Uploaded on November 1, 2007 by Stuck in Customs

Canada, has announced that it is beginning to formulate its own Cap and Trade system this week, to continue the trend of North American policy convergence on Climate Change issues.

Fresh off the press (from Treehugger),it has been reported that what many Environmental proponents have long hoped for In Canada, could soon become a reality as serious federal policy is being formulated. Here’s the scoop:

“Canada has just announced that it will likely follow suit and move towards carbon cutting measures of its own. … And what’s more, Canada has said the two trading systems could later be linked”

More from Bloomberg, Canadian Environmental Minister Jim Prentice noted:

“We’re watching very closely what the U.S. is doing,” Prentice said. “We’re working on the broad-brush issues at the moment.” He declined to say when Canada might implement its own carbon-trading system . . . “There are still some continental issues that need to be worked out, but I’m in Washington regularly” to follow the issue.”

As Treehugger goes on to note, this could even reinforce efforts in the US, as legislators can now see a wider scope for a Cap and Trade system and if the systems were integrated it would allay to some extent fears that the US would be jeopardising its economic competitiveness.

The idea of a Northern American integrated Carbon Market might at once seem radical but in fact follows a well trodden path of economic policy convergence between these two countries that has been pursued for over two decades. The first agreement in 1988, the Canada-United States Free Trade Agreement, marked the beginning of the end of protectionist fears between two countries who already shared strong economic links. The treaty was soon replaced by the far-reaching NAFTA act, signed in 1994. Despite considerable anxiety about further economic integration, NAFTA created further standardisation of trading and worker movement, including the first such major economic deal which included a developing country in Mexico.

While NAFTA further opened up the North American continent in many respects it reflected pre-existing trade relations with Canada being the US’s largest trading partner. The integration of the continent and perhaps the lack of a linguistic barrier with Canada has also been reflected in contemporary policy, especially with regards to Climate Change. This shouldn’t be surprising the two countries share strong economic ties over resources that directly impact on Climate Change such as their energy markets. The most notable example of Climate policy convergence is in the WCI, which includes most of the major Canadian states as well as several US states including its founder, California. Notably the majority of observer states to the WCI are from Mexico (6 in total), underlining North America as a platform for policy convergence.

The convergence does not stop at state level. Federal policy on the environment has been a recurrent theme in recent years. Canada has three reasons for this: Firstly, given the integration of the two countries economically, a change in one would precipitate a change in the latter anyway, so they may as well follow suite, the example can be seen when Canada recently announced it will standardise its fuel standards with the US, reflecting the overlap of the two countries’ automobile markets. Secondly, and because of the first, any undue burden Canada on its economy, could directly reduce its competitive in some areas with the US. Finally, Prime Minister Harper, long reluctant to pursue Climate Change policy, could follow the US under President Bush, safe in the knowledge that Canada would then have to do very little.

While no one expected the status quo to stay the same after the 2008 election, with both Presidential candidates supporting action against Climate Change, and a widely tipped increase in the Democrats’ control of congress, few could have expected the Obama administration and congress to move so quickly on Climate Change. Although many of the measures have received individual criticism for a lack of strength, consider that since coming to power: the US has funded billion to green projects through the stimulus, seen a Cap and Trade bill, unthinkable under Bush, emerge out of the House energy committee and a fuel standard passed, 4 years earlier than expected aim for standards far higher than expected, and that has just been the first 4 months. 

In reality, what we’ve seen is a paradigm shift in the US that has seen the Climate Change debate move from its existence to debating its solution, from an “economic burden” to an essential tool for recovery through millions of green jobs and from a fringe liberal idea, to one that is central the US’ geo-political security

The pace of change has left the Harper government playing catch up, when before even its meagre efforts could make it seem like the leader in North America. Prentice’s latest statement underlines two factors; that Canada cannot afford to be left behind on the green market (something most major Canadian states have long recognised), nor isolated internationally as the US sets a positive tone for UN discussions later this year.

A Canadian Cap and Trade has obvious benefits, in that it would link in with the current state systems, such as those proposed by Quebec and Ontario, as well as bringing in to play albeit with concessions, heavy polluting states such as Alberta. Bringing in states such as Alberta is critical, to re-aligning polluting industry with Climate goals. The simple fact is that as long as carbon has a price, even if heavily polluting developments such as tar-sands continue, investment in cleaner technology for them will become a necessity. Furthermore, Cap and Trade on a federal level create a stable investment climate for renewable technology whose value can only rise as carbon prices increase.

