Canada Ratifies Kyoto and Takes First Steps to Implement Climate Change Plan

Elisabeth DeMarco

On Dec. 17, 2002, Canada ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change (the Kyoto Protocol) following symbolic ratification votes from the House of Commons and the Senate. Approval from these legislative branches of government was sought only to demonstrate public support for ratification and is not required under Canadian law as treaty-making power resides exclusively in the executive branch of the Canadian government.

Ratification was based on the Canadian government’s Climate Change Plan for Canada (the “Implementation Plan”), that was released in final form on Nov. 21, 2002. The Implementation Plan includes a combination of current, proposed and future actions directed at seven main sectors in order to address the 240 million metric tons (MT) of carbon dioxide equivalent that Canada must reduce under the Kyoto Protocol. The central features of the Implementation Plan include:

• the establishment of a domestic emissions trading system targeting the below-mentioned large industrial emitters (LIEs)
• the purchase of international emission reductions
• maximizing emissions reduced by forestry and agricultural sinks
• targeted regulatory measures directed primarily at the transportation, municipal and housing and building sectors
• emission reduction objectives for individual Canadians
• establishment of incentives for renewable energy, small and medium enterprise energy efficiency, clean fossil fuel, and CO2 capture and sequestration infrastructure
• a partnership fund to share costs of emission reductions with provincial and municipal governments.

Highlights of the Proposed Domestic Emissions Trading System
The proposed emissions trading system will take the form of a hybrid system requiring a total of nearly 100 MT of CO2 emission reductions from certain large industrial emitters and allowing those emitters to use to domestic emission offsets and international emission reductions to meet those commitments. Currently sectors that will be covered in the mandatory domestic emissions trading system include: thermal electricity generation (coal, oil and gas); oil and gas (upstream extraction, oil and gas pipelines, gas utilities, petroleum refining); mining; pulp and paper production; chemical production (including fertilizers); iron and steel production, smelting and refining; cement and lime production; and glass and glass container production.

The sector-based emission reduction commitments will be founded on sector covenants with government that are backed by regulatory or financial measures. The Canadian government, through Natural Resources Canada, is currently in the process of negotiating sector-wide emission intensity factors and is scheduled to release a model sector covenant for negotiation purposes in spring 2003. Within targeted sectors, each facility will receive an allocation of allowances on the basis of its sector’s emissions intensity factor, projected output and growth. Capped facilities will also have access to certain approved domestic offsets (proposed to come from agriculture, forestry, and possibly, landfill gas) and international emission reductions in order to meet their emission reduction requirements.

In response to industry concerns about international competitiveness, and in particular competition with U.S. market participants, the federal government has also committed to limit both the quantity and price of emission reductions for capped industrial sectors. Specifically, the government has indicated that it will ensure that Canadian companies will not have to pay more than $15 (Cdn)/ton CO2 to meet their emission reduction targets. If the price of CO2 allowances and offsets exceeds this limit, the government is likely to make up the shortfall through international credit purchases. The government has also committed that the oil and gas sector emission intensity target will be set at a level that will require no more than a 15 percent reduction from business as usual emission levels in 2010. Most recently, during the negotiation of the sector emission intensity targets, the government indicated that the $15/ton pricing guarantee may only apply if a company is “prudent” in its greenhouse gas mitigation strategy. This statement has led to considerable industry uncertainty regarding the conditions, nature and extent of the government’s pricing and quantity guarantee.

There are still a large number of details to be determined before the proposed domestic emissions trading system is implemented in the current 2005 to 2006 time frame. One of the most difficult issues that the Canadian government may have to grapple with will be potential conflicts between Canadian NAFTA obligations and Canadian Kyoto obligations resulting from the exclusion of U.S. emission reductions from the Canadian emission trading market place.

For further information on the Canadian Implementation Plan please do not hesitate to contact Elisabeth (Lisa) DeMarco at 416/203-4431 or elisabeth.demarco@tor.macleoddixon.com.