Chapter 5 TRADEABLE PERMIT SYSTEMS

In the simplest form of a tradeable permits system the government establishes a limit on total allowable emissions of a given pollutant. It then either sells or assigns permits to industries that emit the pollutant until the limit is reached. Each permit allows the release of a given amount of pollutant during a specified time period. Polluters can buy and sell these permits so that those with the lowest abatement costs can reduce emissions and sell their permits to those with the highest abatement costs.

A tradeable permit system has three basic elements:

1. the government established a limit on total allowable emissions of a given pollutant within a defined geographical area;

2. the government then sells or assigns permits that fix the level of allowable emissions per company to emissions producers until the limit for total allowable emissions is met; and

3. if the system works, it will trigger a permits market among emissions producers, because companies whose emissions are already below the allowable limit or who have low pollution abatement costs will seek to profit from selling their excess emissions to companies whose emission levels are above the limit and cannot afford the cost of abatement measures. In this way, businesses are given a financial incentive to clean up their act.

Tradeable permit systems usually require reductions in the total allowable discharges over a certain period although they can be used to maintain environmental quality in areas that meet ambient objectives. Tradeable permit systems are distinct from current approaches to environmental protection which often do not impose an upper limit on total discharges from a particular source [(380) -- 380. Limits are often based on levels of production and concentration of pollutants.] and have no legal limits on the total permitted discharges from all sources.

This chapter discusses specific elements that are necessary and advisable in implementing legislation for tradeable permit systems aimed at environmental protection. The chapter also identifies potential legal challenges to systems of tradeable permits. In particular, it considers whether permit holders can claim compensation for regulatory changes that reduce the value of their permits.

We do not advocate adopting tradeable permit systems for pollution control in all situations. As with any complex regulatory mechanism, a poorly planned and executed tradeable permit system is worse than no system at all. The following extensive discussion of the elements of legislation required for tradeable permit systems to improve the environment shows that these systems are difficult and perhaps expensive to operate. Many of the restrictions on trading and requirements for regulatory oversight, which are necessary to ensure environmental goals are not sacrificed, may make the systems less effective in reducing the emission control costs of industry. Command and control regulation without tradeable permits may be both more effective in moving to a clean environment and more efficient. The feasibility of tradeable permit systems needs to be studied on a case by case basis.

This chapter focuses on tradeable permits or allowances, such as those used in the United States for the reduction of sulphur dioxide emissions, rather than emission reduction credits. Both are often referred to as emissions trading. Under a tradeable permit system all emitters must have tradeable permits in place before they pollute, while under an emission reduction credit system existing sources that meet command and control requirements do not require the credits to operate. Emission reduction credits are created when emissions are reduced below levels that are legal under existing command and control regulation. Acquisition of these credits is necessary for new sources to begin operation or for existing sources to modify or expand. Emission reduction credits can also be used in a tradeable permit system in order to create new permits. [(381) -- 381. For more discussion on the distinction between emission reduction credits as a part of a tradeable permit system and emission reduction credits as part of a command and control system see footnote 418 and accompanying text. ]

The phrase tradeable permits can refer to different things. For instance, a permit could mean a permit which lasts for a number of years enabling the release of a certain number of units of a pollutant in the first year, less units in the second year, even less in the third year and so on. Alternatively, separate permits could be issued for each year with one less permit being issued each year. The terminology used in this chapter assumes that a permit is for a specific unit of pollution in a specific time period, although it could potentially be used in later time periods. We refer to the right to receive a permit in later years, once an initial permit is held, as allocation rights.

Throughout this discussion it is important to remember that tradeable permit systems still involve the use of some command and control regulation.

Implementing Legislation

There are a range of approaches that can be taken in enabling legislation for a system of tradeable permits, from the grant of a general power to establish a system to an extremely detailed description of the system. There are examples of both approaches in North America. On the one hand, title IV of the United States Clean Air Act [(382) -- 382. 42 U.S.C.S. §7651.] includes 40 pages of legislation solely devoted to establishment of a tradeable allowance system for sulphur dioxide and nitrous oxides from power plants. On the other hand, section 13 of Alberta's Environmental Protection and Enhancement Act, [(383) -- 383. S.A. 1992, c. E-13.3. ] merely states that the minister may:

in accordance with the regulations, establish programs and other measures for the use of economic and financial instruments and market based approaches, including without limitation

(a) emission trading ... for the purposes of ... protecting the environment, achieving environmental quality goals in a cost effective manner and providing methods of financing programs and other measures for environmental purposes.

Manitoba similarly has a brief enabling provision for tradeable emission permits providing:

The Lieutenant Governor in Council may, where it is consistent with established environmental quality objectives, market units of allowable emissions of specific pollutants, in accordance with the regulations, and the revenue so generated may be held in trust by the Minister of Finance as an environmental contingency fund, to be used at the request of the Minister in the event of any environmental emergency. [(384) -- 384. Section 45, Environment Act, S.M. 1987-88, c. 26.]

Neither the Manitoba nor Alberta legislation give specific regulation making authority beyond the power to pass regulations for the purposes of establishing these systems. [(385) -- 385. Environmental Protection and Enhancement Act, S.A. 1992, c. E-13.3, s. 35(c); Environment Act, S.M. 1987-88, c. 26.] The difference between the American approach and the approach of Alberta and Manitoba reflects not only differences in legal tradition between Canada and the United States, but more importantly the degree of commitment of the three jurisdictions to tradeable permit systems.

The enabling provisions in Alberta and Manitoba legislation have limited what types of tradeable permit systems these provinces can establish and the mechanisms they can put in place to enforce those systems. The presumptions of statutory interpretation discussed in Chapter 2 indicate that the Courts might interpret the sort of general provisions found in Alberta and Manitoba legislation in such a narrow manner that effective tradeable permit systems might be undermined. For instance, if legislation similar to Alberta's were adopted in British Columbia, it is questionable whether the government could delegate regulation making to a local agency such as the Greater Vancouver Regional District or a Fraser Valley Air Quality Management District.

This chapter suggests terms of enabling legislation that allows for a tradeable system that will protect the environment, withstand legal challenges and provide certainty.

Our recommendations are directed at the legal requirements for designing a proper tradeable permit system; and they are generic in the sense that they are basic to any permit system regardless of the emission to be regulated. The design of a permit system to deal with a specific emissions problem will require legislation and/or regulations that are tailored to suit that situation. In practice, the success of any tradeable permit system will depend upon its use in the proper circumstances as much as the quality of the design.

Our recommendations address both the substantive and procedural issues that must be dealt with in implementing legislation to create an efficient, legally sound system that will maximize environmental protection. The substantive issues are: first, the core elements of a tradeable permit system; second, provisions relating to allocation of permits; and third, the statutory provisions required to operate the system, such as enforcement, trade approval and creation of credits. The procedural issues are: provisions aimed at ensuring fairness and openness; provisions necessary for efficient administration; and provisions allowing coordination with tradeable permit systems in other jurisdictions.

