Pembina Institute

Far From Turning the Corner

Canada's Conservative government has substantially shifted its position on climate change, but is its policy response too timid, too complex and likely to be superseded?

Matthew Bramley

Published in Carbon Finance (June 20, 2008)*

By Matthew Bramley, Director, Research, Pembina Institute

Canada's Conservative government has come a long way in acknowledging the importance of climate change. Since taking office in early 2006, Prime Minister Stephen Harper has moved from publicly doubting the science to declaring climate change to be "perhaps the biggest threat to confront the future of humanity today." Environment minister John Baird recently called it "the defining issue for my generation." But will the government's proposed policies put a meaningful price on greenhouse gas (GHG) emissions? And what is the likelihood that those policies will actually be implemented?

The federal government calls its GHG reduction plan "Turning the Corner" — a reference to its stated intention to put an end to the growth in Canada's emissions "as early as 2010 and no later than 2012." Canada's emissions rose by 22% between 1990 and 2006, and they are projected to rise a further 24% between 2006 and 2020 in a business-as-usual scenario. New oilsands operations in Alberta account for close to half of this projected further increase.

The plan ignores Canada's Kyoto Protocol committment to reduce its annual emissions to 6% below 1990 levels by 2012. Instead, it sets a target to cut Canada's emissions to 20% below the 2006 level (equivalent to 3% below the 1990 level) by 2020. To meet this target, Canada's carbon dioxide (CO2) equivalent emissions in 2020 will have to be 332 million tonnes (Mt) below the business-as-usual level of 937 Mt.

The centrepiece of the government's plan is a proposal to set mandatory emissions intensity targets, starting in 2010, for electricity generators and heavy industrial sectors, together accounting for about half of Canada's emissions. In March, the government released an updated description of this regulatory framework proposal, setting out targets and compliance options. But it has delayed the publication of actual draft regulations — specifying the precise legal requirements — until the autumn.

Industrial facilities in operation before 2004 will have initial targets to cut their emissions intensity to 18% below their 2006 level in 2010. Newer facilities will have a three-year grace period followed by targets based on the use of "cleaner fuels," generally natural gas. "Fixed process emissions" (e.g., from the calcination of limestone) are exempt. Targets for all facilities will be tightened by 2% annually. Oilsands facilities and coal-fired power plants starting in 2012 or later will face special targets set at the emissions intensity level of carbon capture and storage (CCS) — but only from 2018 onwards.

According to the government, these targets add up to a 128 Mt reduction in annual emissions by 2020, relative to business-as-usual. But the proposed compliance options, plus the application of CCS-level targets only in 2018, mean that a large portion of real emission cuts will be delayed until that year. This makes it unlikely that Canada's emissions will peak by 2010–12, and 204 Mt of additional reductions would still need to be found to meet the government's overall 2020 target. Other announced federal and provincial measures don't yet come close to closing this gap.

The compliance options for the industry targets include payments into a Technology Fund, starting at C$15/tonne (US$14.70) CO2 equivalent. Firms can use this option to meet 70% of their mandated emission reductions in 2010; the percentage will decline annually until the option is removed in 2018. Participants are also allowed to buy unlimited domestic offset credits, and credits from Clean Development Mechanism projects will be allowed for up to 10% of a firm's mandated reductions. Tradeable credits will also be granted to firms that surpass their targets.

The government projects that almost half of the 128 Mt total reduction in annual industrial emissions will come from oilsands producers — a consequence of the CCS-level targets beginning in 2018 for facilities starting up in 2012 or later. But before 2018, those facilities would not have to achieve or pay for any immediate emission reductions. Instead, through a provision called "pre-certified investments," firms that agree to implement CCS by 2018 can meet 100% of their compliance obligation before then by setting aside money to pay for their CCS projects.

The government claims that this system will result in a price for domestic credits starting at C$25/tonne in 2010, rising to C$65/tonne by 2018. If these assumptions are correct, then it is plausible that the cheapest option for meeting CCS-level targets would be to actually implement CCS, because buying offsets would be more expensive. In this scenario, total purchases of domestic credits would be limited, because the biggest buyer — the oilsands sector — would use the pre-certified investment option before 2018 and comply through on-site reductions thereafter.

But the C$65/tonne figure depends on unstated assumptions about the offsets system. The government has published an overview paper describing that system, but many of the detailed rules are not yet known. In a scenario where offset credits are available at a significantly lower price than C$65/tonne, the cheapest option for complying with CCS-level targets in 2018 would appear to be massive offset purchases instead of actual implementation of CCS.

All of the above casts doubt on how much emissions trading Canada would see under the federal government's proposed system. Its complexity, and the delay in publishing the draft regulations, creates considerable uncertainty for regulated firms and other potential emissions trading market participants.

There are, moreover, questions as to whether Canada's future emissions-pricing policy will, in fact, resemble the present government's proposal. The provincial governments of Ontario, Quebec, British Columbia and Manitoba (home to almost 80% of Canada's population) have rejected the federal intensity-based approach and are working together on their own cap-and-trade proposals. This is being done under a recent agreement between Ontario and Quebec, and also in partnership with US states through the Western Climate Initiative and the Midwestern Greenhouse Gas Accord. A federal election must take place by October 2009, and the leader of the largest opposition party, the Liberals, is proposing an alternative national approach based on an immediate broad-based carbon tax and a later cap-and-trade system. Some observers speculate that, even under a continuing Conservative government, Canada will end up joining a future national U.S. system.

Although nearly all Canadian politicians now agree on the need for deep cuts in GHG emissions, the policies that will be used to achieve them remain unclear, despite being 14 months on from the introduction of the present federal government's plan.

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