The same can be said of a North American wide system. By creating a single market, it effectively allows pooled investment in renewable technology regardless of the geography. This makes eminent sense in North America, as in Europe, where crucially energy resources are already shared across the border and set to expand further.

A further strength of the system is that once initiated, it would be difficult to alter it, as it would be shared across two political systems, while this can work both ways a crucial element of Climate Change policy has to be that it can be sustained across political changes. Canada has seen such turbulence, when the former liberal government ratified Kyoto, only for the Harper government to declare that ratification was invalid because it was undertaken prior to Harper’s own government.

I can only see the move to federal and hopefully regional Cap and Trade policy as a net positive. If it goes ahead, and I suspect in the medium term it will, then we will have two regional blocs integrating Climate Change policy, the EU and the US. Not only could this set a trend for other regional blocs (and if in Climate Change why not in other areas) but it also paves the way in the long term for inter-regional integration of Carbon markets, given how much simpler policy alignment would be if regions are already integrated. I’m getting ahead of myself, but one can’t help but feel positive that at the start of the 21st century, it is a promising that a global problem is beginning to be met by global solutions.

Quebec is in the process of taking a bold step towards North America’s first Cap and Trade system.  Bill 42, tabled recentlyis designed to bring in a mandatory Cap and Trade system to Quebec, in line with the WCI, of which Quebec is a key member along with Ontario and British Columbia and California among others. The bill aims to be passed by fall of this year ready to come into action for 2012. The Globe and Mail has the details:

“The first emission caps will be issued between 2012 and 2015, targeting only electricity-producing companies and major industries that emit more than 25,000 tonnes a year of greenhouse gases. After 2015, the second phase will target, among other sectors, transportation as well as home and commercial heating companies.”

As with all Cap and Trade systems, companies that can make reductions will be the beneficiaries as they sell their Carbon Credits to larger polluters.  In effect putting a price on pollutions and benefitting those within an industry who can undercut the industry average, profiting from their competitors failures. As the number of credits is contracted over time, companies have the choice of bearing the cost, keeping up with the contraction or best of all, aiming to beat the contraction and gain financial advantage by reducing carbon emissions so as to be able to sell their carbon credits. Part of the beauty of Cap and Trade is that  the internal competition between similar industries, in the electricity sector this is most evident, where cap and trade will directly feed down to customers, the designers hope that consumers will favour the cheaper which will in theory become synonymous with lower emitting companies.

Quebec’s move is not just symptomatic of state level leadership in Climate Change but also of what direction Climate Change policy in North America may be taking. Although Quebec has a carbon tax

“Quebec became the first province to create a carbon tax, collecting just under one cent per litre of fuel products from petroleum companies; the aim is to raise about 0 million a year to pay for energy-saving initiatives”

Cap and Trade through the WCI appears be gaining momentum as the favoured form, despite British Columbia’s recent election where the pro-Carbon tax incumbents stayed on. The reasons are numerous but the fundamental issues appears to be the reluctance of politicians to impose anything that would directly tax citizens from the state ( or even has the word in it), Cap and Trade will raise prices for consumers, particularly in electricity, consumers will in theory be able to choose.

The collective approach of the WCI, containing big names such as California, Ontario, Quebec and British Columbia to name a few means that throughout North America, some of the biggest regional economies will be committing to a Cap and Trade system. As far as Canada is concerned AHN news notes this will make up: “80 percent of the nation’s headcount and 75 percent of Canada’s local economy”. The figure is critical on two counts. WCI leaders have been able to show that leadership on Climate Change is possible even in the midst of a recession. Furthermore, strong leadership has kept Climate Change policy in the public domain the in the middle of a global recession.

Where does this leave the Federal Government?

Speaking to the Globe and mail, Quebec’s Environment Minister Line Beauchamp had this to say:

“We hope Quebec’s participation in this common market with Ontario, Manitoba, British Columbia will incite the federal government to co-operate with the provinces to develop a Canadian carbon market compatible with what is taking place elsewhere in the world,”

Jim Prentice, Canadian Environment Minister added his own thoughts:

“I think it is typical of the kinds of efforts that we are making with all of the provinces to harmonize…,” Mr. Prentice said. “And we’ll need to determine the extent to which it’s consistent with what’s been proposed continentally with the United States and also internationally.”

Prentice’s line is symptomatic of the Canadian Government, that of a follower not a leader in Climate Change, despite Harper favouring “intensity based reduction” it appears the clock may be running down as absolute systems as envisaged in Cap and Trade, crop up across North America, partly through the WCI but also through a US federal cap and trade as envisioned in Congressman Waxman’s bill currently trying  to get through congress.  What may prove harder for Harper is the manner in which Climate Change legislation has managed to stay in the limelight in some of Canada’s largest states, indicating that Canadians may be difficult to avoid it in upcoming elections and that many Canadians may not accept Canada as simply a follower when their own states have proven that leadership is possible.