Core Elements of a Tradeable Permit System

1. The power to establish tradeable permit systems should not be limited to permits for emissions, but also extend to permits for production and import of a product and permits for the use of a process or equipment which is expected to lead to emissions. For instance, if a tradeable permit system were established to control carbon dioxide emissions from fossil fuels, it would be much easier to issue permits for the import and production of fossil fuels based on their carbon content rather than measure actual emissions. [(386) -- 386. Canada, Economic Instruments for Environmental Protection (Ottawa: Minister of Supply and Services, 1992) at 39 to 40.] Similarly, tradeable permit systems have been used to govern the emission standards newly manufactured cars must meet [(387) -- 387. U.S. EPA rules for vehicle manufacturer permit trading are found at 40 C.F.R. 86.090-15 (1991).] and have been proposed or used for the phase out of hazardous substances such as cadmium and lead, based on production, import or use in a particular application. [(388) -- 388. Macauley et al., Using Economic Incentives to Regulate Toxic Substances (Washington, D.C.: Resources for the Future, 1992) at 101 to 103.]

2. In order to avoid legal challenges to regulations based on discrimination between polluters in different areas or between different classes of polluters, the enabling legislation should allow regulations which apply only to designated areas and prescribed classes of polluters.

3. The enabling legislation must include the power to regulate trading in permits, including the power to regulate terms of trade between zones and subzones, and the ability to use permits in different time periods. These types of regulations can help avoid geographic concentration of pollutants and avoid releases at times when they are more likely to exacerbate pollution problems. Regulating transfers by means of generic trade rules rather than case by case approval generally fosters greater trading and more cost effective control of pollutants. [(389) -- 389. Brennan Van Dyke, "Emissions Trading to Reduce Acid Deposition," (1991) 100 Yale Law Journal 2707 at 2724.] The need for specific approval of some types of trading is dealt with below. [(390) -- 390. See footnotes 442 to 447. ]

These recommendations apply if either the province or the federal government establish a tradeable permit system. However, additional considerations apply if the federal government decides to enact a tradeable permits system. Federal legislation should also establish the constitutional basis for the permit systems, since it might be attacked on the basis that the legislation is not confined to areas of federal jurisdiction. There is strong authority that courts should not consider the breadth of authority granted under statute as a basis for invalidating regulations made under the statute without considering whether the regulations themselves keep within areas of federal jurisdiction. [(391) -- 391. Central Canada Potash v. Saskatchewan, [1977] 2 S.C.R. 134 at 149.] Courts nonetheless often judge legislation unconstitutional on the basis of broad enabling provisions even though the regulations themselves may be quite narrow. [(392) -- 392. Attorney General of Canada v. Hydro Quebec (August 6, 1992), Shawnigan Reg. 410-36-000024914 (Que. S.C.); See also Rand, J. in Saumur v. City of Quebec, [1953] 2 S.C.R. 299 at 333.] Federal enabling legislation should specify that the power to establish tradeable permit systems is for the purposes of regulating substances which may cross provincial or international boundaries, may be a threat to human health, are a matter of national concern, may be deleterious to fish, or are emitted by federal undertakings or from federal land.

Total Emission Reduction Schedule

One of the key reasons that tradeable permit systems have gained support is that they are a means of establishing a cap on total emissions from a particular class of sources which can be reduced over time. It is essential that enabling legislation require regulations to include a mandatory schedule for reducing the cap on emissions or, where air quality objectives have been met, establish a fixed cap for emissions. This not only assures the public that there will be some improvement in the environment but also allows firms to anticipate the future value of their tradeable permits. If a schedule for reductions is not clearly set out in regulations, firms may be reluctant to trade permits for fear that the value of their permits may be suddenly reduced.

Establishing a schedule for emission reduction does not rule out acceleration of that schedule. Knowledge and scientific understanding of pollutants and their impacts on health and the environment progresses continuously. Therefore, any program must be able to accommodate changes in requirements and rules based on new knowledge or changes in values society puts on a clean environment. [(393) -- 393. Canadian Council of Ministers of Environment, Emission Trading Working Group, Emission Trading: A Discussion Paper (Winnipeg: CCME, 1992). ] However, the legislation should clearly state that if emission reduction targets are accelerated, the units of pollution allowed by any permit will be reduced equally as compared to all other permits within the same zone or sub-area. This would assure permit holders that permits which are held for future use or sale would not be specifically targeted for confiscation or reduction in value if air emission reduction targets are redefined.

We also recommend that legislation require that schedules and caps be set to achieve desirable air quality objectives. In particular, air quality objectives could be defined as ambient concentrations identified as desirable air quality objectives under the Canadian Environmental Protection Act. [(394) -- 394. See Canada, Order in Council P.C. 1989/1482.] A statutory commitment to certain ambient standards will aid in reaching consensus on appropriate cap levels.

An emission reduction schedule can be used in conjunction with a system that allows for the opting in of new sources or the creation of emission reduction credits. While the total number of permits in circulation might increase, the reductions from sources initially included would be specified. Sources that opt in would acquire allocation rights which decrease with time so that reduction goals from sources initially included in the system are not diluted by being spread over a wider range of dischargers.

Local Area Caps

The enabling legislation should allow regulations to establish local area caps on some pollutants such as NOx and VOC that may have impacts which are more localized than the areas in which a trading system for these pollutants would likely be established. [(395) -- 395. CCME Working Group, above at footnote 393, at 26, recommends that trading ratios and limitation of trading distances be used to avoid local clustering of heavy emitters or other local inequities.]

Avoiding local effects of emissions is problematic since restrictions on trading between areas may reduce the potential for both economic and environmental gains. The balancing of competing local and broader interests has lead to litigation in the United States. [(396) -- 396. Environmental Defence Fund v. Environmental Protection Agency CA DC, No 93-1214, cited in "New York Sues to Limit Acid Rain Trading" (March 19, 1993) Environmental Reporter 3024.] New York state and New York environmental groups argue that restrictions on trading between the Midwestern states and other regions are necessary to ensure that sulphur dioxide emission reductions are made in the Midwest and that areas harmed by midwestern emissions, such as many parts of upstate New York, receive a net benefit. A national organization, the Environmental Defence Fund, and the U.S. Environmental Protection Agency argue that emission trading will encourage Midwest utilities to speed up emission reductions, providing quicker relief for the acid rain ravaged Northeast. They argue that, if trading is burdened with additional restrictions, incentives for early reductions will be weakened and prospects of early reductions in Midwestern emissions may be reduced. [(397) -- 397. Ibid. See also Joseph Goffman, "To Halt Acid Rain, Reward Innovation" (New York: Environmental Defence Fund, 1993); Joseph Goffman, "Learning to Love Emissions Trading" (New York N.Y.: Environmental Defence Fund, 1993).] While this type of challenge is unlikely to succeed in Canada [(398) -- 398. Typically challenges to EPA regulations will be much easier because there is more room for arguing that particular regulations passed by the EPA do not reflect Congress' intent.] it indicates the difficulty in identifying how to deal with trading between locales.

