Day One — Introduction
A Federal Perspective on Market Instruments
Presenter:
Mike Beale, Environment Canada
This introductory presentation provided an overview of the federal government’s
perspective on emissions trading. While the federal government has not yet determined its
view on the best approach for implementing Canada’s Kyoto commitment, it recognizes
the potential economic efficiency benefits associated with broad-based economic
instruments.
A carbon tax is problematic for a number of reasons, including potential regional and
sectoral implications and competitiveness concerns for Canadian businesses. Domestic
emissions trading, however, needs to be carefully considered, for reasons such as that:
- it has been successfully used in the US with respect to SO2 emissions;
- international emissions trading is a key element of the Kyoto Protocol, and it
therefore makes sense to consider similar techniques at the domestic level;
- the US is moving in this direction, and the integration of the two economies makes it
sensible to consider a similar approach; and,
- domestic emissions trading is a good fit with credit for early action.
There are several issues to be considered with respect to the development of a domestic
emissions trading program. The development of such a program will require some form of
regulation, and we do not have an existing regulatory regime (this is based upon the
assumption that a purely voluntary program will not get us to the six per cent agreed to
in the Kyoto Protocol). There are also numerous design issues, including what the
trading program would cover in terms of scope; how to allocate the permits; and the extent
of the economic impacts of such a program. Another issue is the need to consider what sort
of complementary measures would be required to give effect to such a regime.
The federal government is supportive of many of the current processes underway to
advance thinking on this issue, such as the National Roundtable on the Environment and
Economy process, Greenhouse Gas Emission Reduction Trading pilot, Ontario’s Pilot
Emission Reduction Trading program, Credit for Early Action, and the newly established
working group as part of the National Climate Change process.
Panel 1 — Opportunities and Threats of Climate Change and Climate Change
Responses
The Science of Climate Change
Presenter:
Bill Taylor, Environment Canada
Bill Taylor’s presentation summarized the latest science in relation the causes
and the potential effects of climate change.
Were it not for the existence of greenhouse gases, which occur in minute amounts
throughout the atmosphere, the earth’s average temperature would be –18oC. However, the actual average temperature is 15o C, indicating GHGs play a significant role in the
earth’s climate. Prior to the industrial revolution, CO2 concentrations
did not vary much. Since that time, atmospheric CO2 concentrations have
increased 30% and we have seen an increase in global temperature of 0.6o C. However, there has been considerable year-to-year
variability in these temperature changes. Is the upward trend in global temperatures
merely a part of the long-term natural cycle or can it be attributed to rising
concentrations of greenhouse gases? These issues have been considered at length by the
Intergovernmental Panel Climate Change (the IPCC) — the international body of
scientists, which advises government on climate change. In 1995 the IPCC concluded that
"the balance of evidence suggests a discernible human influence on global
climate." This statement is a clear indication that greenhouse gas emissions should
be taken seriously.
Research also indicates that these warming patterns have been uneven, and that some
places are actually cooler. The global climate model developed by the Canadian Centre for
Climate Modelling and Analysis shows that future warming will occur during winter, over
land and in the north. The IPCC predicts that global surface warming will be anywhere from
1 to 3.5o C. Reduced sea ice and a sea level rise of 15
to 95 cm are also predicted. Climate change projections for BC and the Yukon indicate that
we will have warmer, wetter winters and wetter summers in the north, but dryer summers in
the south. There are numerous potential impacts, including changes in hydrology: floods,
landslides, and erosion; glacier loss; permafrost reduction; increase in summer drought;
shrinking salmon habitat; northward migration of ecosystems; coastal erosion and loss of
habitat; and, increase in forest fires, pests and disease.
While Canada ranks eleventh over all in greenhouse gas emissions, we are second in
per-capita usage. In 1995, our emissions stood at nine per cent above 1990 levels, and are
projected to grow to 20 to 25 percent of 1990 levels by 2010, therefore the six per cent
reduction mandated by the Kyoto Protocol will really require a 30 per cent
reduction. The three largest sources of greenhouse gas emissions in Canada are CO2,
methane (CH4), and nitrous oxide (N20). Almost ninety percent of our
emissions can be traced to production, transport, and consumption of fossil fuels.
The Economics of Greenhouse Gas Emission Reductions
Presenter:
Michael Margolick, Global Change Strategies International Inc.
This presentation set out the economic context for emissions trading, keeping in mind
the commitments of the Kyoto Protocol. Dr. Margolick suggested that, in the context
of climate change policy development, non-experts who take positions and make decisions
overestimate the accuracy of economic models and do not understand their limited meaning.
For example, while GDP is a well-defined concept and considered a key output, many
models which use GDP as a base are "horrifically abstract." An example of lack
of certainty is a study by the World Resources Institute on the Economics of Climate
Change and/or CO2 taxes, which found that 80 per cent of the variation in
results of different models is due to differences in assumptions.
Often, economic models are not practical enough to be helpful in analyzing an issue as
complex as climate change mitigation. We need a different set of analytical tools to
implement the Kyoto Protocol, but Dr. Margolick does not see this happening.
Further, much of the current does not address the long-term need for solutions. For
example, in the 18th Century sanitation was not a public policy priority —
raw sewage ran in the streets. The discovery of bacteria and the recognition of the public
health implications of this led to action and investment in sewer systems. We now take it
for granted that sewer systems are necessary and worthwhile. But if an economist had
applied cost benefit analysis to the need for sewage systems in the 18th
century, he probably would have concluded it wasn’t worthwhile. Given this context,
it is possible that by the year 2050, the need and benefit of reducing greenhouse gases
may be taken for granted and abstract concepts like GDP may no longer be considered
significant.
The issue of whether emissions trading is based on credits, allowances, or market
trading is immaterial, as none of these will have any environmental or economic effect
unless there is scarcity. Limiting greenhouse gas emissions through regulation will create
scarcity and the degree of scarcity will determine the economic value of whatever is
traded. If we are truly concerned about environmental outcomes, we must address scarcity.
In the meantime three factors favour some emissions trading in today’s context:
- it is a hedge against the risk of future regulations (the assumption being that emission
reductions created now will be usable against future regulation);
- it is an effective government relations tool as it indicates that some action is being
taken; and,
- it facilitates speculation by the financial community.
An Environmental Perspective on Policy Context
Presenter:
Dermot Foley, David Suzuki Foundation
Dermot Foley provided an environmental perspective on climate change. He sees the six
per cent reduction agreed upon at Kyoto as merely a first step, as we will need to reduce
greenhouse gases by 60-80 per cent in order to stabilise.
David Suzuki Foundation supports the use of economic instruments such as taxes and
emissions trading as a means to reduce GHG emissions. They have advocated a cap and trade
allowance program for industry which could result in a twenty per cent reduction of
emissions by 2010. This program includes a number of flexibility mechanisms, which alone
could achieve a ten per cent reduction and will enable Canada to assist with
implementation efforts in other jurisdictions.
The cap and trade allowance program for industry contains a strictly domestic focus.
There are four reasons for this:
- the need for an immediate reduction in fossil fuel consumption (according to Health
Canada, approximately 16,000 people die prematurely each year from air quality problems);
- the need to stimulate the Canadian economy toward innovation and competitiveness; the
need to show international leadership; and,
- early action to lay the groundwork for the post 2012 world.