During the past week, the House Energy and Commerce Committee held hearings on the draft legislation of ‘American Clean Energy and Security Act 2009′. Over 60 witnesses testified, including Energy Secretary Steven Chu, former House Speaker Newt Gingrich and Nobel laureate Al Gore, as well as representatives of environmental groups, electricity producers, auto manufacturers and renewable energy companies.

Prior to the hearings, Rep. Henry Waxman, chairman of the Committee and co-sponsor of the bill, promised that he will stick to his proposed 20% reduction in GHGs emissions in the next decade and that it was Congress, rather than the EPA who should determine how to regulate these emissions (referring to the EPA’s endangerment finding released on the previous Friday).

Here is a brief description of the proceedings and some of the highlights.

Tuesday:

The first day consisted of opening statements only, but the action surrounding the hearings kick-started with a letter from the 23 Republican members of the House Energy and Commerce Committee to the Committee’s Democratic leaders saying that the draft bill is not ready to be discussed, as a major element – how the permits will be distributed – is missing. They also called for a hearing dedicated to the EPA’s recent endangerment finding.

This was seen more as a delaying tactic, as Edward Markey, the other co-sponsor of the bill, said in the opening session – “The time for delay, denial and inaction has come to an end”.

Wednesday:

In the second day the committee heard from representatives of the administration (Secretary Chu, EPA Administrator Lisa Jackson and Transportation Secretary Ray LaHood), the United States Climate Action Partnership (USCAP) and others, such as the CEO of American Wind Energy Association, President of the Union of Concerned Scientists and a Senior Economist from the Stockholm Environment Institute.

The administration’s representatives responded to the concerns of Republicans as well as some Democrats and explained that the benefits of a cap-and-trade system will outweigh the costs, stressing that such a bill will create jobs and a stable investment environment, as well as ultimately reducing costs to consumers. Both Chu and Jackson though said they are still studying the details of the draft bill and that the administration had not given its blessings to it.

Secretary LaHood, in response to a question from Democrat John Dingell, assured the committee that the administration is committed to helping the automobile industry.

Companies belonging to USCAP generally stated their support of a cap-and-trade system. For example the representative from Alcoa, an aluminium producer, mentioned that increasing energy efficiency has already helped them reduce costs, and that aluminium is expected to be used in future energy efficient vehicles and buildings. However, both she and others (Duke Energy and NRG Energy, to name two) said they will drop their support for the bill if they did get free permits.

Thursday:

Day three saw testimonies from utility companies, think tanks and research institutions, consumer organisations, renewable energy companies and more. The panels dealt with issues of allocation policies, ensuring US competitiveness and the more technical issues of low-carbon electricity, CCS, renewables and grid-modernization. 

The utility companies stressed that they will need time to adapt and urged a gradual transition to a full auction system, also requesting allocation of free permits at first. It is encouraging to note though, that the American Public Power Association, which represents more than 2,000 community-owned electric utilities, supports auctioning no more than 5 percent of total allowances from the onset of the programme.

In response to that and to opposition from Republican members of the committee, as well as concerns raised by Democrats, Markey told reporters that “There are going to be some free allocations of allowances.”

Advocates of renewable energy called on Congress to set a renewable-energy standard requiring all states to get part of their energy from renewable sources.

Friday:

The main focus of the day was on the “star” witnesses – former vice-president Al Gore, former Republican Senator John Warner, and Former House Speaker Newt Gingrich, which was apparently added by the Republicans as a last minute addition to balance out Gore and Warner’s favourable testimonies.

Former Sen. Warner was one of the few Republicans in the last Congress who supported strong action on climate change (and joined with Dem. Joe Leiberman in a bipartisan attempt to pass a climate change bill). He attacked the “clean coal” mantra, saying that “we know clean coal is not around the corner” and argued that climate change is a national security issue which must be addressed.

There were no surprises in Al Gore’s testimony, who equated the bill under discussion to the civil rights legislation of the 1960s and the Marshal Plan of the 1940s. He urged the House panel to make sure the bill includes provisions to protect people who would face hardships as a result of the expected changes. In response to Rep. Dingell’s concern that US jobs will suffer after all, as countries such as China won’t face the same burdens, Gore drew on his experience with the international negotiations when he said that “If the United States leads, China will follow”.

What Next?