To avoid these disputes and to protect local air quality standards, caps could be placed on the volume of discharges which can occur within any particular sub-area within the system. Local area caps represent the maximum number of permits that can locate in that sub-area, while overall caps represent the total number of permits in existence in the large area at any time. Regulation of trading ratios would attempt to avoid the limits on local area loading being reached, but the existence of a local area cap would help ensure local inequities do not develop and allow flexibility in trading. To ensure air quality, local area caps should be somewhat dependent on the number of permitted emissions in an adjoining local area.

For instance, if a tradeable emission system existed for VOCs and NOx in the lower Fraser Valley and lower mainland of British Columbia, one local area might represent the Port Moody area. Trading ratios could be set to encourage the migration of VOCs and NOx production away from Port Moody which already has a high concentration of VOC and NOx emissions. However, an absolute limit on permits allowed in the Port Moody area would provide greater assurance that there will be no localized effects.

We also recommend that legislation require local area caps be reset after the transition phase at a level necessary to meet desirable air quality objectives. To the extent that this is a feasible means of ensuring no significant local adverse impacts of trades, local area caps would partially replace the need for case by case approvals of trades. However, as discussed below, in some circumstances there will be a continuing need for some case by case approval of trades.

Avoiding Litigation Based on Claims of Property Rights in Tradeable Permits

A common concern about tradeable permits is whether they create property rights. The specific concern is whether, when a reduction schedule is accelerated or regulations are amended, polluters are able to claim compensation for "expropriation" of these "property rights". This type of claim would likely fail. However, the potential problem can be avoided by specifically stating in the enabling legislation that tradeable permits and allocation rights are not property rights but are merely a revocable licence to emit pollutants in accordance with the law.

In Canadian law there is a strong rule of statutory interpretation that compensation is payable for the taking or expropriation of most types of property. [(399) -- 399. Attorney General v. De Keyser's Royal Hotel, Limited, [1920] A.C. 508 at 542.] Statutes can, if their intent is clear, provide for expropriation without compensation although most governments have shied away from doing so. Expropriation is not available for the taking of non-property interests. Courts have distinguished property from revocable licences. Revocable licenses merely allow someone to do legally what they otherwise could not do; compensation is not payable on the revocation or change in the conditions of a revocable license. [(400) -- 400. See Sanders v. Milk Board (1991), 53 B.C.L.R. (2d) 167 (B.C.C.A.) at 175 and National Trust Co. v. Bouckhuyt (1987), 61 O.R. (2d) 640 (Ont. C.A.).]

As noted above, enabling legislation could specifically provide that tradeable permits are not property, but merely a revocable licence to emit a specified amount of some pollutant. This approach is taken in the U.S. Clean Air Act to avoid claims for compensation based on the constitutionally entrenched right in the U.S. to compensation on expropriation. [(401) -- 401. 42 U.S.C.S. §7651 b(f).] Such a provision would overcome any argument that permittees should receive compensation if the pollution allowed by their permits were to be revoked.

Claims for compensation probably would fail even in the absence of this sort of provision. In Sanders v. Milk Board [(402) -- 402. Sanders, above at footnote 389.] the B.C. Court of Appeal held that valuable statutorily created tradeable quotas created under the Milk Industry Act [(403) -- 403. R.S.B.C. 1979, c. 258.] were not property but were revocable licences. The characterization of the quota as a revocable licence defeated the milk producer's claim for compensation when regulations mandatorily reduced his quota.

Similarly, the B.C. Court of Appeal has held that mining under the authority of mineral claims located in a provincial park can be prohibited without compensation because the mineral claims were statutorily created and neither the mining nor the parks legislation showed any intent to compensate claim owners. [(404) -- 404. Cream Silver Mines Ltd. v. British Columbia (1993), 75 B.C.L.R. (2d) 324.] The Court found that the claims were property, but relied on the fact that they were not an interest in land and were not an interest which existed at common law. Tradeable permits are also statutorily created interests.

Finally, compensation is only available for the taking of property, not the regulation of property. Courts have distinguished between the regulation of property, for instance by zoning, and the taking of property, suggesting that taking only occurs where value is added to a government asset. [(405) -- 405. The Queen v. Tener (1985), 17 D.L.R.(4th) 1 (S.C.C.) held that prohibiting mining in parks was a taking of mineral claims because a public asset, the park, gets the benefit from no mining taking place. Tener involved a different type of mineral interest from Cream Silver; in Tener the claim was an interest in real property which existed at common law. See also Hartel Holdings Co. Ltd. v. Calgary, [1984] 1 S.C.R. 337.] Since reductions in overall emissions do not specifically benefit a government asset they should not be a basis for compensation.

Since there are cases holding that statutorily created rights are property, it is advisable to specifically state that tradeable permits are merely revocable licences. In Ackerman v. Nova Scotia [(406) -- 406. (1988), 47 D.L.R. (4th) 681 (N.S.S.C.T.D.).] the Nova Scotia Supreme Court held that milk production quotas created by milk marketing board regulations were a form of property and that clear authority would be required to take a portion of this property without compensation. Ackerman was considered but not followed by British Columbia courts in Sanders, and the reasoning in the case is problematic. The milk quotas, like a system of tradeable permits, were created by regulation and would not have existed but for the regulations. Therefore, they should have been subject to changes in regulation or repeal of the regulations. [(407) -- 407. The Ackerman case was appealed to the Nova Scotia Appeal Court where the Court specifically refused to affirm or reject the argument that the quotas were property. ]

However, while milk marketing quotas are closely analogous to a system of tradeable permits, it may be possible to distinguish the two systems and argue the need for compensation depends on the specific inferences of legislation. [(408) -- 408. Specific aspects of the legislation were important in Cream Silver and Sanders as well as in an Ontario case looking at the nature of milk quotas: National Trust Co. v. Bouckhuyt, above at footnote 389.] It may be possible to distinguish tradeable permits from the marketing board quota cases, for example if the statute does not require approval of trades.

While on the basis of Sanders and other cases it may not be necessary to specifically state that tradeable permits are revocable licences, for the sake of certainty we strongly recommend including this specific provision in the enabling legislation. An express legislative statement should remove any concern regarding claims for compensation based on property rights in permits.

Allocation of Permits

The three main means of initially allocating permits are through auction, according to historic emissions, or according to quantities an emitter would release if it met some criteria such as best available technology. [(409) -- 409. CCME Working Group, above at footnote 393, at 33-39.] The Discussion Paper on Emission Trading by the Working Group of the Canadian Council of Ministers of the Environment (the "CCME Discussion Paper") recommends an initial allocation based on an average of emissions in recent years. The United States sulphur dioxide program, on the other hand, allocates allowances on the basis of production levels and good practices. Allocation systems also can be combined. For instance, under the United States sulphur dioxide system, utilities receive less than their full allocation of allowances. Therefore, they are forced either to reduce emissions or acquire allowances to come into compliance. Withheld allowances are available through auctions and direct sales. [(410) -- 410. See 42 U.S.C.S. §7651 c(a), 7651 i(b); 7651 d(b); Barakat & Chamberlin, Study of Atmospheric Emission Trading Programs in the United States: Final Report (Winnipeg: Canadian Council of Ministers of the Environment, 1991) at 48.]