An Industry Perspective on the Current Policy Context
Presenter:
David Balser, BC Hydro
David Balser outlined the perspective of BC Hydro on climate change. BC Hydro is a
Crown Corporation, and the third largest utility in Canada. Most of its focus is
hydroelectric power, and its GHG emissions are relatively low. Average emissions at BC
Hydro are 30t/GWH, whereas the US utility average is 550t/GWH and the Canadian utility
average is 200t/GWH. Climate change presents challenges for BC Hydro as it may be
penalized for being good at what it does.
BC Hydro emissions are projected to increase. Concerns about protecting fish and
wildlife habitat and protecting the land base create limits on the development of further
hydropower, meaning that BC Hydro may add more gas turbines. Changes in the North American
electricity market also mean that BC Hydro no longer has a captive market, thus BC Hydro
is interested in flexible approaches to environmental protection which allow it to meet
environmental ends at the lowest possible cost.
BC Hydro is currently investigating opportunities to invest in emission offsets —
measures that compensate for increased emissions from one source by reducing emissions
from another source. BC Hydro sees offsets as a means of mitigating future emissions at a
relatively low cost. Offsets also allow BC Hydro to use synergies which exist between
offset types and other BC Hydro business incentives (such as electricity trade and
customer service). In addition, using offsets will provide transaction experience for
future emissions trading programs or the possibility of offset regulations. BC Hydro is
keen to invest in offsets now as offsets are consistent with BC Government policy and as a
Crown corporation BC would like to support its shareholder. Moreover, BC Hydro competitors
are already investing in offsets.
There are risks in investing in offsets. First, the value of offsets may be uncertain
given the likelihood and costs of future GHG regulations are uncertain. Second, the
legitimacy of these offsets may be uncertain in the event that government policies
recognizing early action do not materialize.
BC Hydro sees a comprehensive offset investment portfolio as premature but would like
to participate in public policy development and gain experience in emissions trading. On
this latter point, BC Hydro supports credit for early action with respect to offsets, low
transaction costs, and a baseline that would accommodate a range of circumstances.
Questions:
Q: What is the value of a carbon credit?
A: The current value of credits is low, because much of this activity is speculative.
Panel 2 – Introduction to Market Instruments
The Case for Market Instruments
Presenter:
Erik Haites, Margaree Consultants Inc.
The fundamental reason to use an economic or market instrument — an emissions tax
or emissions trading — is that once you have set an environmental goal, it should
help you achieve the goal at lower cost. The money saved can then be used for other useful
purposes. The environmental goals are set by legislators, not the marketplace. To achieve
an environmental goal using an economic instrument requires monitoring of compliance, and
enforcement in cases of non-compliance, just like any other environmental regulation.
An emissions tax is a tax or fee per unit of a pollutant emitted or discharged. Sources
subject to the tax pay a specified amount per unit of emissions discharged, for example $1
per tonne of CO2. An emissions tax provides an incentive to reduce emissions.
Sources able to reduce emissions at a cost below the tax rate reduce their emissions and
avoid paying the tax. Sources facing high emission reduction costs pay the tax.
To tax greenhouse gas emissions directly, government would need to monitor and tax all
sources of these emissions. There are millions of sources of greenhouse gas emissions,
most of them small and costly to monitor. Thus, it would be difficult and costly to
implement an emissions tax in this way. But the same result can be achieved more simply.
Energy-related CO2emissions account for most of Canada's greenhouse gas
emissions. The energy-related CO2 emissions due to combustion of a fossil fuel
are determined by the carbon content of the fuel use. Thus, taxing fossil fuels based on
their carbon content has the same effect as taxing the CO2 emissions from
combustion of those fuels. A tax on the carbon content of fossil fuels used in Canada
would involve several hundred producers and importers, most of whom are already required
to report their production or imports to the government. Thus a carbon tax would be
relatively simple to administer.
A tax on the energy content or an ad valorem tax on the market price of fuels is
also possible. Such taxes increase the price of fossil fuels to consumers and so reduce
consumption and CO2 emissions. But they are much less efficient at reducing CO2
emissions than a carbon tax. Coal has the highest CO2 emission and lowest price
per unit of energy of any fossil fuel. To provide the proper incentive to consumers the
tax should be proportional to the CO2 emissions. A carbon tax achieves that
result, leading to higher price increases for coal than for other fossil fuels. An energy
tax would increase the price per unit of energy by the same amount for each fossil fuel.
And an ad valorem tax would increase the price of coal less than the prices of
other fossil fuels — exactly the opposite of the desired result.
Emissions trading can take the form of a cap with allowance trading or credit trading.
In the first case a cap is established for total emissions by the sources required to
participate in the program. Allowance equal to the cap (total allowable emissions) are
distributed to participants. Participants must monitor and hold allowances equal to their
actual emissions. Participants are allowed to buy and sell allowances. Sources that can
reduce emissions at a cost less than the market price for allowances implement reduction
measures. They benefit financially because they can sell the extra allowances (or buy
fewer allowances).
Every existing trading program has allocated allowances free of charge but this may not
be appropriate in the context of greenhouse gases because it tends to penalize new and
expanding sources relative to existing and declining sources, and a greenhouse gas trading
program might be in place for a century. Instead allowances could be sold at auction or be
distributed free of charge based on a formula that reflects changes to the participant
population.
As in the case of a tax on energy-related CO2 emissions, it would be
difficult and costly to implement an allowance trading program for the millions of sources
that discharge such emissions. But it is feasible to implement an allowance trading
program for fossil fuel producers and importers for the carbon content of the fuels sold
in Canada. This would effectively cap energy-related CO2 emissions. This is
sometimes called a substance trading system.
A credit trading system allows sources to claim credits for actions to reduce their
emissions from an agreed baseline. The challenge then is to define a baseline that
reflects what the emissions would have been in the absence of the reduction measures. If
the baselines for the participants are the same as the allowances received under a cap and
allowance system (e.g. both baselines and allocations can be based on historic emissions)
the systems are very similar.
Emissions trading is similar to an emission tax, except in terms of where the
uncertainty lies. With a trading system you know what the emission reductions will be, but
not the price of the allowances which determines the cost of the reduction measures that
should be implemented. With a tax you know how much sources will pay per tonne of
emissions (the cost of reducing emissions) but you do not know the total emissions
reduction that will be achieved.
Emissions trading, rather than emissions taxes, are being considered for greenhouse
gases because the commitments to reduce emissions are expressed as quantitative limits and
because taxes are unpopular. Emissions trading requires flexibility in terms of where and,
to some extent when, emissions are reduced. Greenhouse gases have no local health or
environmental impacts so shifts in the timing and location of emissions reductions do not
involve environmental risks so they are well suited to emissions trading. Also the
potential cost savings from trading are estimated to be substantial; international
emissions trading offers cost savings of over 50% relative to the cost of achieving the
same reductions using conventional regulations.
Questions:
Q: From local government perspective, I question the conclusion that it does not matter
where emission reductions take place. From a local perspective there are many other
benefits from emissions reductions.
A: That is absolutely correct, my comments were an oversimplification. Actions to
reduce greenhouse gas emissions often reduce emissions of other pollutants, such as NOx,
VOCs, SOx, particulates and toxics, which have local health or environmental benefits. The
benefits of the reductions in these ancillary pollutants differ by location. Thus, the
location of the reductions may be important for the ancillary benefits.
Q: With Canadian permits, what if you give out the permits, and then you have a foreign
company that wants to invest in Canada and needs to buy them. Wouldn’t international
permits be more equitable? If they pass the Multilaterial Agreement on Investment, how
would national permits fit?
