Climate Change Policy - Cost and Risk Impacts

June 2008

Things are heating up in the Canadian climate change arena.

Previous and the current federal governments have achieved little success in reducing greenhouse gas emissions, by using information and incentive schemes. In the policy realm these tools are referred to as "carrots". These mechanisms are usually viewed as benign or even popular because they are voluntary and come at no apparent cost, but they are almost always ineffective and/or expensive.

Governments then turn to "sticks", in the form of efficiency standards and/or financial tools such as cap-and-trade and taxes. Over the last few months a number of initiatives aimed at reducing greenhouse gas emissions have been announced. These initiatives will eventually have direct or indirect impacts on all Canadians. These impacts will represent a risk that likely warrants measurement, estimation, monitoring and management.

Federal government

The federal government's Turning the Corner program is scheduled to take effect starting in 2010 and is meant to reduce total Canadian reduce greenhouse gas emissions by 2020 by an absolute 20%, relative to a 2006 baseline year.

For the 2010 calendar year, regulated emitters (previously referred to as large final emitters) will be required to reduce their emissions intensity (emissions per unit of output) by 18 %, relative to their 2006 baseline.  Further intensity-based reductions of 2% per year will be required in subsequent years.

Emitters unable to meet their commitment directly through their own reductions can then do so via a number of mechanisms:

• pay into a technology fund, for up to 70% of their commitment, at a $15 per tonne of CO2 equivalent; the allowable percentage will decrease in 2011 and thereafter and the price will rise to $20 in 2013 and thereafter at the GDP growth rate, to 2017
• purchase "beyond-commitment" offsets from other regulated emitters
• purchase offsets from non-regulated emitters
• purchase clean development mechanism (CDM) offsets arising from projects implemented in developing or Kyoto accord non-annex 1 countries, for up to 10% of their commitment
• claim a one-time early-action credit for measures implemented between 1992 and 2006

The program would effectively set the initial carbon price at $15 per tonne of CO2, or higher if emitters bump up against the technology fund limits and domestic and/or international offsets end up being more expensive.

Details of the program will be developed throughout the remainder of 2008.

Provincial government

On June 2, the Ontario and Quebec provincial governments announced a Memorandum of Understanding that included a Provincial - Territorial Cap and Trade Initiative. The initiative calls for:

• cap-and-trade system
• absolute caps, i.e. it will not be intensity-based
• 1990 baseline, consistent with Kyoto targets
• linkage to other cap-and-trade systems, in the interest of increasing liquidity and economic efficiency
• harmonization of reporting to facilitate communication with other jurisdictions using a cap and trade system.

Notable for their divergence from the federal plan are the absolute versus intensity approach and the 1990 versus 2006 baseline year.

At this stage there is little "meat on the bone" and so we'll have to wait for further details.

Liberal Party

On June 19 the Liberal party announced its Green Shift plan.  The plan calls for a first-year carbon tax of $10 per tonne, rising $10 per year to $40 per tonne in year four of the plan. It is to be revenue neutral and calls for increases to taxes related to pollution, greenhouse gas emissions and waste and reductions to income, investment and innovation taxes.

As with all plans it has warts but it is consistent with those proposed by well known economists such as Jack Mintz and Mark Jaccard.

Green Party

The Green Party somewhat pre-empted the Liberals by announcing their plan, which calls for an initial carbon tax of $50 per tonne and accompanying tax cuts.

Impact on Energy Consumers

Regulated emitters that have been reporting their direct emissions as large final emitters should already know their potential direct risks arising from the federal plan. These risks arise from their own direct emissions, their ability to meet their intensity target and the cost to meet any initial and subsequent compliance shortfalls. These emitters also need to understand the indirect risks that arise from their indirect emissions arising from sources such as purchased electricity.

Non-regulated emitters face the same risks but if they have not taken stock of their direct and indirect carbon emissions they will not be aware of the magnitude of these risks.

In future newsletters we will discuss how emitters can take stock and quantify their risks.