C$30 per tonne on July 1, 2012.
The Changing Regulatory Climate
Another significant source of change is coming from regional North American efforts to mitigate global warming. Although the federal government has been reluctant to adopt binding extrajurisdictional commitments, several provincial governments have become increasingly interested in North American regional initiatives, including the WCI, described above. Ontario and New Brunswick have also expressed interest in partnering with the Regional Greenhouse Gas Initiative (RGGI), a cooperative effort by northeastern and mid-Atlantic states to reduce carbon dioxide emissions from certain electricity generators.New Brunswick and the Secretariat of Eastern Canadian Provinces are already participating in this initiative as observers. Partnering with their US neighbors, Québec and the Atlantic provinces have also set emissions reduction targets together with the New England states. Such regional integration is growing as more provinces embrace the benefits of a multijurisdictional approach to mitigating climate change.
British Columbia, in particular, is working closely with California to implement vehicle emissions standards, having agreed to develop an equivalent Low Carbon Fuel Standard that will require the carbon intensity of transportation fuels sold in the province to be reduced by at least 10 per cent by 2020. Also influenced by California’s Global Warming Solutions Act of 2006, BC premier Gordon Campbell has promised to reduce the province’s GHG emissions by 33 per cent below current levels by 2020. BC also plans to require electricity produced in the province to have zero GHG emissions by 2016.
To reduce GHG emissions, many states and provinces are encouraging a transition to lower carbon or carbon neutral energy sources. In the Powering the Plains policy directive, certain Upper Midwest states are aiming to achieve a carbon-neutral infrastructure by 2055. As of October 7, 2008, 33 states, including Connecticut,New Jersey, California and Texas, have adopted some form of renewable portfolio standards. So too have more Canadian provinces focused on energy-related initiatives. Notably, the Ontario government plans to increase its renewable energy capacity to help achieve its aggressive GHG reduction targets of six per cent below 1990 levels by 2014; 15 per cent below 1990 levels by 2020; and 80 per cent below 1990 levels by 2050. In particular, the Ontario government plans to retire all of the province’s coal-fired generation plants by 2014, require a certain percentage of ethanol content in gasoline, ensure that new renewable energy projects account for 10 per cent of Ontario’s capacity by 2010 and enter into more standard offer contracts for cogeneration and renewable energy generation. These initiatives will account for approximately half of the targeted reductions for 2014. Power plant emissions, in particular, are expected to drop by 85 per cent by 2014, the regulatory deadline for the closure of the province’s coal-fired plants, provided the province can source sufficient new generation capacity in time.
Institutional investors and capital markets commentators are continuing to examine how climate change regulation and the physical effects of global warming could affect investment. Many Canadian investors have urged companies to disclose the business risks and opportunities that climate change presents, backing voluntary reporting mechanisms such as the Carbon Disclosure Project as well as seeking enhanced disclosure from public companies through shareholder proposals made at shareholders’ meetings.
Avenues for reporting GHG emissions are already developed. The federal Department of the Environment has required large facilities in the industrial sectors to which the Framework will apply to report certain information regarding designated air pollutants, GHGs and other substances for the 2006 calendar year — the Framework’s proposed baseline. More recently, Environment Canada issued a notice requiring any person that operates a facility that emitted 100,000 or more tonne of CO2e in the 2008 calendar year to submit certain information about those emissions to the federal government no later than June 1, 2009.
Securities law continuous disclosure requirements for publicly traded issuers are also being re-examined in the context of climate change. In this light, Canadian securities laws, like US securities laws, require that management’s discussion and analysis disclose any known trends, demands, commitments, events or uncertainties that are reasonably likely to have an effect on the company’s business or that will materially affect the company’s performance. Arguably, for certain issuers, this requirement captures risks related to climate change and climate change regulation. In a 2005 discussion brief titled “MD&A Disclosure about the Financial Impact of Climate Change and Other Environmental Issues,” the Canadian Institute for Chartered Accountants (CICA) commented that issuers will need to account for assets and liabilities related to carbon transactions in their financial statements and notes, and suggested best practices for climate risk disclosure. CICA has announced the release of an exposure draft titled “Building a Better MD&A: Climate Change Disclosures,” which updates and expands upon information in the 2005 discussion brief.
Securities disclosure rules may also require a public issuer’s Annual Information Form (the equivalent of a US Form 10-k) to discuss the financial and any operational effects of environmental protection requirements on the capital expenditure, earnings and competitive position of the company in the current financial year and the expected effect in future years; environmental policies fundamental to a company’s operations and the steps taken to implement them; and risk factors and regulatory constraints that would be likely to influence investor decision-making.
Institutional investors and securities regulators in Canada are watching developments south of the border, where a broad coalition of investors, state officials and environmental groups petitioned the Securities and Exchange Commission on September 18, 2007 and again on June 12, 2008 to issue an interpretive clause clarifying that material climate-related information must be included in disclosure under existing reporting requirements — that is, to require publicly traded issuers to assess and fully disclose their financial risks from climate change. And on July 18, 2008, the Senate Appropriations Committee approved language in the Financial Services Appropriations Bill calling on the SEC to issue guidance for publicly traded companies to assess and fully disclose their financial risks from climate change. Canadian securities regulators can be expected to closely monitor the SEC’s position in this regard.
Canadian climate change regulation is expanding rapidly, with almost weekly announcements of new initiatives and developments. While the federal government prepares to set domestic GHG reduction targets, opposition parties are exerting their influence to press the government to meet its Kyoto commitments, and environmental groups are doing the same through the judicial process. Moreover, various investors and concerned citizens are increasingly urging government to consider new regulations requiring companies to disclose the impact of climate change on their businesses and to help mitigate and adapt to impacts on the global climate.
Governments are responding to these calls — especially in the provinces, which are experimenting with a variety of initiatives, from carbon taxes in BC and Québec to emissions trading regimes in Alberta and, soon,WCI partner jurisdictions.With numerous new initiatives springing up south of the border as well, and with the tendency of the provinces to favor regional integration, the only thing that is certain is that the regulatory climate will continue to change rapidly.
This article was originally published in The 2009 Lexpert/American Lawyer Guide to the Leading 500 Lawyers in Canada