A. The Kyoto Protocol has three trading options and each country will develop
its own domestic system. Any company setting up in the countries with caps will be faced
with different but similar compliance requirements. The costs for new companies will
depend on how the trading system works. If allowances are auctioned then there is no cost
difference between new and old. If they are grandfathered then there will need to be
mechanisms which allow new players into the market.
Q: It all seems like an end-of-the-pipe solution considering the monitoring that will
be required. Why not focus on the source, which would be the fossil fuel producers?
Wouldn’t that be easier to control and monitor?
A: That option is being studied. Both carbon coupon systems and carbon taxes would be
imposed at that level.
Q: We can’t cap car emissions, but how do we access the users?
A: Two things happen. If you have a trading system or tax at the producer level, prices
at the consumer level go up. Prices go up downstream of the trading system or the tax, and
that is the signal to be more efficient and to fuel switch. You might want to complement
such a policy choice with regulations for increased energy efficiency standards.
Q: The actual price on your graph does that reflect the market price of the allowance?
How is the market price determined?
A: The market is thin in some of the state programs and it is harder to determine the
market price; this is due to the minimal number of uses for the credits. They are required
to mainly offset the emissions due to large new sources or expansions. The number of large
new and expanding sources is relatively small in many areas.
The Different Forms of Emissions Trading
Presenter:
Chris Rolfe, West Coast Environmental Law
Market instruments are instruments by which the state harnesses the market to achieve a
state mandate goal at lower cost. The following four instruments all provide signals
throughout the economy, but their specific design attributes are important for a number of
reasons.
Under a carbon tax, a charge on the carbon content of fuel would directly affect 72% of
Canada’s emissions and could be fairly easily expanded to cover other emissions. A
single relatively simple instrument would influence the myriad decisions and behaviours
that impact on Canada’s greenhouse gas emissions.
Under emission allowance trading — or cap and emission allowance trading —
emission rights are allocated to different sources. Allowances represent emission rights.
Allowance trading is mainly practical for large industrial sources, but not small sources
such as passenger transportation. Unless combined with credit trading, there is no access
to the potentially low cost emission reductions that lie outside a cap and trade system.
Emission allowance trading is often criticized as involving licences to pollute. This is
true, allowances are licences to emit greenhouse gases. But, whereas currently everyone
has a licence to emit an unlimited amount of greenhouse gases, cap and allowance trading
limits the amount of allowances and the emissions per allowance.
In credit trading programs credit is generally given for reductions in emissions from
the lower of actual levels or levels allowed by regulation. Credit trading programs do not
involve a formal allocation of emission rights. Instead, a de facto allocation
occurs through standard setting. If standards are stringent there is a lower allocation.
One of the fundamental differences between most allowance trading systems and most credit
trading systems is that credits can be created from emission reductions which occur
anywhere. For instance, an environmental group might generate credits by carrying out home
energy efficiency retrofits to produce credits. The emissions reductions must be real
(although avoided increases in emissions may count as a reduction), measurable (i.e.,
quantifiable with a reasonable degree of accuracy), verifiable (i.e., there must be means
of verifying implementation of the action), and surplus to any regulatory requirements.
In a cap and carbon allowance trading system a cap is set on the total amount of fossil
carbon in fuels that can be imported or produced in Canada. Importers or producers would
need to hold carbon allowances for the fossil carbon content of their imports or
production. Exporters and users of fossil fuels as inputs into long lived products would
receive allowances equal to the carbon content of fuel exported or sequestered in
products.
This system creates scarcity, and holders of carbon allowances are able to charge a
premium on their fuels. The premium is highest on carbon intensive fuels. In the case of
emission allowance trading, allocation of emissions on the basis of historic emissions may
be considered socially acceptable because those receiving the free allowances are also
incurring the cost of emission reductions. Generally this will not be the case in the
context of carbon allowance trading. Those holding the carbon allowance would be able to
collect the premium on carbon-based fuels and will not necessarily bear the costs of
emission reductions. Giving fossil fuel producers and importers the right to appropriate
this premium would likely be socially unacceptable, so it usually assumed that government
will either auction carbon allowances or tax back the premium. Government can redistribute
the revenue in many ways.
Often stakeholder’s opinions as to what market instruments are best depends on
assumptions regarding burden sharing. For instance, it is often assumed by businesses that
emission allowances will be allocated in proportion to historic emissions in a baseline
year. It is often assumed that revenue from carbon coupon auctions or carbon taxes will be
used to reduce general taxes. Neither assumption is necessarily true. Indeed, most market
instruments can be designed to have the same redistributive impacts. For instance, tax
revenues might be redistributed to industries that pay the tax. (Sweden’s tax on SO2
is redistributed to utilities.) Emission allowances might be allocated to individuals. In
the same way that government can allocate carbon tax revenue to community transition
strategies, it can give allowances to community transition funds.
Credit trading is an exception to the rule that different market instruments can be
designed to have the same redistributive impact. Under credit trading there is no way of
allocating auction revenue or distributing allowances to aid sectors. Burden sharing
depends on the standards applicable to a firm and their cost of reducing emissions. Firms
with large, low cost emission reductions may favour credit trading because they assume
they will be able to sell large numbers of credits that are surplus to regulatory
standards.
One advantage to a carbon tax, or auctioned allowances, is that government has
flexibility in how it redistributes revenue. If one sector is reaping windfall profits
through a combination of low cost emission reductions and tax credit packages for energy
intensive sectors, government can reduce the tax credits and shift revenue redistribution
to sectors that need assistance in the transition to lower carbon emissions. For instance,
the passenger transportation sector might need investments in transit in order to make the
transition.
Different instruments raise different issues with regard to the certainty of achieving
an environmental goal. The difficulty with the carbon tax is that it is hard to know what
level is needed to achieve an environmental goal, and it requires ongoing political will
to keep increasing the tax. Credit trading, unless combined with a cap and allowance
system, requires ongoing increases to the stringency of regulations, and is thus also
dependent on continuing political will. It would be difficult to work out a politically
acceptable free allocation of allowances in a cap and emission allowance trading system,
but once the system is established it would have momentum and be hard to derail. Cap and
carbon credit trading, would be relatively simple to establish and creates momentum as
well.
Market Instruments and Competitiveness
Presenter:
John Duffy
Macroeconomic modeling has been used to estimate the costs of reducing emissions in the
industrialized world. Macroeconomic models have been subject to criticism for being highly
dependent on assumptions, but they are the only tools we have. The good news is that the
costs of reducing greenhouse gases are less costly in Canada than in Europe and Japan. The
bad new is that it is twice as high in Canada as in the US. This is an important
conclusion if it is true, as the US is our greatest competitor. The US has lower cost
emission reductions mostly due to their use of coal and the easiest way to reduce
greenhouse gases is to switch from coal use. The relative lack of low cost emission
reductions in Canada will have an impact on our competitiveness.
On the other hand, energy is only a small share of the total costs of goods produced in
Canada and US. On average energy costs only represent four per cent of total productions
costs for Canadian industry. We need to keep the big picture in mind; the costs of
greenhouse gas reduction may be a small factor in our overall competitiveness.
The main advantage to market instruments is that they provide for flexibility in where
emission reductions occur and thus should reduce the cost of compliance for industry. This
will help Canada’s competitiveness. Grandfathering allocations (i.e. distribution in
proportion to past emissions or productions) would lead to "windfall profits,"
but these profits are likely to be invested and could lead to increased productivity.