The bill will have to go through other House panels, but Waxman planned a tight schedule and hopes to have it ready for discussion in front of the full House by Memorial Day (May 25).

In the meantime, there are apparently negotiations going on behind the scenes to find a compromise that will build a winning coalition in favour of the bill.

Canadian coins (Pieper)

 

 

The Canadian province of British Columbia has a carbon tax that is not yet a year old and already it is on thin ice.  First announced during the delivery of the 2008 budget and implemented July 1, 2008, British Columbia`s carbon tax policy came as a surprise to many observers in the Canadian environmental field and was considered a significant shift in policy on climate change for the Government of British Columbia.  The orgin of the policy is thought to be as a result of the direct influence of Gordon Campball, Premier of British Columbia, who has been strongly influenced by the ‘green’ California Governor Arnold Schwarzenegger.

In the context of an increasing sense of urgency about environmental policy making, consideration of this new carbon pricing policy is instructive as the suggestion has been made that the B.C. carbon tax may be internationally significant as a model of carbon pricing policy.

However, despite the passing of the 2008 British Columbia Budget containing the carbon tax measure, the future of British Columbia’s environmental tax policy remains uncertain. 

National politics may also influence the future of British Columbia carbon tax policy.  In the Canadian federal system, the sub-national jurisdictions (10 provinces and 3 territories) retain control over natural resources, environment, and energy policy.  As a result, the Canadian climate change and energy policy landscape has been described as a ‘patchwork’, differing significantly between the provinces in scope, scale, and instrumentation, and which suffers from a lack of coordination and leadership from the federal government.  Without coordination of efforts across Canada, the compatibility of B.C.’s carbon tax with other provincial and federal actions might be limited, thereby reducing the overall effectiveness of the measure.  In the October 2008 federal election the Canadian public clearly rejected the central policy of the opposition Liberal Party of Canada – a nation-wide carbon tax similar in structure to that of the provincial tax in British Columbia.  Demonstrated public opposition to carbon tax measures across Canada may influence future decisions to increase the rate of B.C.’s carbon tax. The current rate is $10 CAD per tonne of carbon dioxide, or carbon dioxide equivalent, emissions scheduled to escalate $5 per year until reaching $30 per tonne in 2012.  Those increases, and even higher rates in the future, will be required in order to achieve significant GHG reductions but they are at risk in an uncertain political and economic climate.

The effectiveness and the future existence of the B.C. carbon tax policy might also be influenced by international developments in carbon pricing, climate change negotiations, and global economic conditions.  US President Barack Obama and Canadian Prime Minister Stephen Harper have both signalled their interest in the creation of a North America wide emissions cap-and-trade scheme and potentially new emissions reduction mechanisms will emerge from ongoing international negotiations proceeding under the United Nations Framework Convention on Climate Change. The impacts of the current global financial crisis might also have an impact on the future plans for increasing the rate of British Columbia’s carbon tax.   Despite the fact that emissions tend to decrease during economic recessions, political reactions to the downturn might influence the ability of the carbon tax to reduce emissions effectively when the economy recovers (eg. if the carbon price does not escalate over time according to the proposed plan). 

While it is too early to evaluate the overall impact of B.C.’s carbon tax, given increasing international trends towards the implementation of market-based mechanisms to meet stringent environmental targets (should the policy remian) B.C. may gain a ‘learning-by-doing’ advantage for having first implemented a significant carbon pricing policy in Canada and North America.

The economics of reducing greenhouse gas emissions are a complicated business. And this is especially true when you want to set up a domestic cap and trade system in a carbon-dependent economy, a process both the USA and Australia are in the process of beginning to work through.

At the outset there are the problems of setting a floor and ceiling price for carbon; this ensures that it remains scarce enough to be expensive but in supply enough to prevent a domestic economic squeeze from soaring prices.

Another issue is how the permits will be given out to emitters. This is the problem that the new EU climate deal has being grappling with. On one hand, auctioning permits increases the initial price of carbon and so further reduces willingness to pay; at the same time an a

uction also generates funds for other climate change policies, such as grants for clean technology. However, on the other hand, as the EU has found, auctions are politically rather unpalatable–so much so that the EU has agreed to only auction 30% of the second round of ETS permits. As well as economic prices, then, there are political prices to take into account.

Once the price and distribution has been set, there is still the question of coordinating the system. This is emerging as a particularly important variable in the Australian carbon trading scheme. While at the federal level the purchase price of carbon is capped at AUS$40 per tonne, a report released today shows that in New South Wales the state government has been buying permits up from companies at AUS$240 per tonne.