The political acceptability of one system of allocation or another will vary greatly from case to case and may vary according to the pollutant. If enabling legislation is intended to authorize a number of different tradeable permit systems it should allow allocation of permits by any means, taking into consideration certain basic principles such as fairness and minimization of economic dislocation. The legislation also should specifically provide that the total amounts permitted under the initial allocation should be no greater than amounts estimated to be released from affected sources under existing regulation.

Moreover, where initial allocation is made on the basis of historic emissions, the relevant criteria should be the lower of actual or permitted emissions. [(411) -- 411. This is the approach used in the U.S. Clean Air Act for sources other than electrical utilities: 42 U.S.C.S. §7651 i(c).] These qualifications are extremely important. Often permitted emissions in British Columbia and the Greater Vancouver Regional District are significantly higher than actual emissions. Allowing permitted but unutilized levels of emissions to be sold and utilized would damage the environment, as well as being an unfair windfall for emitters with lax permits. Many of the recommendations which follow in this chapter are aimed at avoiding this problem of converting unutilized permitted emissions into actual emissions.

Transitional Reductions

The CCME Discussion Paper recommends that initial allocation of permits be made on the basis of historic emission levels. This tends to reward companies which have lagged in reducing their emissions and are in a position to reduce emissions cheaply and sell excess permits, but avoids an economic shock to firms not in compliance with best practices. To partially overcome this unfairness the CCME recommends reducing allocation rights for firms which do not comply with acceptable standards or have not applied best available control technology [(412) -- 412. For definition of best available control technology, see text at footnote 413. ] at a faster rate than the reduction in allocation rights for firms that do comply with best available technology.

An accelerated reduction could be achieved in two ways. First it could be achieved by requiring firms which are furthest out of compliance with acceptable standards to reduce emissions at a faster rate, so that the allocation rights of all firms would be equal to emissions achievable through best available technology within a fixed transition period, such as five years. Second, it could be achieved by reducing rights at the same accelerated rate for all firms not in compliance with acceptable standards, while allowing a longer transition period for firms that are the furthest from compliance.

We recommend the first option. Where historic emission levels are the basis for initial allocations, legislation should specify that firms out of compliance with standards achievable through best available control technology receive allocation rights that are reduced to levels achievable through best available control technology within a specified period, such as five years. This approach achieves faster overall reductions in emissions and reduces the potential for recalcitrant polluters reaping windfall profits.

A difficulty inherent in accelerated transition for firms out of compliance with best emissions standards is defining what levels of emissions are achievable by any standard such as best available control technology. There is a strong incentive for polluters to argue that the lowest emissions achievable through best available control technology are relatively high; doing so would give polluters greater potential to sell allocation rights on the market because they would be more likely in a position to reduce emissions below the defined level.

To partly overcome this difficulty legislation should include a strong definition of what is meant by best available control technology ("BACT"). We recommend adoption of the definition of BACT used in a recent British Columbia government discussion paper on environmental protection:

"the currently available state-of-the-art control technology which is proven to be successful at reducing waste discharges and has been applied for at least one year in similar facilities in the province or in other relevant jurisdictions. Control technology refers to all of the following: raw materials, fuels, process technology and pollution control equipment or devices used to minimize both generation and discharge of wastes." [(413) -- 413. British Columbia, Ministry of Environment, Lands and Parks, New Approaches to Environmental Protection in British Columbia, (Victoria, B.C.: Ministry of Environment, 1992).]

Legislation should allow regulations to specify what emission levels constitute best achievable emissions. As discussed in Chapter 2, if specified by regulation these emission standards would be less susceptible to legal challenge. Setting these emission standards by regulation is preferable to setting these standards by administrative process, since successful appeals of administrative decisions could undermine adherence to discharge caps. If regulations are used, dischargers and the public should be given an opportunity to comment on the content of draft regulations which establish allocation rights dischargers will receive for the period following transition.

Subsequent Auctions

Enabling legislation should provide for a system of periodic auctions of permits whereby each emitters' allocation rights would be reduced by a certain percentage for the purpose of being auctioned off. Reduction in allocation rights in order to obtain permits for auctions would be in addition to reductions in allocation rights aimed at reducing overall discharges. Auctions could be conducted to raise revenues for the government agency responsible for the system or on a revenue neutral basis. In the revenue neutral case, the revenues generated would be returned to polluters in proportion to the permitted allocations taken from them and sold in auctions. The advantages of periodic auctions include: [(414) -- 414. These advantages are discussed in Van Dyke, above at footnote 389, at 2718.]

• overcoming psychological barriers against trading;
• reducing any incentives for permit holders to hoard their permits;
• lowering transaction costs;
• ensuring that permits are not used by one firm to exclude competitors from the local market;
• if regulators are given a portion of revenue generated by auctions, providing a strong incentive to ensure compliance since strict enforcement would ensure higher permit prices and hence higher revenue; and

With some simplifications the four elements of the U.S. EPA's emission reduction credits policy are as follows:(a more complete description can be found in Robert W. Hahn & Gordon L. Hester, , "Marketable Permits: Lessons for Theory and Practice," (1989) 16 Ecology Law Quarterly 361 at 370 to 375. Offsets. The offset rule requires new and modified sources in heavily polluted areas to offset their increased or new emissions with emission reduction credits from other sources in the same area. These sources are still required to meet stringent emissions limitations;(Lowest Achievable Emissions Rate in areas that do not meet clean air objectives, Best available technology in areas that meet objectives). Netting. Netting allows a modified source to avoid the most stringent emission limitations that would be applied to the modification by reducing emissions from another source within the same plant. Bubbles. Bubbles allow existing sources to vary the levels of emission control applied to emissions from different sources as long as the aggregate limit is not exceeded. The sources included within the imaginary bubble do not have to be within the same firm. Banking. Banking allows firms to reduce emissions at one time to use at a later date. There is no reason in law why any of these elements could not be included as a matter of policy in existing permit systems. For instance, the Greater Vancouver Regional District could require offsets for any new or expanded source in the area. Fisheries Act pulp mill regulations could similarly be amended to allow banking. As a matter of policy, however, we are strongly opposed to the use of emission reduction credits (with the exception of offsets where there is a continuing requirement for stringent emissions) unless all the safeguards discussed below are in place. If the government considers use of emission reduction credits in the context of the current command and control regulation we recommend that there be legislation allowing emission reduction credits that commits the government to those safeguards and protects regulators from pressure to allow questionable emission reduction credits. The problems we have identified with regard to emission reduction credits in a tradeable permit system are even greater in a command and control system where there is no overall reduction in the cap to compensate for the difficulties inherent in emission reduction credits.]

Opting in of sources and creation of emission reduction credits is another means of creating tradeable permits in relation to initial allocations.