Auctioned permits means the profits go to government and the economic effects depend on
what the government does with the revenue. Paying down the debt would remove money from
the economy. Lowering taxes would free up money for investment, and would also lead to
productivity gains.
Panel 3: Trading in the Real World
The Toronto Greenhouse Gas Pilot Trade Project — Mobilizing Municipalities
Presenter:
Ralph Torrie, Torrie Smith Associates
Local governments are major players in the energy economy: they own and control
utilities; they control and operate transit; they regulate energy using activities; their
land use planning determines urban form and energy consumption.
The International Council for Local Environmental Issues wanted to look at trading to
see if municipalities could have a role in trading systems using their levers to reduce
emissions. At that time it was only the big energy companies looking at the concept. There
was a desire to avoid a polarization in the argument between those steadfastly against
trading and those for trading.
The Toronto Greenhouse Gas Pilot Trade Project looked at the potential for
municipalities to take what they were doing to reduce emissions and look to a potential
role for emissions trading. The Pilot looked at a number of issues that relate to whether
or not municipalities could realize the potential of reductions from municipal actions.
Market instruments have to be designed so that the lowest cost emission reductions can
be realized. Programs can be designed to shut out the lowest cost emission reduction
opportunities. For instance, additionality requirements can rule out lowest cost emission
reductions. The largest opportunities for low cost emission reductions remain through
aggregating emission reductions on the demand side.
Market instruments have to be designed so that their equity implications are
acceptable. There is no right and wrong answer to what is equitable: it is a political
decision. However, market instruments will create winners and losers and need to be
designed with equity in mind.
Market instruments will require government refereeing or intervention. Government must
establish an enabling framework so that trading can proceed in an orderly way. In
particular, there needs to be government sanctioned protocols for quantification and
verification of emissions or emission reductions. There is a particular need to address
the quantification protocols for electricity demand measures. Average emissions are simply
too poor a proxy for actual emission reductions from demand side management, but the
protocols cannot be overly complex and expensive to apply.
Transaction costs must not cripple the program. There are a lot of innovative ideas out
there to avoid high transaction costs. Municipalities are looking for a way to bring their
emissions reductions to a market and minimize the level of transaction costs. The
transaction costs will go down as a system becomes established. The market must at the
outset not squelch innovation since it will bring down transaction costs.
The size and the scope of the cap is all important. An open market trading system is
not viable as an effective long-term solution to growing emissions. One of the stressful
things that trading brings up is concern that the environmental goal will not be achieved.
There are a number of conditions that have to be met for local government to
participate in emissions trading, including: strict criteria for quantification and
verification protocols, an enabling framework (certification, rules), inclusion of end
users, resolution of electricity credit problem, stability, aggregation, brokerage,
financial return.
Questions:
Q: Is emissions trading getting too much attention?
A: Any attention to the greenhouse gas issue is a good thing in my view, but I do feel
that there aspects of the issue which are more important than emissions trading but which
are getting less attention. First among these is the gap between what the climate
scientists are telling us is necessary — a 50% to 70% reduction in emissions —
and the level of the Kyoto target – only a six per cent reduction in Canada, and even
less in many other countries. We are still in denial on the size of the transition we are
entering. We need to acknowledge and take responsibility for the size of emission
reductions that must be achieved if the emissions trading market is to be relevant to the
task at hand.
The US Sulphur Dioxide Trading Program
Presenter:
Dale Bryk, Natural Resources Defense Council
In the US, as in Canada, the idea of a carbon tax does not have much political support.
On the other hand there is real appetite for trading even though many industries do not
want to see a carbon cap or ratification of the Kyoto Protocol. One of the
advantages of trading, even in the absence of a cap, is that it provides companies with an
opportunity to explore the potential for a competitive advantage in a carbon-restricted
environment and incentive to seek out low-cost or profitable emission reductions.
Not only does trading allow companies to reduce the cost of compliance with regulatory
requirements, it can also result in additional environmental benefits. This happens, for
example, when trading makes it cost-effective for a company to over-comply in early years
and "bank" credits for future use. The SO2 program is an example of
the value of banking. The goal of the SO2 program is to reduce emissions by
twenty per cent of 1980 levels in Phase I, and by an additional 30% in Phase II, for a
total reduction of 8.5 million tonnes of emissions by the year 2000. In Phase I, many
companies decided to over-comply, knowing that they could bank their excess reductions for
use in Phase II. As a result, participants reduced total emissions by 35%, rather than
merely twenty per cent during Phase I. These early reductions – nearly two million
tonnes – benefit the environment by removing acid from the atmosphere immediately,
while simultaneously helping companies to reduce future compliance costs.
Another lesson learned from the US program was that it is very easy for regulated
companies to overestimate the costs of compliance with future emission reduction
requirements. This is primarily due to the fact that it is impossible to predict the
technological advances that trading will drive. The great advantage of a cap and trade
system is that it puts all compliance options in direct competition with one another,
lowering costs and driving companies to develop new and cheaper methods of compliance. In
the acid rain program, this resulted in cheaper low sulphur coal, technological advances
allowing the use of low sulphur coal without capital investments to upgrade plants and
cheaper control technologies — scrubber costs fell 50% from 1989 prices during Phase
I of the program. In addition, when the acid rain program was initiated, many assumed that
companies would only trade emission allowances internally, and did not take into account
the efficiencies that companies realized by trading allowances with one another. Projected
annual compliance costs for Phase II were expected to be around $2.6 billion, but actual
costs have been around $0.7 billion and are expected to peak at $1.4 billion. In a
greenhouse gas trading program we can expect even greater opportunities to reduce
compliance costs because there will be so many more options for emissions reduction than
there were in the acid rain program.
Setting baselines and distributing allowances are very contentious processes, as the US
acid rain program demonstrated. This is likely to be even worse in the context of
greenhouse gas trading because there are far more sources and sectors that can argue they
have special circumstances. If allowances are allocated on the basis of emissions during a
historic baseline period, as they have been under most existing trading programs, dirtier
generators are likely to benefit. In contrast, basing allocation on a single, output-based
standard — for example tons of emissions per megawatt-hour — would give an
advantage to cleaner generators. Baselines can also effect the speed with which emission
reductions occur. California’s Regional Clean Air Incentives Market (RECLAIM) program
(a cap and trade system for local pollutants) set its baseline so high that in the first
years all sources were in compliance even though emissions had increased.
Questions:
Q: The actual price on your graph does that reflect the market price of the allowance?
How is the market price determined?
A: The graph illustrates the average market price for allowances sold in the
program’s auction. Companies may participate in the auction or transact directly with
other companies.
Q: When might some of this be implemented in the greenhouse gas context?
A: A number of parties are already experimenting with carbon transactions and exploring
the possible frameworks and rules for a greenhouse gas trading scheme. However, there are
some valid reasons for caution in this area. If a single bad trade receives a substantial
amount of criticism from the environmental community it could tarnish the whole idea of
trading. We want to be sure that what companies are doing stands up environmentally.
The NESCAUM and PERT Credit Trading Program
Presenter:
Ron Nielsen, Pollution Probe
Under US programs there are essentially two types of trading credit programs and
allowance programs. Nearly half of the states in the US are engaged in some sort of
trading system, mainly to deal with Clean Air Act "criteria pollutants."
