1. Large Industrial Emitters Emissions Trading Natural Resources Canada March 14, 2003

2. Objectives The LIE World Federal Framework Context Role of Emission Trading Developing a Domestic Trading Market

3. The LIE World Backstop Targets Reporting Compliance Penalties Covenants Targets Reporting Compliance Penalties Measurement/ Verification Audit Performance Target x output – emissions= Credit (+)/Deficit(-) Compliance Carbon market Offsets Restoration rate? Carbon Market Linked to “world” Exchange-traded Price Cap Terms & conditions Fiscal implications Offsets Not a positive list Encourage supply

4. Federal Framework 1.55 Mt in emission reductions - equivalent on average to 15% below projected “Business-as-Usual” 2.Emissions Intensity Approach 3.Emissions Trading both domestic and international 4.$15/tonne cap Agreed Elements:

5. The Context Maximum compliance cost equivalent to about 0.0025 of sales Impact will be uneven – greatest for low-margin commodity producers Need to accommodate competitiveness with firm principles

6. Timelines 2008-2012 1st Kyoto commitment period Implementation will take time Spring 2003 model covenant Then start negotiations 2004 aim to complete covenants

7. Proposed Role of Emission Trading Goal: Keep costs of cutting emissions down and protect industry’s competitiveness Protocol includes international emissions trading between states Plan combines covenants/backstop with emission trading for individual firms –covenants/backstop provide impetus for reducing covered industrial emissions –emissions trading lets firms minimize the cost of cutting those emissions.

8. Vehicles for Emission Trading Under Kyoto Permit trading between firms covered by the covenants Linked to international trading of assigned units with industrial countries that have ratified Kyoto And credits created through project-based investments –internationally, through projects in LDCs (the “Clean Development Mechanism”) and in other industrial countries (Joint Implementation) that have ratified Kyoto. –domestically, through offset investments in areas not included in the covenants

9. Current State of the Carbon Market International market showing signs of growth. –UK covenant/emissions trading system –consideration of a 2005 emissions trading system for the EU –Project-based transactions involving LDCs However, market is still at a very early stage –while growing, trading volumes are still small –high degree of market segmentation

10. Developing a Domestic Market Clean Development Mechanism and Joint Implementation Office established in DFAIT –will assist Canadian companies to access international projects Covenants/backstop key catalyst for 2008- 2012 domestic trading Work still needed on how a domestic emission trading system might operate in practice

11. Designing a Domestic Emissions Trading Market Thinking still at early stage, but: Linked to “world” market –international links, however, must be Kyoto compliant Maximize domestic opportunities to find low cost compliance options –gets costs down as low as possible –develop competitive new technologies

12. Creating an Institutional Framework Private sector - driven Government should set the basic rules – permit allocation, backstops, offset creation, permit transfers, emission monitoring and reporting requirements, etc Over time, market likely exchange-based Important for any framework to support a broadly-based and integrated carbon market.

13. Offsets Role: Can expand access to low cost abatement and removal opportunities But need to define the rules, e.g. –appropriate baselines, measurement criteria Need to take into account the administration burden

14. Offsets: Process Interdepartmental federal working group –examining criteria for recognizing domestic offsets –workshops and consultations –decisions this year Assessing the scope for avoiding an exclusive list of eligible industries/activities

15. Emission Trading: Way Ahead Design a backstop system and negotiate GHG covenants Create rules for the trading regime Set out rules for creating offset credits