Doing Their Bit: Ensuring Large Industrial Emitters Contribute Adequately to Canada’s Implementation of the Kyoto Protocol Matthew Bramley / Robert Hornung Pembina Institute, Ottawa May 2, 2003

(total Kyoto gap is 240 Mt)

Covenants/ET system Targets (mostly emissions intensity) Four ways to meet targets: –Internal reductions –Buy domestic credits (“offsets”) –Buy international units –Buy domestic permits Price cap $15/tonne CO 2 e Backstop = default covenant w. default target Emissions reporting system

Is industry being asked to do enough? Plan allocates 99 Mt out of 180 Mt to industry – consistent with 53% of Canada’s GHG emissions accounted for by industry Industry must pay for the 55 Mt from covenants, cost sharing OK for the rest If Kyoto gap increases, 55 Mt must increase Backstop must add up to more than 55 Mt Need tough compliance penalties There should be at least a small percentage of permits auctioned

Emissions intensity targets Environmental performance at risk Government should pursue absolute emissions targets Compromise: make intensity targets adjustable within some limits

Offsets Double counting risk Offsets only for activities going clearly beyond what is in the Plan Offsets don’t provide strong incentives: $10/tonne = < 1 cent/kWh Need strict rules, especially for additionality

Other measures for large industry At least 42 Mt Must be additional to the 55 Mt: –Adjust BAU downwards to include the 42 Mt –The 15% target for oil and gas must be relative to a BAU defined in this way If the programs supposed to deliver the 42 Mt aren’t up to it… upgrade them!

Electricity 45 Mt CO 2 e available at a marginal cost of less than $10 per tonne (Jaccard) Emission reductions from output reductions (renewables, DSM) must be fully additional to emission intensity reductions from covenants Plan lacks any industrial DSM (need to work with provinces) Covenants need to be tweaked to ensure no disincentive to industrial cogen

Allocation Define sectors broadly: maximize incentives to fuel switch, restructure –Same logic: treat old facilities same as new to encourage capital stock turnover Allocation among sectors must consider: –Sectoral emissions intensity –Rate of emissions growth since 1990 –Financial effort to reduce emissions –Sector’s competitive position (risk of leakage) –Availability of low-cost reductions 15% intensity reduction for O&G doesn’t meet these criteria

“Small” industry Includes some pretty big facilities! (automakers etc.) Plan only seeks 3 Mt – should be upgraded Fugitives – Plan seeks 4 Mt – need regulation or a threat of it (provinces)

Purchases of international units Long-standing ENGO concerns: –Co-benefits –Hot air / bogus CDM credits –Emissions per capita inequity Need to hold feds to the commitment to close half the Kyoto gap domestically Need to hold companies to account for the quality of their purchases

Timing (1) Advantages of starting in 2005 (less demanding targets initially): –Deadline for covenant negotiations –Companies forced to prepare –Likely to result in more domestic reductions –Iron out the bugs It’s what the EU’s doing

Timing (2) Covenants extending post-2012: –Why should taxpayers accept the liability? – Emissions trading market provides enough timing flexibility for companies –Why allocate 2 nd CP emission rights now when we don’t know how many Canada will have? –NO WAY!

Process Report to be completed, reviewed and approved by CANet Soon ready for: –Public release –Lobbying –Education