The US EPA has encouraged states to experiment with trading in non-attainment areas. Most
programs are concerned with ground level ozone.
One of the first efforts to look at the open market credit trading was under the
NESCAUM (North East States for Coordinated Air Use Management) program. Most of the
programs work with the existing legislative and regulatory system. For instance, trading
is used to reduce the costs of Reasonably Available Control Technology standards. These
standards are essential to creating the scarcity that drives trading.
The Regional Clean Air Incentives Market (RECLAIM) program was an exception to reliance
on existing regulatory standards. It is an allowance trading system. It was established
because the California’s South Coast Air Quality Management District felt they had
gone as far as they could with a command and control approach.
The elements common to both allowance trading and credit trading are that you have to
set a baseline of some form, and there needs to be an incentive causing sources to reduce.
Both systems rely on an incentive to reduce. In credit trading the incentive is regulatory
standards or targeted emission reductions. In an allowance trading program it is the
number of allowances. The two programs are working on the same basic principle; the
difference lies in what is quantified, the reduction or the allowable emissions level. In
an open market credit trading program any source is eligible to reduce emissions and seek
recognition of ERCs. Allowance trading is typically a closed market: a cap is placed on
emissions from specified sources.
In the states where trading has happened, you are seeing very small amounts of the
total emissions being addressed: typically trading programs only deal with about five per
cent of annual emissions of pollutants in the state. Without really clear incentives the
only people taking advantage are those that are either very low or very high on the cost
curve. Volumes have been pretty low. They have contributed to early reductions, but on a
small scale.
PERT — Ontario’s Pilot Emission Reduction Trading Program — is an
Ontario-based pilot initiated by industry but using a multistakeholder approach. It
addresses a number of pollutants including NOx, SOx, CO2, and possibly VOCS. A
letter of understanding with the Ontario Ministry of the Environment promises some sort of
recognition for reductions made under the Pilot. To date it has established a mechanism
for creating credits, registering them and trading reduction credits. Two of the six
trades have been international. There is an inventory of reductions on the books now.
The mechanics involved in setting up a trading system are reasonably straightforward.
The primary difficulty is the same in both allowance trading and credit trading: you need
to set baselines or allocate allowances. The trading program needs to be integrated with
the legislative framework which establish a need to reduce emissions. The trading program
itself does not create the need for emission reductions or provide the incentive to make
reductions. It is simply the mechanism through which sources can potentially obtain more
cost effective reductions, and can do so on a schedule that is potentially more to their
advantage, thus providing flexibility as well.
Existing trading programs have involved only a limited number of sources (e.g., the US
acid rain program began with 263 sources and will expand to approximately 2000 sources in
its next phase). Developing a trading program for greenhouse gas, in which there are
millions of sources, is an entirely different challenge. Thus one of the key issues to be
addressed is: at what point in the system (upstream, midstream, downstream) should a
trading program be established? This choice will affect the number of participants in the
trading program, which has a direct impact on implementation and administration issues.
Questions:
Q: The actual price on your graph does that reflect the market price of the allowance?
How is the market price determined?
A: It is also influenced strongly by the degree of certainty surrounding whether
credits will be recognized. Most sources have made their own reductions because there are
often questions as to whether the credits will be approved by EPA. If there is concern
that the credit may be revoked, then its perceived value will be lower.
Q: Is emissions trading getting too much attention?
A: The discussion on emission trading is deflecting the discussion from the key issue
which is the environmental targets themselves.
Q: When might some of this be implemented?
A: Five years is a reasonable time line. We have ministers calling for a credit for
early action program in place for January 1999, and on the international scene the clean
development mechanism is allowed to take place in the year 2000. You could have the
developed and developing countries producing credits by that time. Although, you want to
proceed with caution to avoid bogus credits, and avoid having the system called into
question.
Reducing Industrial Emissions: the Alcan example
Presenter:
Steven Pomper, Alcan Aluminum
Alcan will reduce its GHG emissions from 1990 levels but will not likely be a net
seller of credits. They intend to gain trading experience but will be for the most part
apply credits to their future business activities. The aluminum production system takes
bauxite and processes it through an alumina refinery. The aluminum oxide (alumina) is then
sent to a primary smelter that uses a great deal of electricity to produce aluminum. The
significant part of the process that produces greenhouse gas is the primary smelter. On
average aluminum production on a life cycle basis generates about fifteen tonnes of CO2
per tonne of aluminum produced. The majority of that fifteen tonnes, about twelve tonnes,
is associated with the electricity used, the carbon anode consumption, and the PFC
generation from the smelting process.
The carbon anode consumption represents about 1.5 to 2 tonnes. PFCs are very long-lived
greenhouse gases. They have a Global Warming Potential (the total impact on global warming
over the next 100 years) that is about 6500 to 9200 times greater than CO2.
They are liberated from the smelting process during a process upset known as an anode
effect. Alcan has reduced PFCs by about 25% since 1990. We see further reductions in the
future.
Alcan would like to see trading programs designed in a manner that both allows us to
take credit for our successes, but also makes us responsible for the full lifecycle of our
product. Alcan believes in a consumption-based approach, which implies that Alcan should
be responsible for emissions from the electricity they use. Alcan thinks they should be
responsible for all upstream effects, including the mining. They will also take
responsibility for transporting the product to the consumer. While a production-based
approach would make them look better from a global warming perspective, they believe the
decision-maker should take responsibility for their decision.
Alcan believes in the credit-based approach since it is actions that should be
rewarded. Alcan does not see the debate around allocation as a productive discussion.
Being firm believers in the open market system, they do not want a small group of people
deciding how much it is going to cost them to do business. Alcan believes that the
voluntary approach by itself will not be enough to get the job done, they want to use a
legally binding covenant.
By using a credit-based approach, Alcan hopes to have a number of actions that reduce
greenhouse gas. For instance, they would like to get credit for recycling activity: a
tonne of recycled aluminum can be produced at about five per cent of the CO2 as
for primary aluminum, thereby avoiding about 95% of the emission. The aluminum industry
would like to see this credit in order to further encourage recycling.
Transportation applications of aluminum is where you see large reductions in emissions
through displacing heavy materials and therefore improving fuel consumption. For example,
one tonne of aluminum which displaces steel will reduce twenty tonnes of CO2
over the life of an average vehicle. Alcan has spent over $200 million on technology which
can be applied to the standard family car. The Ford P2000 mid-sized car is an example
where the extensive use of aluminum helped to reduce vehicle weight from 3300 to about
2000 pounds. The fuel economy of this vehicle increased from 27 to 35 miles per gallon.
With the lightweight car, the power plant can also be reduced to achieve the same
performance while saving addition fuel. .
Questions:
Q: What was the decision like when you decided to reduce PFCs, given that there was no
price for carbon?
A: When PFC emissions occur there is a process upset, something that you wanted to
avoid regardless. In some cases the investments necessary to avoid these upsets paid for
themselves in power and production savings, in others the investments cannot be justified
simply on an economic basis.
Q: How can you accommodate reductions if your business is growing?
A: You will run into a problem in the long run without further technological
innovation. For the present, we have a remarkable opportunity to reduce some of these
fairly potent gases. Also important is secondary aluminum vs. primary, you can use it for
a twentieth of the carbon intensity. We have to remember the Kyoto Protocol was not
about growth, but about limits to growth.
Q: We have been advocating the same responsibility regarding if you consume it, so does
that mean the recyclers get the credit for what they recycle?