The CCME Discussion Paper notes that tradeable permit programs can be broadened to cover polluters through

• adding new participants by category,
• allowing voluntary opting into the program by emitters, or
• by allowing participants to reduce emissions from sources within their plant or firm or from third parties that are not part of the system. These reductions from non-participating sources would count as credits that could be exchanged for permits and allocation rights. For example, the California South Coast Air Quality Management District's "Beater Buy Back" program allowed several oil refineries to gain emission allowances by purchasing and destroying old automobiles with high exhaust emissions. [(418) -- 418. See Environmental Defence Fund and General Motors Corporation, Mobile Emissions Reduction Crediting: A Clean Air Act Economic Incentive Policy Proposal for Retiring High Emitting Vehicles for a description of the SCAQMD program and for a similar proposed national program.

]

The last two options are essentially the same, merely representing different ways of creating tradeable permits by reducing emissions from sources that are not required by law to take part in the tradeable emission permit system. We refer to these together as creating tradeable emission reduction credits.

Generally speaking, emission trading systems will likely be more effective if covering a broader base of emitters. However, there are several significant problems with creating emission reduction credits that, if not adequately compensated for, could easily subvert the success of any program. Emission reduction credits have been subject to a number of court challenges in the United States based on the argument that they subvert the purposes of the Clean Air Act. [(419) -- 419. Natural Resources Defense Council, Inc. v. Gorsuch, 685 F. 2d 718 (D.C. Cir., 1982); reversed sub nom Chevron U.S.A. Inc. v. Natural Resources Defence Council 467 U.S. 837, 81 L. Ed 2d 694 (1984). In the Gorsuch, case the U.S. Court of Appeal held that application of the netting (see footnote 417) to non-attainment areas was contrary to the purposes of the Clean Air Act to improve environmental quality in those areas. The U.S. Supreme Court overturned this decision only because it found that the EPA had to be given more room in implementing legislation than the Appeal Court had allowed. ] Although there is much less potential for such litigation in the Canadian legal context, [(420) -- 420. Under the American system Congress passes relatively specific laws which the Environmental Protection Agency must implement through passing regulations. The EPA can be sued for not implementing regulations within the time mandated by Congress or for passing regulations out of keeping with the policies of statutes passed by Congress. Canadian legislation does not usually require action and is much less specific in terms of goals to be achieved etc. Because of this there is much less potential for litigation challenging the content of regulations. ] the issues raised are important.

Claiming Credit Where Credit is Not Due

When emission reduction credits are created they will be based on claims that a non-participating source has reduced emissions by a certain amount. In practice it will be very difficult to measure actual emission reductions. For instance, an urban smog reduction program for the Fraser Valley initially would include mostly or all permitted point sources. Stack emissions from these sources are generally much easier to measure than pollution from the types of sources likely to create emission reduction credits, such as fugitive emissions [(421) -- 421. Fugitive emissions are emissions that escape unintentionally from a process, for instance VOC which escapes from car gas tank filler pipes rather than exhaust pipes, or gases that escape from leaks in pipes rather than emission stacks.] and non-point sources. Fugitive emissions can only be estimated, and often there is great uncertainty in predicting discharges from non-point sources. [(422) -- 422. David Letson, "Point/Non Point Source Pollution Reduction Trading: An Interpretive Survey," (1992) 32 Natural Resources J. 219 at 226.] It is very east to overestimate emission reductions from sources that are not susceptible to monitoring. [(423) -- 423. See David Hawkins "Providing Economic Incentives in Environmental Regulation," (1991) 8 Yale J. of Regulation 463 at 490; Richard Liroff, Reforming Air Pollution Regulation: The Toil and Trouble of EPA's Bubble (Washington, D.C.: Conservation Foundation, 1986) at 74 to 95.] Indeed, in one American example, emission reduction credits were claimed for a supposed 20% reduction in emissions from command and control standards; these claims were initially approved by regulators. A subsequent reexamination of the figures and assumptions by the Natural Resources Defence Council concluded there would be a 36% increase in emissions. [(424) -- 424. Liroff, Ibid., at 91 to 97.] When invalid emission reduction credits are used to increase emissions from other points, the result can be an actual increase in emissions.

Claiming Credit For the Inevitable

In many cases emissions that are the source of emission reduction credits may have been reduced even without the emission reduction credit program. For instance, a "Beater Buy Back" program in the Lower Fraser Valley might only buy back vehicles that would be taken off the road soon even without the program. While estimates can be made of the probable continued use of cars of a certain age, [(425) -- 425. See Environmental Defence Fund and General Motors Corporation, Mobile Emissions Reduction

Crediting: A Clean Air Act Economic Incentive Policy Proposal for Retiring High-Emitting Vehicles, (undated) at 12-13.] changing regulations can drastically accelerate the retirement of high emission cars. Many "beaters" would likely be taken off the road because of the implementation of Air Care regulations. If firms get credit for reductions that would have occurred anyway, overall progress in emission reductions will be less than if emission reduction credits were not available.

The Opportunity Cost of Emission Reduction Credits

There are only a finite number of easy, cheap, and technically obvious emission reduction opportunities. [(426) -- 426. Hawkins, above at footnote 423. ] One reason for the current pollution levels is that regulators have difficulty identifying a sufficient number of inexpensive and attractive regulatory options. [(427) -- 427. Ibid. ] Industry is often in a better position to identify these cheap options for reducing discharges. The problem is that if you create an incentive that lets industry identify emission reduction options and then apply the benefits to compensating for poorly controlled new units, you have skimmed the cream from attractive emission reduction opportunities that might have been identified by government regulators. [(428) -- 428. Ibid. ] Instead of making progress towards an overall reduction in pollution, the benefit is applied to compensate for an emission increase that could have been avoided. [(429) -- 429. Ibid. ]

Valuable Credits for Poor Performers

Providing for emission reduction credits also raises the same problems as distributing permits to a number of different sources, whose efforts to reduce or eliminate emissions have varied. Distributing permits on the basis of historic emissions tends to reward the worst polluters.

Increased Enforcement Demands

Emission reduction credits can place additional strains on enforcement. A U.S. Environmental Protection Agency review of emissions trading states

"It will increase the number of sources that must be monitored and thus may overwhelm resources available to assure adequate and continuous compliance with regulations. An examination of some of the early trades indicates that (emission reduction credits) will involve small and non-point sources not historically given much attention by the regulators.... Measuring emissions from these sources ... may be extremely difficult and expensive." [(430) -- 430. Eckard Rehbinder & Rolf-Ulrich Sprenger, The Emissions Trading Policy in the United States of America: an Evaluation of its Advantages and Disadvantages and Analysis of it Applicability in the Federal Republic of Germany (Washington, D.C.: United States Environmental Protection Agency, March, 1985) at 116 to 119.]

These strains on enforcement would be added to strains placed by emission trading in general. [(431) -- 431. See under the heading "Enforcement" below.] The need to spend funds on increased enforcement must be taken into account when deciding on whether or not to implement a program.

