Canada at the Climate Crossroads

The second half of 2009 is shaping up to be one of the most important periods for international policy development. Ever. The fragile state of the economy, which continues to throw up worsening data with each passing period despite more optimistic talk in the media, will continue to be top of mind. But the collective response to that other deep, long-term challenge, climate change, will be crafted in Washington and in international talks leading up to December’s Copenhagen Conference of Parties, which will, if all goes according to plan, produce a new post-Kyoto protocol.

What happens on these fronts will inevitably drive Canada’s climate bus. Developments in the US Congress are of huge importance, as they will have a ripple effect on the ability to get an international agreement at all. This is largely because big developing countries like China and India, who are now large emitters in their own rights due to their massive populations, rightly argue that they are responsible for only a small share of the historical stock of emissions, and they will only make moves if the US goes first. I see a lot of parallels to dynamics of international trade negotiations in this climate process, and fear that a WTO-like stalemate could be the outcome we end up seeing in Copenhagen.

Putting my pessimism aside, with Copenhagen looming in the future much of the current attention is on Waxman-Markey bill. This bill, in the muck of US House of Representatives, represents huge progress although it has emerged from the Energy and Commerce Committee severely watered down, with the Ways and Means Committee yet to come, and eventually some parallel Senate bill, both of which promise to make any bill signed by Obama a pale shell of what was promised back during the election campaign. The intent appears to be to try and get a bill passed by the House in time for Copenhagen, so at least there is something on the table, and perhaps via international agreement more pressure could be put on a Senate bill in 2010.

The back door of US climate policy is the Environmental Protection Agency, which was essentially been given a court order last year to treat CO2 and other greenhouse gases as pollutants needing regulation. The EPA is developing a framework to apply the existing Clean Air Act (i.e. no congressional meddling required) to GHGs. There may be legislative extras in Waxman-Markey that would be a bonus, but a lot of early work may be done through the existing regulatory apparatus.

Because of politics, it may end up that regulatory approaches are the most politically expedient means of addressing GHGs. The simplest option, a carbon tax, appears to be toxic in the US context. The other major plank of Waxman-Markey is a cap-and-trade system that would cover 85% of US emissions. Of note, only 15% of emissions permits would be auctioned initially (Obama campaigned on 100%) though this amount would rise over time, and the remaining 80% would be “free” but given to local electricity and gas distributors, and a variety of other interests, with only a fairly small slice going to emitters.

A potentially bigger loophole is that the provisions for offsets are huge: 2 billion tonnes per year, split between US and international, amounting to just under a third of US emissions. But are there enough offset projects out there to absorb this much? At a recent carbon pricing conference, an expert on offsets argued that by 2012 there would be a worldwide shortfall of 1.45 billion tonnes of offsets, which suggests they are going to get increasingly expensive and fast. A lot depends on the design parameters of the offset system, particularly as it relates to ensuring that projects funded would not have happened anyway (Durning argues that Waxman-Markey raises the bar for assessing valid offsets).

There is a lot to W-M and for a good overview of the good and bad, I would suggest Alan Durning’s analysis here. As a final thought, I am very concerned about the prospects for vested interests gaming such a complex system, as well as the enforcement and compliance side. I think there is a lot of low-hanging fruit out there and companies are sitting on making new investments until the rules are clear and they can get credit in the form of offsets and allowances that can be sold to pad bottom lines.

Where does Canada fit into all of this? For progressives, there is case to be made for Canada being dragged kicking and screaming into doing the right thing by the US government, reversing a do-nothing policy that followed its equivalents south of the border during Republican rule. I have a lot of sympathy for this view that a North America wide framework would be better, but the other side of the story is that this essentially means accepting whatever the US decides on our behalf, since we have no votes in Congress and the US has a long history of doing what is in its own interests without considering the hosers to the north.

On offsets, the feds just introduced guidelines for public comment. Most offset projects would be in afforestation, methane capture from landfills, agriculture and wind power. But there is a bigger issue in that it looks like Canada will not be eligible to sell offsets to the US under Waxman-Markey, as the international portion is aimed at developing countries, and may turn into a form of foreign aid.

Canada has a lot of energy-intensive resource and manufacturing industries. Since 1990, essentially all of our increase in GHGs has been due to exports, according to Statscan. It is not clear what adjustments need to be made if we were to fit into a North American system. The biggest challenge for Canada as a whole is constitutional. Whereas the US federal government can impose a system on the states, in Canada this is disputed territory and there is a strong constitutional argument to be made that the federal government cannot impose international treaties in areas of provincial juridiction.