A: If the action is taken by group that collects the aluminum, they should get the
credit. This would create quite an inducement to encourage further recycling.
Q: When might some of this be implemented?
A: These ideas could be put in place with a credit for early action approach
Panel 4: Alternatives to Trading and Concerns Regarding Trading
Communities and the Need for Transition Strategies: A Labour Perspective
Presenter:
Cliff Stainsby, BC Government Employees Union
This presentation focused on transition strategies, with particular reference to
working people and communities. Cliff Stainsby presented the perspective of the BCGEU,
which has about 60,000 members who work and live throughout BC. Climate change is a
symptom of a larger problem and we need transition strategies that go beyond climate
change.
The government response to climate change has so far been "tentative" at
best, as many studies based on bottom-up considerations of what can actually be done
indicate that substantial emission reductions can be achieved with current technological
potential, while maintaining economic growth and creating jobs. Many economists tend to
distrust these bottom up models, so they construct their own models which maintain that
reducing emissions will be extraordinarily expensive. These top down models are extremely
misleading, as they rarely include the benefits of avoiding climate change; they place
tremendous weight on current consumer preferences; and, they assume that the current
economy operates optimally.
In either scenario even if economy-wide impacts are minimal, some communities, workers,
and industrial sectors will be affected. It is neither fair nor just for society to simply
abandon these communities and workers to the whims of the marketplace. Therefore, we must
begin to develop strategies which will fairly share the burden of change, and which will
create new opportunities for these people and communities. These strategies should focus
on full employment as an economic goal, and should direct resources to assist in community
restructuring. Economic instruments, such as revenue-neutral green taxes and emissions
trading can aid in facilitating these changes, which will result in a fairer distribution
of wealth and income.
With respect to tradable permits, initial allocation of such permits should be
auctioned, and the economic rent should go to the public purse where it can be used to
fund transition activities. This would also help internalize the costs of greenhouse gas
emissions.
Our current economic situation poses a problem for successful transition strategies as
governments are increasingly restrained in their ability to function on behalf of their
own citizens. For example, the NAFTA and the proposed Multilateral Agreement on Investment
(MAI) remove the ability of government to discriminate in favour of local communities.
There are other problems impeding the development of successful transition strategies:
the ideology of progress and the religion of humanism. These tenets of progress and
humanism are rarely questioned in our society; progress maintains that there are no limits
to our ability to increase our material well-being, and humanism holds that as a species,
we will be able to solve all problems to our own advantage and betterment. Combined, these
theories maintain that we need not worry about the future, as progress will look after
things, and nature will always be ours to dominate.
We now face climate change because we mindlessly equate more with better, we arrogantly
assume that ingenuity will prevail, and we pretend that limits do not exist. A successful
transition strategy cannot deal simply with climate change because we face so many
problems that threaten workers and communities, and because our way of life is
unsustainable. Civil society has withered, and control of the public sphere has been ceded
to the corporate sector. Our belief in progress blinds us to the warnings of the
world’s top scientists that there are limits to our growth.
Therefore, to be successful, any transition strategy must consider abandoning progress
and the arrogance of humanism. Simply eliminating the threat of climate change will not
result in transitions which provides much hope. A meaningful transition strategy will see
us move from worshipping progress to striving for sustainability.
Concerns about Market Instruments
Presenter:
Michael Doherty, BC Public Interest Advocacy Centre
This presentation outlined five objections or concerns about economic instruments and
more specifically, tradable permits. On a somewhat ironic note, Michael Doherty noted that
discussions regarding economic instruments are extremely useful, as they provide great
work projects for many in the public policy, economic and environmental communities.
The first main concern about economic instruments is the lack of political will to
implement them, or adopt serious measures to avert climate change. The policy options
exist but to date, governments have failed to endorse them in a serious way. It is a leap
of faith to think that governments want to use economic instruments, because they have not
yet done so.
The second concern pertains to the value of debating economic instruments. While there
is no harm in discussing these ideas, one drawback is that these discussions give the
illusion that something is happening on these issues, letting decision-makers "off
the hook," and providing them an excuse to do nothing.
The third problem is that even if a system for tradable permits was established,
governments would still find a way to undermine them, as there will always be special
circumstances warranting exceptions to regulations.
The fourth concern is that discussions regarding economic instruments assume a primacy
of economics that may not be warranted or deserved. The assumption that economics prevails
over other disciplines in this regard should be reconsidered.
Finally, Michael Doherty argues that economic instruments will hurt the poor and that
middle class behaviour will not change. For example, the poor in society will have
difficulty heating their homes but the middle class will continue to use Sport Utility
Vehicles (SUVs). Purchases of these energy-wasting machines has little to do with
rationale economics and everything to do with image and status. Image and status will
continue to drive demand for SUVs even if they become even less attractive economically.
Michael Doherty concludes by stating that if governments wanted to address global
climate change, any one of us could write up a plan on the back of a napkin that would
achieve change, but that, to date, governments have shown little interest in actually
putting economic instruments into effect.
Questions: This discussion focused on the need for political will to act on
climate change and the need to empower voters, consumers, and organised labour to advocate
for change. In this regard, Michael Doherty commented that real change will likely occur
when we have a crisis of some sort, and Cliff Stainsby noted that both the right and left
sides of the spectrum are enthralled with progress, and until this notion is dismissed
little change will occur. Bottom up solutions present a particular challenge because
people tend to think more as consumers than as voters.
Day Two: Credit Trading for Credit Producers
Panel 1 – Review of Credit Trading
Overview of Credit Trading
Presenter:
Chris Rolfe, West Coast Environmental Law
Chris Rolfe’s presentation reviewed the reasons for focusing on credit trading and
discussed the pros and cons of credit trading.
Credit trading is of special interest because it is happening already. Large emitters
are shopping for low cost emission reductions either for public relations purposes or as
hedges against the threat of future regulation. The latter is the more important
incentive. Government has given a vague commitment to recognize the emission reductions
that are registered under the Greenhouse Emission Reduction Trading program. There is a
strong possibility that under a national Credit for Early Action program, emission
reductions from projects which occur after 1998 will receive credit, most likely in the
form of a portion of Canada’s allowable emissions budget (Canada’s Kyoto
allocation).
From an environmentalist’s perspective, credit trading is attractive because it
creates incentives for a third party to overcome barriers to no-regrets measures. In a
credit trading program a municipality, environmental group or entrepreneur can carry out a
program to try and aggregate a large number of small emission reductions. They can
potentially sell credits for programs like home retrofits, or trip reductions. The US
Environmental Defence Fund is already in the business of generating credits for local
pollutant emission reductions from scrapping old high emitting gas guzzlers. This
theoretical benefit might be difficult to deliver in practice. Often the best projects
from a societal viewpoint are the hardest to quantify.
Early credit trading may help overcome political resistance to effective climate policy
because early experiments with credit trading could deflate the projections that it is
going to cost $300 per tonne to reduce greenhouse gas emissions. Also, companies that have
accumulated credits may, in some cases, begin to see a competitive advantage to tough
emission reduction targets.
The disadvantages of credit trading are significant. Without a cap on emissions, credit
trading will require ongoing political will to impose tougher standards. Using credit from
a project that would have occurred anyway will reduce environmental effectiveness of
regulations. This problem is particularly acute in the context of greenhouse gas emission
because many projects which reduce emissions are profitable and they are happening all the
time. Simply because of the difficulty of setting baselines and verifying emission
reductions at multiple sources, credit trading will likely be much more expensive to
enforce and administer.