Safeguards Against Negative Aspects of Emission Reduction Credits

Emission reduction credits are one of the prime concerns of environmentalists in assessing tradeable permit systems. In the U.S. these concerns have lead to litigation. The State of New York and the Environmental Defence Fund contend that credits given to firms for improvements already made and for improvements they would have had to make in any event are contrary to the goals mandated by Congress. [(432) -- 432. "New York Sues to Limit Acid Rain Trading; EDF Suit Seeks to Close Credit Loophole" (March 19, 1993) Environment Reporter 3024.] While lawsuits of this type are unlikely to arise in the Canadian context, [(433) -- 433. The U.S. litigation is based on statutorily set emission reduction goals and much more extensive statutory direction than is likely in the Canadian context. This is due to the nature of the U.S. constitution where the administration of laws is independent from the legislature. ] the American experience indicates the need to deal adequately with emission reduction credits if tradeable permit schemes are to be seen as legitimate.

Despite these concerns, emission reduction credits should not be rejected out of hand. In some cases they have helped accelerate emission reductions. [(434) -- 434. See Liroff, above at footnote 423, at 100 and 131 to 134, who concludes that bubbling for existing sources (see footnote 417) under the U.S. Clean Air Act has helped accelerate compliance in some cases. ] If emission reduction credits are allowed, it is essential the enabling legislation include provisions ensuring that there will be no increase in actual total emissions or a slowing of progress toward reductions in total emissions. We have a number of recommendations in that regard.

First, regulators should only have the authority to approve emission reduction credits from non participating sources or approve sales of allowances from opted in sources where it can be demonstrated that emissions were occurring at the rate claimed prior to reduction. Regulators must be required by statute to abide by the principle that emission reduction credits can only be given for reductions that would almost certainly not have occurred otherwise. [(435) -- 435. The South Coast Air Quality Management District, Rule 1309(1) requires that applicants for emission reduction credits demonstrate that they are real, quantifiable, permanent and enforceable. ] As discussed below, [(436) -- 436. See "Public Involvement and Appeal".] the allocation of emission reduction credits should be subject to appeal by all interested parties including the public through a defined appeal mechanism.

Second, because sources of emission reduction credits tend to be poor environmental performers and have emission levels that are difficult to measure, emission reduction credits should only be available for reductions below the level of emissions achievable with best available control technology. The latter provision is found in many American tradeable permit systems. [(437) -- 437. For instance, South Coast Air Quality Management District Rule 1309(1) provides that applicants for emission reduction credits must prove that reductions are "not greater than the equipment would have received if operating with the best available control technology". Similarly, the American sulphur dioxide trading emissions program requires that any sources opting into the program only be allocated allowances up to the levels of emissions which would occur if the sources were in compliance with the best available control technology provisions of the Clean Air Act: 42 U.S.C.S.§7651 i(f).]

Third, there should be an automatic discounting of emission reduction credits. For instance, some American jurisdictions automatically discount any emission reduction credits by twenty percent. [(438) -- 438. South Coast Air Quality District, Rule 1303(b)(2).] Allocation rights based on emission reduction credits should be reduced at a faster rate than allocation rights of sources in compliance with best available technology. Indeed, we recommend that allowances for opted in sources be reduced by some minimum amount, such as 20 percent of their initial value per annum. The minimum amount should be supplemented by a higher rate at the discretion of regulators where they have reason to believe emissions from which credits are claimed would have been eliminated.

Finally, we recommend that where a source opts into the system, its allowances should be based on the lower of current emissions or their emissions prior to widespread discussion of implementing a tradeable permit system. This would guard against a source increasing its emissions for the purpose of opting in and then selling emission reduction credits based on its inflated emissions. The Clean Air Act in the United States uses this approach: sources which opt in to the sulphur dioxide emissions trading program have their initial allocation of permits based on production levels in the years 1985, 1986 and 1987, a period two to four years prior to introduction of the Clean Air Amendments into Congress. [(439) -- 439. 42 U.S.C.S.§7651 i(b).]

These safeguards against misuse of emission reduction credits might reduce the utility of emission reduction credits to industry to such a degree that they are not utilized. However, to allow the creation of tradeable permits from emission reduction credits without adequate safeguards is much like a government not protecting itself against counterfeit currency. While emission reduction credits have the potential to achieve some environmental gains, they also have the potential, if not properly implemented, to flood the market with counterfeit reductions.

In summary, emission reduction credits can broaden the scope and number of polluters taking part in a tradeable permit system and can create more tradeable permits. Unfortunately, they can also subvert environmental goals if not adequately regulated. Government must be aware of this risk when adopting a tradeable permit system.

Pollution Reduction Credits

Pollution reduction credits are similar to emission reduction credits, but are issued in exchange for activities that remove contaminants from the environment. Pollution reduction credits are usually discussed in relation to carbon emissions trading, giving credit for activities that will remove carbon dioxide from the air. However, activities for which credit would be given may only be a temporary or partial solution to the pollution problem. For instance, credits for planting of forests would allow increased carbon dioxide emissions in spite of the eventual release into the environment of the carbon temporarily absorbed by growing trees. [(440) -- 440. Canada, Economic Instruments for Environmental Protection: Discussion Paper (Ottawa: Minister of Supply and Services, 1992) at 40.] Due to the limited potential for pollution reduction after contaminants have been released, we recommend against statutory provisions for pollution reduction credits.

Operation of the System

The need for predictability in approving trades on the basis of clear and consistent rules has been underlined by a number of commentators. [(441) -- 441. See Barakat & Chamberlin, above at footnote 410, (Winnipeg: Canadian Council of Ministers of Environment, Emission Trading Working Group, 1991) at G-15; see CCME Working Group, above at footnote 393, at 45.] As discussed above, [(442) -- 442. See text accompanying footnote 406 to 410.] the power to set generic trade approval rules defining trading ratios and maximum concentrations of emissions within any area or sub-area can help ensure consistency and predictability. We recommend that generic trade approval rules be used as much as possible so that permittees become familiar with the rules and know when a permit is tradeable. However, any system will involve some case by case approval, to ensure actual reductions occur from the source selling the permit and to ensure that individual characteristics of the emission permitted do not cause harmful environmental effects.

Ensuring an Actual Reduction by the Vendor

There always will be difficulties in ascertaining that a reduction has been made where:

• the firm selling permits or allocation rights does not have continuous emissions monitoring systems ("CEMS") in place;
• where the firm selling the permit has opted into the system;
• where the firm selling the permit has increased its output in order to gain additional permits based on historical emissions;
• where the firm selling the permit would have voluntarily reduced its emissions or would have been forced to reduce its emissions in any case.

Generally applicable safeguards for permit transfers should include legislated requirements that legislators be convinced on demonstrable evidence that an emission reduction has taken place, and that this reduction would likely not have taken place in any event. Moreover, administrators should be required to discount by a minimum amount, traded permits from firms not having CEMS or from permits created through an emission reduction credit with the possibility of requiring further discounts to ensure that there is no increase in emissions. Once such emission reductions have been approved, the permits being traded could be certified to indicate that there will not be a need for further demonstration of actual reductions if those permits are traded in the future.