In effect the NSW government has been paying companies a vastly inflated price to force them to reduce emissions. These kind of actions heavily distort national markets, especially those still in their infancy; in this case, they give a competitive advantage to companies in NSW in a low-carbon economy compared to those who have not been injected with capital in this way.

Pricing, Politics, Coordination: three issues that the architects of domestic carbon markets need to tackle in order to get these systems working effectively. As yet the details of soon-to-be President Obama’s domestic cap-and-trade system have not been finalised or released. However, in a country that is traditionally market-driven, with powerful industrial political lobbies, and that is highly geographically diverse and decentralised, the Pricing, Politics, and Coordination questions are big ones to answer.

Last week, from the midst of COP-14 in Poland, I reported that the major developed countries were engaged in something of a waiting game on emissions targets, each waiting to see what others would do before announcing their own.  

As you may remember, on Wednesday of last week Canada, Australia and Japan pulled the text on 2020 emissions targets from one of the conference texts.  The absence of the targets (25-40%) left states waiting to see if others would commit before they did in a classic example of game theory.

Australia put itself in the best position in this game by delaying announcement of its targets until today–two days after the end of the Poznan COP-14.  It has now pledged a 5-15% cut by 2020, as well as an auction-based cap-and-trade system covering 75% of emissions.  Permits will be auctioned with a maximum price of A$40, with the system becoming operational by mid-2010. 

The emission target is much lower than other major developed countries, especially in Europe and increasingly the USA where targets are 20%.  You’ll also notice that this number is a range, and not a particularly narrow one.  If ‘other countries’ (read: USA, Canada, Japan) do not take on targets themselves in Copenhagen–meaning that there would not be a global emissions cut for developed countries–Australia will take the 5% option.  If a global deal is reached then the numbers move up, presumably on some kind of undefined sliding scale.  The definition of these numbers will, in turn, shape the domestic carbon market price. 

Effectively, Australia has managed to keep it hand in the game by allowing itself some room for maneuver into the future.  It has the advantageous position of having made a commitment but also allowing itself remaining competitive by altering that commitment in such an uncertain political process.

From the inside, however, this position looks less advantageous; Prime Minister Rudd is under significant pressure from the mining lobby in Australia, who, according to reports in the corridors at Poznan, were pushing for the abandonment of the cuts completely.  On the other hand, Rudd has consistently run on a green political platform, building expectations from both NGOs and European Leaders over the past year of major emissions cuts.  

Rather than a carefully calculated game theory move, Australia’s announcement today is more of the sum of the pressures Rudd faces from various sides.  

An interesting question to emerge from this announcement is just how many more countries will use this ‘targets range’ in their discussion about interim targets this year.  The EU has said 20%, with a possibility of 30%; now Australia is 5 to 15%.  Are we seeing the overcoming of traditional game playing where an early mover incentives other change?  Maybe in this, the most complex of games, countries will all set ranges and then simply negotiate to a common point–thus partially overcoming some of risk taken by the earlier players, which has often disincentivised action.

It’s certainly a ‘one to watch’ for 2009.

Not even two months after the last federal election in Canada (Oct.14, 2008­) signs are strongly pointing towards the defeat of Prime Minister Stephen Harper‘s minority government, as early as Monday, Dec. 8, 2008.

In Flux: Canadian Parliament (Source: Don MacKinnon @ flickr)

Opposition parties have signed a deal this week outlining their plan to form a coalition government following the predicted defeat of the Conservative government in a confidence vote early next week. According to the opposition, they are preparing to bring down the government over their lack of response to the financial crisis. The proposed coalition government would be led by the former President of the UNFCCC COP 11 Stéphane Dion, leader of the Liberal Party of Canada. His cabinet would consist of members from his own party and those of the New Democratic Party (NDP). Both parties advocated for deeper climate targets than the ruling Conservatives in the last election, however the Liberal Party suffered at the ballot box largely due to public (and internal) opposition to a controversial carbon tax plan.

The formation of a coalition government is unheard of in modern Canadian politics. The timing of this rare political manoeuvre could have an impact on Canada’s representation at the Poznan COP. It is now unclear as to who will show up in Poland to represent Canada for the high-level segment in the second week of the conference. If the Conservative government falls, it is likely that a NDP member would be assigned the Environment portfolio given the Liberals preference for the cabinet posts related to the economy. It has been reported that part of the agreement signed between the Liberals and NDP would include support for a North America wide cap-and-trade market to restrict carbon emissions. Even if the government does not fall before the Poznan meetings conclude, Canadian participation in the meeting may well be overshadowed by domestic politics.

This is a cross posting from the Canadian Youth Delegation to Poznan blog.