One of the biggest problems with credit trading is that it is likely to lead to an
inequitable distribution of the emission reduction "burden." Under a credit
trading program, the issue of burden sharing — who profits and who pays — is
likely to be an accident. Large emitters who can reduce emissions cheaply may be able to
make windfall profits by selling emission reduction credits. Although they can be subject
to more stringent standards, they will be able to reap windfalls from low cost emission
reductions prior to the development of stringent standards. Such windfall profits are not
inherently bad, but they mean that some other businesses or other sectors will have to
shoulder a greater share of the emission reduction "burden." Moreover, there is
no possibility of using the allocation of emission rights to raise revenue for public
emission reduction initiatives like transit or for community and worker transition
strategies.
Introduction to Greenhouse Gas Emissions Trading Pilot
Presenter:
Warren Bell, Ministry of Environment, Lands & Parks
This presentation was an overview of the Greenhouse Emission Reduction Trading project,
which is designed to test the effectiveness of emission reduction trading for greenhouse
gases in the Canadian context. It is an eighteen-month partnership between the federal
government, and number of provinces, industry, labour, and environmental groups.
GERT was under development for several years, and came about because companies in BC
wanted to explore the potential for the use of offsets. A pilot project was seen as
advantageous because it would provide an opportunity to build good policy though
experience. The purpose of GERT is to get as many stakeholders together and learn trading
by doing. The pilot has three main objectives: to understand the role of trading; to
develop standard approaches; and, to provide practical experience. The key elements of the
pilot are the establishment of rules, the existence of a multi-stakeholder review,
regulation, recognition, and evaluation. Recognition is particularly important as it
provides early credit for trading activity. In this regard, a Memorandum of Undertaking to
determine how to recognise trading has been developed.
In terms of eligibility, the projects can be located anywhere in the world, but the
buyer and seller must be located and registered in Canada. The program began on January 1,
1997, and review criteria have been established to evaluate the success of each project.
Several trades are imminent — involving wind energy and the substitution of wood
residue for propane.
Some of the lessons learned to date are that trading is not easy, as there is much
uncertainty around implications of the Kyoto Protocol. Trading is also a lot of
work in that it is costly and time consuming.
Mr. Bell encouraged those who want to learn more about GERT to visit the pilot web site
at http://www.gert.org.
Panel 2: The Nuts and Bolts
Setting Baselines and Dealing with Additionality
Presenter:
Andrew Pape, Compass Resource Management
As the panel title indicates, this presentation addressed some of the essential
technical issues in emission trading, such as the definition of reference cases and
additionality.
According to the Greenhouse Emission Reduction Trading (GERT) pilot, a reference case
is the best possible estimate of the greenhouse gas emissions that would have occurred in
the absence of the reduction activity. It is used as the "project baseline"
against which actual emissions are compared, to calculate the emission reduction from a
project. A reference case is synonymous with a business as usual scenario. It is important
that reference cases be carefully defined and include various external factors such as
regulatory considerations, as these will be used in calculating registered emission
reductions (RERs). An RER will be produced when actual emissions are less than reference
case emissions. An RER operates as a form of quasi-credit, as there is no guarantee that
RERs will recognized under future regulatory or tax regimes. The success of credit trading
will depend upon the success in defining reference cases.
There are two key ways to define a reference case: based on historic emission levels,
or on projected emission levels. However, there are inherent uncertainties in both
approaches, including statistical uncertainties for historic reference cases, and
technical, regulatory and economic uncertainties in projected reference cases.
GERT uses both approaches, and because its goal is to provide practical trading
experience, it is possible that multiple baselines will be created by GERT projects. Where
there are multiple baselines the actual number of RERs created by a project will be
uncertain.
"Additionality" involves a consideration of whether a project would have been
undertaken in the absence of emissions credit trading. If it would have happened anyway,
it is a non-additional project. It is difficult to determine project additionality, and
there is no consensus on the definition in the GERT Pilot. However, additionality is
extremely important in some policy contexts. It guarantees an environmental benefit will
occur for all project activities. If a company is using a credit from a project as
alternative to complying with a regulation, the environmental impact of the regulation
will be upheld. If a regulation mandates a certain emission reduction, and that reduction
is achieved through credits from a non-additional project, the purpose of the regulation
— reducing greenhouse gases — is defeated. Money has traded hands and there has
been an emission reduction, but the regulation has not succeeded in shifting the overall
emission trajectory.
The Pembina Institute has established five criteria for characterizing additionality:
- Regulatory additionality. No other laws or regulations require the activity; this is the
same as the "surplus" criterion in GERT, so this aspect of additionality is
incorporated into GERT.
- Emissions additionality. The project results in real atmospheric reductions; again this
has been incorporated into GERT through the criteria that emission reductions must be
"real."
- Financial additionality. Does a project pass regular investment criteria? If it would
have been invested in because of its potential cost savings or profitability, it is not
financially additional — however, this doesn’t exclude all profitable projects
— there are many profitable investments that are not pursued in our economy (see
below).
- Technical additionality. Does the project exceed the norm for technologies and
management in a sector?
- Overcoming non-financial barriers to investment. Does the project overcome some
political or institutional barrier which stops profitable projects from happening?
There is a risk that demanding additionality may mean the most cost-effective projects
are not always pursued. However, in the absence of real caps on emissions, you need to
consider additionality to maintain environmental effectiveness.
Additionality can be incorporated into reference cases by looking at factors such as
typical improvements in energy efficiency within a sector.
There are several factors to consider in defining a reference case, including the
physical project boundaries, the historical emission rate, the sensitivity of the project
emissions to technical economic and political factors, the identification of
uncertainties, and assessment of the elements of additionality.
Andrew Pape then considered various steps in defining historical reference cases and
projected reference cases and concluded that the successful credit trading depends on
successful definitions of reference cases and a clear understanding of additionality.
Dealing with Lifecycle Emissions and Leakage
Presenter:
Chris Rolfe, West Coast Environmental Law
Chris Rolfe discussed what is defined as leakage, gave examples and suggested a general
approach to leakage. Leakage refers to the indirect undercutting of emission reductions
caused by an emission reduction project. Examples include:
- Major improvements in vehicle fuel efficiency may, in the absence of fuel price
increases, lead to increases in kilometres driven;
- Manufacture of hydrogen for a fuel cell may significantly increase emissions at another
location; and,
- Telecommuting may decrease the number of days in which telecommuters drive to work, but
as a result telecommuters may choose to live further away.
Consideration of leakage is not unique to greenhouse gas credits, but because the
analysis must be global or national, the analysis becomes more complicated in the case of
greenhouse gases.
The first step to quantifying leakage is to define the project in a way that includes
easily measured indirect impacts. If a project is defined as a measure which decreases
energy consumption at one point in a production process without considering the need for
increased processing at a later point, the project boundary is too narrow. Beyond the
project boundary, the need to consider leakage involves a balancing of the desirability of
accuracy with the ability to determine leakage accurately and at a reasonable cost.
Development of lifecycle emission factors will help reduce transaction costs and
increase accuracy. Work is underway in Alberta on defining a methodology for calculating
the emissions avoided by developing new green power sources which reduce the demand for
fossil fuel fired electricity. Similar work will eventually be needed to develop lifecycle
emission factors for different fuels. Emission factors used to calculate changes in
emissions resulting from an emission reduction project should reflect marginal sources of
a particular form of energy. Also, with time, rough but conservative adjustment factors
for leakage are likely to be defined in approved protocols, with the onus on the project
proponent to show why a less conservative adjustment factor should be used for their
project.