Review of Individual Effects

A review by the American Environmental Protection Agency of its emissions trading policy [(443) -- 443. The EPA review of the bubble policy allows a firm to increase emissions from one source above generally applicable standards in exchange for compensating by decreases in emissions from other sources.] states:

There are well-founded fears that equal trade-offs among the same pollutants may nonetheless degrade environmental quality because of the different physical and biochemical characteristics of the traded emissions ....

For example, particulates emitted from a stack might have a different size and chemical composition than fugitive dust from roads or storage piles within a plant site and therefore might have a totally different and more harmful impact on ambient air quality. ....

For trades involving non-reactive pollutants, such as SO2, TSP, or CO [sulphur dioxide, particulate matter, or carbon monoxide], whose ambient effect may vary where the emission increases or reductions occur, ambient considerations are crucial. In addition to distance between sources, plume parameters (e.g. stack height, temperature and velocity of stack gases), pollutant characteristics, meteorology and topography will also affect the ambient impact of such a trade. [(444) -- 444. See above at footnote 430. ]

In some cases the negative aspects of one trade may be balanced out by the positive aspects of another trade and in other cases the inability of emission impact modeling to make accurate predictions of effect [(445) -- 445. Ibid., at 122 to 122.] may limit the utility of case by case analysis. However, there clearly is a need for administrators, on a case by case approval basis, to ensure that trades do not lead to reduction of overall environmental quality or hot spots of pollution.

Public Registry and Banking

All permit trades, including allocations, sales and transfers, should be recorded in a public registry. A registry should have separate accounts for all sources. Trades would not be effective until recorded. Publication of data on firm emissions and permits in place would facilitate trading activity and tend to expose any firms who are hoarding allowances for anti-competitive purposes. [(446) -- 446. See CCME Working Group, above at footnote 393 , at 45 and Barakat, above at footnote 410, at F3 and G13.] A banking system also could be used to identify and register allocation rights or permits being held as surplus. Permits or allocation rights registered as surplus could then be utilized in the future or sold. [(447) -- 447. CCME Working Group, above at footnote 393, at 42.] Tracing of permits and emissions in different zones and local areas would ease public concerns over the concentration of emissions.

Enabling legislation should require a registry system with public access to data on emissions and permit holdings. It should also provide authority to regulate the banking of permits for future use. [(448) -- 448. The benefits of allowing permits to be banked for future use or sale have been identified by the CCME Working Group and others. See CCME Working Group, above at footnote 393 at 43 and Hahn, above at footnote 417, at 384-328.] Permit holders should pay the cost of the registry, including public access.

Liability of Purchaser for Vendor's Activities After Sale

We recommend that the legislation clearly set out when a purchaser of allocation rights or a permit will be penalized for the fact that the permit or allocation rights were improperly created by the vendor or earlier holders. While holding buyers liable for the legitimacy of their permits encourages buyers to scrutinize their purchases, too strong a "buyer beware" policy will make firms reluctant to trade permits. Under the United States sulphur dioxide emission trading program, if a permit allocated to an opted in source is sold and the opted in unit subsequently closes the permit is considered void.

We recommend that implementing legislation clearly set out that the purchaser will be responsible if, at the time of purchase, it is aware, or if it has reason to suspect after due inquiry, either that the vendor's emissions exceed its remaining allocation or that the emissions were created through some improper means such as the claimed reduction in emissions being greater than the actual reduction. This provision requires purchasers to exercise due diligence and make inquiries to avoid against dishonest transactions, while not adding significantly to transaction costs.

Sales of Permits from Firms that Close or Reduce Production

It also is necessary to consider how regulators approving trades should treat permits from firms that have reduced their emissions by shutting down or lowering their production rate. The U.S. bubble policy [(449) -- 449. See footnote 417.] has been criticized for allowing creation of credits that would last indefinitely from reductions by plants that would have closed their doors in a few years. Allowing trading of such permits can slow emission reductions in later years. [(450) -- 450. Rehbinder & Sprenger, above at footnote 441. ]

We recommend that legislation prohibit sales where a firm is only in a position to sell permits because it has shut down or reduced its operations, unless the firm purchased those permits. Rewarding a firm for leaving the jurisdiction by allowing it to sell rights to a public resource which it acquired at no cost is indefensible and would be a serious impediment to public support for an emissions trading system. In keeping with this approach, the United States sulphur dioxide trading program prohibits the transfer of allowances from opted in sources who reduce or cease production. [(451) -- 451. 42 U.S.C.S.§7651 i(f).]

Monitoring

Accurate monitoring is essential for an effective tradeable permit system. This is true not only because there is greater incentive to cheat in a tradeable permit system but also because command and control approaches may offer alternatives to actual emissions monitoring that are not available under a tradeable permit system. [(452) -- 452. CCME Working Group above at footnote 393, at 50.]

Under the United States sulphur dioxide emission trading program, emitters are required to operate continuous emissions monitoring systems ("CEMS") on each stack. Alternative monitoring systems are only permitted where they can provide information with the same precision, reliability, accessibility and timeliness. [(453) -- 453. 42 U.S.C.S.§7651 k(a); see also §7661 (c) for monitoring requirements on ozone depleting substances.]

A general requirement for CEMS should be established in any implementing legislation. For small polluters CEMS may be prohibitively expensive. Administrators may need a power to approve alternatives to continuous emissions monitoring for emitters below a specified size. Legislation should provide that where an alternate system does not have the same precision, reliability, accessibility or timeliness as provided by CEMS, special requirements shall be imposed for approving any trades of permits from such sources. Legislation should include criteria for approval.

Reliability of emissions data is essential to the working of a tradeable permit system. A 1993 report of the U.S. General Accounting Office reviewing self-reporting of emissions monitoring results found that sampling was statistically unrepresentative and open to substantial fraud both in sampling of emissions and in testing. [(454) -- 454. United States General Accounting Office, "Environmental Enforcement: EPA Cannot Ensure the Accuracy of Self-Reported Compliance Monitoring Data" (Washington, D.C.: GAO/RCED, March 1993) at 21.] The result appears to be a very significant level of fraud amongst emitters and independent laboratories. [(455) -- 455. Commercial laboratories may falsify emissions monitoring with or without the knowledge of facility operators in order to save money or handle more work. In some instances falsification has been a routine part of major commercial laboratories' operations: Ibid. at 51 and 56-7. Instances of fraud by emitters have included plant managers persistently over a period of at least nine years directing workers to falsify results: Ibid. at 53. ] Even where programs are in effect to detect fraud in emissions monitoring, the chances of detecting fraud is often low. [(456) -- 456. Ibid. at 55.] As a result, self reporting of emissions monitoring should not be permitted if there is any potential for falsification of data. This may be a major constraint to the use of tradeable permit systems.

Enforcement

Commentators on tradeable emission permit systems consistently reiterate the need for strong enforcement. [(457) -- 457. Barakat & Chamberlin, above at footnote 410, at G-14. ] Both inspection of facilities and prosecution of offences must be increased in a tradable permit system. There is an added incentive for polluters to exceed their permitted emissions in a tradeable emissions system as extra permits can be sold. This must be counterbalanced by a high probability or near certainty that offences will be penalized.