I was excited to see a link on the main page of Environment Canada that said, “Canada’s Environment Minister Jim Prentice outlines Canada’s climate change plan” but the “plan” is merely a speech to the CD Howe Institute. What can we tease out of the speech to assess the state of federal climate policy? Here is some of the pertinent text:

In the time between now and November, all of the Canadian sources of greenhouse gas emissions will be subject to very specific policy announcements that we will make with respect to each source of emission. The first ones that we announced were the tailpipe emission standards, and we will be moving forward from there. The Canadian objectives are to reduce our emissions by 20% by 2020 and to try to get to 60-70% by 2050.

This first step is not much in the way of leadership, as earlier in the speech, Prentice notes: “We have harmonized our emission regulations, our so-called tailpipe emission standards with the United States. In doing so, we are engaged collectively and jointly in the process of reducing emissions, of tightening the standards, of producing more fuel-efficient vehicles.” It goes on:

We will deal with them sector by sector and we will define mandatory reduction targets that will apply across Canada. These will be implemented through the Canadian Environmental Protection Act (CEPA). People have asked why we have not tabled an extensive cap and trade bill. We don’t actually intend to file a cap and trade bill in the same way that is being dealt with elsewhere, because we have the regulatory authority under CEPA to enter into the regulations necessary to create this system.

… The process then of drafting the detailed regulations under CEPA will consume much of 2010, the following year. … The regulations will be drafted with a view to an application date of January 1, 2011 and they will be brought into force thereafter on a sector by sector basis. We will make individual decisions on a sector by sector basis in terms of the application date for those.

We have never said at any time that our regulations will in all cases be the same as the United States, nor have we ever said that they will be introduced on the same dates as the United States. Their content and their timing will be driven by Canada’s national interests, and as we do so we will ensure that we are cognizant of what other trading partners including the United States are doing, when they are doing it and what the implications will be in particular for trade-exposed sectors in our country.

… We will be mindful that we have an economy that is resource-based, an energy-intensive economy in many respects, where growth is taking place in a number of sectors and where virtually all of our heavy industries are heavily trade-exposed. It stands to reason as part of all this that we would be exploring the cap and trade possibilities with the United States, and we certainly are. We are examining the kind of cap and trade system that would best fit Canadian circumstances and that would align with what our trading partner is doing. Through all of this, there is an emphasis on technology in the approach that we are taking. As a country, one of the policy aspects that we intend to make fundamental is a technology fund that would allow and provide for emission allowances to qualifying firms who invest their dollars towards technology development and deployment. This will be one of the compliance options available in the Canadian system.

So it is not clear what we will be getting. Certainly, regulation will be brought to bear with the attendant risk that costs are passed along to consumers in a regressive manner (but unlike a carbon tax or auctioned cap-and-trade system, there will be no revenues for addressing impacts on the most vulnerable). Cap-and-trade of some stripe is also likely, but the devil is in the details, and we may see a parallel Canadian system rather than integration with the US.

Finally, on the role of electricity demand and supply:

Electricity is a major source of emissions in our society. It is in fact the single largest source of greenhouse gas emissions in Canada. Ameliorating this and dealing with this is an important part of what we need to do in terms of our domestic and continental pathway.

The smart grid of which I spoke is an important part of that. The prospect of bringing on new hydroelectricity is an important part of that, as is the prospect of bringing on important new sources of Canadian natural gas.

… I would like to share with you some of the criteria that will shape the regulatory policies as we go forward for the electricity sector. Firstly, the approach for this sector will seek to create a level playing field amongst different fuels that are used for power generation. Secondly, the system will provide industry with flexible mechanisms for compliance, and it should avoid prescribing specific technologies. Thirdly, the approach will include mechanisms to encourage investments in new technology to enable industry to bring clean generation technologies forward, such as carbon capture and storage and renewable generation, which must be part of the future marketplace. Fourthly, we must recognize past capital spending and past regulatory approvals and ensure a fair transition for investors for existing facilities because it is in everyone’s interest that we avoid stranding assets. Finally, the approach must ensure that we have regional equity across Canada’s electricity sector.

It is interesting and telling that Prentice singles out the need “ensure a fair transition for investor” with no mention of a fair transition for workers in those GHG-intensive industries. Beyond that, it is by no means clear what “regional equity” or a “level playing field” is supposed to mean, given the role that coal-based generation plays in a number of jurisdictions. No calls for an east-west grid that bolsters our own energy security, given the north-south orientation of electricity grids right now.

So we will have to wait and see. The big positive in all of this is that Canada is getting pressure from the US and internationally to do something on this long-neglected file.