Until more emission factors and leakage protocols are developed, leakage will be a
challenge. The first step is a common sense qualitative assessment of leakage. In some
cases an initial qualitative assessment may negate the need to consider a certain type of
leakage any further. If a qualitative assessment suggests leakage may be significant,
proponents could be tasked with developing a defensible leakage estimate. Often rough,
back of the envelope, calculations will be as accurate as elaborate computer models.
Who Owns an Emission Reduction?
Presenter:
Paul Wilson and Ron Ezekiel, Russell & DuMoulin
This presentation focused on the issues of ownership of greenhouse gas emission
credits, recognizing that to get to market based system will require new legal mechanisms.
The presenters noted three essential elements of a trading system: that you own what
you are trading; that you can prove title; and, that you can trade it for effective use by
others. This market system is often taken for granted in our society — titles, deeds,
notaries, registries, and last but not least, physical possession are some of the
mechanisms we use to determine ownership of things. Yet, an emissions reduction does not
fit into these traditional perceptions of property. Clearly it’s not something that
you can have physical possession of, and it can not be classified as real or personal
property. A credit is somewhat like a licence, in that once you use it, it is destroyed;
and it is also like intellectual property in that you can deny its use to others, but its
legal nature is uncertain.
Emission reduction credits are a recent concept, and until we define ownership and
rights in such things through conventions, domestic laws, and common law, we have no
guidance as to how or whether they can be owned. In the meantime, the legal solution has
been to use contracts with every party who could potentially claim ownership. In many
cases, there are multiple claims and getting all parties to agree is key to providing
value in the credit.
These ownership agreements follow basic contractual requirements. As with any contract
you need to be able to identify the property, the parties, and the price; however,
identifying specific emission reductions may be more difficult than identifying most other
forms of property. Price options can vary in complexity, and can depend on factors such as
risk for the buyer depending on the certainty of the emission reductions. The value of
credits is dependent upon co-operation and some means of verification to enable the owner
to claim, use, and perhaps trade title. The buyer may want to have some right to verify
the production of the emission reductions, and this may include a right to enter onto the
sellers’ property, check records etc. You also need to define the sharing of risk.
Will the buyer have any recourse against the seller if the credits are not recognized
under a future regulatory program?
The presentation concluded that the market side of market instruments will be extremely
important as a measure of developing their long-term effectiveness. Emissions trading
contracts must clearly establish representations and warranties in order to anticipate
problems which may arise. Finally, if we are to use the market to trade efficiently, we
need to focus as much on making the market side work as on the other policy dimensions.
Questions:
Q: Has there been any litigation on the ownership of emission reduction credits?
A: Ron Ezekiel noted that he is not aware of any litigation regarding ownership of
emission credits.
Panel 3: Case Studies
Case Study 1: Toronto Greenhouse Gas Pilot Trade Project
Presenter:
Ralph Torrie, Torrie Smith Associates
Since 1989, Toronto has established a leadership role on the greenhouse gas emission
reduction front. Toronto wanted to determine if the reductions it had realized could be
traded. If we are going to have carbon trading, is there a way which will be more
conducive for municipalities to take part? The city took actual historical emissions
reductions to see if you could bundle them in such as way that provided for credible
credits.
Municipalities have a profound impact on greenhouse gas emissions. They are directly
responsible for 4 megatonnes of emissions per year in Canada, plus seventeen megatonnes
from landfill gas. If you expand this to what they indirectly control, through land use
zoning, transportation and energy planning, energy related emissions for light industry,
district energy and green space — over many aspects of the infrastructure in the
community — the total goes up to about 295 megatonnes per year. This equates to half
of Canada’s greenhouse gas emission inventory. Because of all these different ways
for local governments to effect reductions in greenhouse gas emissions, they should be a
factor in any emission trading regime which comes into existence. The Toronto Pilot
Project was a way to evaluate this potential through an actual trade.
Often the primary reason for these investments in energy efficiency is to save money or
to realize some other community good. This means that many emission reductions do not meet
any additionality rules, but if you have caps additionality becomes irrelevant and it is
antithetical to the idea of getting the most cost-effective emission reductions.
Under the Toronto Pilot, possible candidate measures were screened according to a
number of criteria. Each measure was assigned a low, medium or high score according to how
they met the following criteria:
- Ownership. Is there a significant issue as to whether the municipal government owns the
emission reduction? Were the measures completely paid for by the City or implemented by
the City? Have other potential claimants transferred any ownership rights to the City?
- Quantity. Larger emission reductions mean more revenue and lower proportionate costs of
verification and protocol development. Measures that netted more than 50,000 tonnes of
reductions per year were given a high score; those that had fewer than 10,000 were given a
low score.
- Future Potential. Even if a measure had relatively small emission reductions it might
still be a good candidate if there was large potential for future emission reductions.
- Quantifiability. The emission reductions achieved by some measures are much easier to
quantify then others. For instance, landfill gas quantification is easy because it is
metered. Energy efficiency retrofits remain complicated. For each measure we considered
issues related to precision of measurement, uncertainty, reproducibility.
- Verifiability. Can the emission reductions be independently verified or the
quantification reproduced? Landfill gas emission reductions are relatively easy to verify
after the fact, but emission reductions from demand side management (DSM) measures are
often difficult. It is, for instance, very difficult to know the emission reductions that
result from trip reduction programs.
- Additionality. Although additionality becomes irrelevant once you have caps in place, in
the interim it may be something considered by credit buyers. The Toronto Pilot looked at
whether measures were part of plans established under the Cities for Climate Change
Campaign or whether they were even partly motivated because of the city’s voluntary
cap on emissions.
- Permanence. Energy efficiency projects that reduce fossil fuel consumption have a
permanent impact because a given amount of fossil fuel is never burned. On the other hand,
sequestration projects are only permanent if the sequestration is permanent.
- Leakage. Leakage of emissions happens when the emission reduction measures result in
offsetting emission increases. Leakage has to be considered on a case-by-case basis.
- Cost-effectiveness. Many of the measures are cost effective in their own right, without
considering the potential sales of credits.
- Environmental co-benefits. Most energy efficiency measures reduce emissions, especially
if they are avoiding electricity production at coal or oil fired generating stations, or
reducing vehicular energy use. Other measures are neutral and there are a few that can
have some negative environmental effects (e.g. some vehicle efficiency measures lead to
increased NOx emissions).
- Social and Economic Co-benefits. Case-by-case consideration is needed here, but economic
development and job creation benefits of greenhouse gas reduction programs are often the
most important rationale for implementation.
These criteria were then applied to various candidate measures, and each candidate
measure was given an overall rating. The following measures were evaluated:
- Street and lane lighting retrofit. This involved a retrofit to high efficiency lamps
funded by a $15 million loan from Toronto Atmospheric Fund and a $2 million grant from
Ontario Hydro.
- Landfill Gas Recovery. Three city landfill sites have methane recovery and landfill gas
recovery and generators to produce electricity. Not only are methane emissions reduced,
but the energy displaces fossil generation at Ontario Hydro.
- Waste Reduction and Recycling. Extensive reduction, recycling and composting programs
reduce landfill methane generation and emissions from manufacturing virgin paper and other
products. The emission reductions associat
| 
