Canada to establish emissions trading market

Vancouver, Canada - The federal government has taken another step to honour Canada’s Kyoto commitment by proposing a set of rules for a domestic offset credit system designed to reward innovation and provide incentives to reduce greenhouse gas (GHG) emissions.

The government has issued a Consultation Paper setting out the system’s proposed rules. Following consultations with provinces, territories, industry and aboriginal groups, the system is to begin operating early in 2006. Public comments on the proposed system will be open until September 30, 2005.

Such an offset credit regime was promised in the Kyoto implementation plan released earlier this year entitled “Moving Forward on Climate Change: A Plan to Honour Our Kyoto Commitment.”The plan is an integral part of Project Green, the overall strategy for Canada’s environment.

See related article “Project Green - $10 Billion and counting”

In releasing the Discussion Paper, Environment Minister Stéphane Dion said, “Enacting this system is a major step forward for our climate change plan. Consultations will maximize its effectiveness in directing innovation to reduce greenhouse gas emissions for cleaner air, a healthier environment and a strong, sustainable, competitive economy.”

Similar to the offset credit system launched in Europe earlier this year the proposed regulations provide credit-based incentives for Canadian projects that reduce or offset overall GHG emissions. It is hoped that such a system will encourage innovation and sustainable practices, allowing Canada to meet its Kyoto target of reducing emissions to 6% below 1990 levels while still maintaining strong economic growth.

Much of the reduction will come from Canada’s 800-plus Large Final Emitters (LFEs), which produce close to 50% of Canada’s total GHG emissions. These companies are concentrated in the oil and gas, mining and manufacturing, and thermal electricity sectors. LFEs will be required to reduce overall emissions by as much as 12% (55 mega tonnes) using a variety of technologies and strategies.

Reduction of emissions through internal process changes and technology improvements is hoped to be the preferred choice, as companies will then benefit from increased efficiency over the long-term. They may also purchase ‘offset credits’ equivalent to their required reductions, or contribute to the Greenhouse Gas Technology Investment Fund that will develop and commercialize Canadian technologies designed to achieve emission reductions over the long term.

Offset credits may be purchased from other LFEs, or domestic and international offset markets. All purchased credits must qualify under the Kyoto accord to attest to a real reduction in GHG emissions.

Canadian credits will be tradable on international markets, allowing Canadian companies and traders to enter what has become a high area market for investors. Credits can be earned two ways: through reduction in GHG emissions, or through sequestration.

  • Reductions occur when emissions released into the atmosphere by a source are decreased. For example, property developers that include district heating and renewable energy elements in their plans for new sub-divisions could earn offset credits for the resulting emission reductions.
  • Sequestration occurs when emissions in the atmosphere are trapped in a sink. For example, farmers who adopt low-till or zero-till practices or forestry companies that engage in state-of-the-art forest management practices could earn offset credits for the resulting sequestration.

Examples of potential offset projects include:

  • Electricity or gas utilities that implement demand side management (DSM) programs that reduce energy consumption by their customers
  • Forestry companies that invest in reforestation
  • Municipalities that capture and destroy methane from landfill sites
  • Businesses that develop innovative ways to reduce emissions through recycling and energy efficiency;
  • Municipalities that invest in alternative transportation modes; and
  • companies who implement programs encouraging their employees to use public transit or tele-commute

    Results from these projects will be quantified according to International Organization for Standardization (ISO) existing standards, using protocols from organizations such as the World Resources Institute (WRI), and the World Business Council on Sustainable Development (WBCSD) as guidance.

    Recommendations have been made to simplify the quantification and credit-issuance system as much as possible, particularly for small projects.

    Once credits are issued, owners will have the option of selling the credits on international and domestic markets, or to the Climate Fund, through which the government will purchase carbon reductions from Canadian companies and international projects that represent Canada’s interests. The Climate Fund is expected to result in a reduction of 75-115 Mega tonnes per year, with a minimum yearly budget of $1 Billion.

    Apart from Climate Fund purchases, the actual trading of the credits will take place through institutions, such as brokers or exchanges that are set up by the private sector. Here the role of the government will be restricted to tracking the credits through a national tracking system in order to ensure they are not used more than once.

    The government is also moving forward with other climate change initiatives under Project Green.

    An agreement has been reached with the automotive industry that focuses on reducing emissions from light-duty passenger cars and trucks. The industry will work with new technology to reach three goals: improving advanced diesel engine technology, producing more hybrid and alternative fuel vehicles, and increasing the use of fuel efficiency technology. These methods will allow the auto industry to meet the agreed GHG reduction of 5.3 mega-tonnes by 2010.

    Also, the proposal includes an expansion of current provisions for renewable energy sources. The Wind Power Production Initiative (WPPI) was quadrupled in the 2005 budget to include $200 Million over five years to be invested across the provinces with the aim of increasing wind power capacity to 4000 megawatts, or enough to power 1 million homes.

    This popular program gave rise this year to the Renewable Power Production Initiative (RPPI), which commits $97 Million over five years to alternative renewable sources, such as biomass, small hydro, and tidal power.

    Tax breaks have also been included, increasing capital cost allowance from 30 percent to 50 percent for highly efficient generation equipment and the full range of renewable energy generation equipment, including wind turbines, small hydro facilities, active solar heating equipment, photovoltaic and geothermal energy equipment.

    Technology and innovation should be driven by these incentives resulting in a more sophisticated market for renewable energy technologies in Canada and supplementing the reductions expected from the carbon credit system.

    While the effectiveness of ‘carbon finance’ is sill under debate, it is clear Canada will be entering this highly active market early next year. There will be a learning curve in the initial stages, but Canada should be well positioned as a leader in the emissions market by the time Kyoto expires in 2012. This will create opportunities for Canadian companies to receive financial rewards for sustainable innovation and technology.

    As well, the government hopes it will encourage energy conservation measures in many industries and make GHG emissions a part of the decision-making process for Canadian businesses.

    Evaluation of progress that will be issued by the government beginning in 2008 will provide an indication of how effective the offset market has been at achieving the overall goal of reducing GHG emissions.

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