Inspection activities will need to increase because firms are less likely to operate substantially below their permitted emissions, as is now common, when they could sell excess permits for profit. [(458) -- 458. Rehbinder & Sprenger, above at footnote 430, at 193.] As discussed above, [(459) -- 459. At footnote 441 to 443. ] if emission reduction credits are allowed, demands on regulators will be exacerbated since there will be an increased number of hard to measure sources to inspect. Legislation should provide either for revenue generating auctions or emission fees to ensure inspectors are adequately funded. [(460) -- 460. See the headings "Subsequent Auctions" above, and "Ability to Charge Emission Fees and Administrative Fees," below.]

Penalties should significantly exceed the cost of acquiring permits. Penalties for administrative violations -- inaccurate records, tampering with monitoring devices -- must be sufficiently stringent that these violations are not used to disguise noncompliance. [(461) -- 461. Barakat & Chamberlin, above at footnote 410 at G-14 to G-15.] Under the United States sulphur dioxide emission trading program, an automatic penalty of $2000 per tonne over permitted emissions is automatically levied every time a polluter exceeds its allowable emissions. [(462) -- 462. 42 U.S.C.S.§7651 i(j).] Firms that exceed permitted emissions also must offset future emissions by an amount equal to the exceedance. The fine is payable whether or not authorities take any action. Firms are liable for a further criminal penalty if they do not pay the automatic fine. [(463) -- 463. 42 U.S.C.S. §7651 j(d).] Firms out of compliance with monitoring requirements are assumed to be out of compliance with their permitted allowances. [(464) -- 464. 42 U.S.C.S. §7651 k(d).]

In the South Coast Air Quality Management District fines of up to $25,000 per violation per day can be levied with the possibility of permit revocation as well as possible civil and criminal penalties. [(465) -- 465. Barakat & Chamberlin, above at footnote 410, at 53.]

We recommend that any implementing legislation impose high minimum fines for permit exceedances. Fines should be levied, as under the sulphur dioxide trading program, on the basis of X dollars per unit of a pollutant and should be levied automatically whether or not the polluter exercised diligence in avoiding the permit exceedance. The penalties should be automatically payable without any regulatory action if monitoring data indicates a permit exceedance. Failure to pay should constitute an offence. Legislation also should provide for substantial minimum criminal penalties where firms are not diligent in avoiding permit exceedances. All permit exceedances should be offset by future reductions in emissions.

Any implementing legislation clearly must grant the regulators power to enter on to any premises where emissions are occurring and inspect the emissions as well as the monitoring equipment. For tradeable permit systems enacted by the province, these enforcement provisions exist under section 21 of the Waste Management Act, although special consideration should be given to creating a specific authority to test and examine monitoring equipment. Also, if there is any self reporting of monitoring data legislation should give regulators the right to conduct routine searches, inspections and audits of laboratories relied on to analyze tests. [(466) -- 466. See above under enforcement.]

Implementing legislation also should include provisions similar to those in the federal Canadian Environmental Protection Act (CEPA) permitting concerned citizens to participate in enforcement, both in the administrative process and in the courts. Under CEPA, any two Canadian residents of majority age can require an investigation if they have reason to believe that an offence has been committed under the Act. The proposed Ontario Environmental Bill of Rights will permit any two residents of the province who are 18 years of age or older and who believe that a contravention a prescribed acts has occurred to apply to the Environmental Commissioner for an investigation by the appropriate Minister. The Minister would be required to investigate unless the application is frivolous or vexatious, the alleged contravention is not serious enough to warrant an investigation, or the alleged offence is not likely to cause harm to the environment. Otherwise, the investigation must proceed and both the people who laid the complaint and the Environmental Commissioner must be notified of the result within a specified period of time. [(467) -- 467. Environmental Bill of Rights, 1993, Bill 26, 3rd Session 35th Legislature, Ontario.]

When the responsible agency declines to prosecute an environmental offence, a citizen has the option of proceeding with a private prosecution. Private prosecutions have been a powerful tool in citizens' efforts to protect the environment. Implementing legislation should encourage private prosecutions by awarding citizens who initiate an action one half of any fine that is recovered. [(468) -- 468. Similar provisions exist for private prosecutions under the Fisheries Act, Penalties, Forfeitures, and Proceeds Regulations, C.R.C. 1978, c. 827.]

Process Provisions

In Chapter 2 we discussed the need for public involvement in the regulation making process. Meaningful public involvement in regulation making is especially important in the context of a tradeable permit system. Emissions now governed by a permitting regime that allows for public input and an appeal process would be subject instead to generally applicable regulations covering the tradeable permit system. Due to the decreased role for public input in individual cases, there is a greater need for public input into the general regulations.

Public Involvement and Appeal

In Chapter 2 we also discussed the potential for challenges under administrative law based on infringement of the rules of procedural fairness. A statute which lays out a procedure for making and appealing administrative decisions can provide a predictable process for decision making that ensures fairness and integrity in the process. Moreover, if grounded in statute, an administrative decision making process often will be less susceptible to intervention by the courts than an informal process.

A process set out in statute also can ensure a right to public involvement in issues that affect the public; the same arguments in favour of public involvement in regulation making support meaningful public involvement in administrative decisions. In the United States, involvement of environmental non-governmental organizations in the approval of emission reduction credits have revealed questionable assumptions and calculations as well as shortcomings in data which escaped the administrator's attention. [(469) -- 469. Liroff, above at footnote 423, at 101.] Because of the technical issues and the need for understanding the policy concerns in implementing a system of tradeable permits, we recommend that an independent agency with expertise in environmental matters responsible for appeals be responsible for appeals.

We recommend a defined process for public involvement and appeal by both public and other interested parties for:

• approval of emission reduction credits;
• approving trades from sources which do not have continuous emissions monitoring in place;
• administrative penalties;
• initial allocations of emission rights; and
• levels of emissions which must be achieved by the end of transition phases.

We also recommend legislation include privative clauses shielding administrative decisions from appeal.

Legal Remedies for Victims of Trading

The safeguards against concentration of emissions in a particular area should help ensure that hot spots of pollution do not occur as a result of trading. However, a concentration of emissions in particular areas does occur, the public should have legal recourse. The nuisance action is the most important common law remedy for persons who are adversely effected by pollution. Nuisance is the unreasonable interference with the use of land by its occupier or with the public's use of a public right. [(470) -- 470. Allen Linden, Canadian Tort Law, 3d (Toronto: Butterworths, 1982) at 531.] An action in nuisance typically involves a consideration by the court of whether an activity such as polluting is reasonable in the circumstances. The courts will normally consider whether an emission is permitted by law in making this assessment. This consideration may be inappropriate in the case of emission trading because government has less control over the amount of emissions from any source.

We recommend that trading legislation specifically state that the holding of sufficient tradeable permits for an emission is neither a statutory defence to an action against a polluter nor a relevant factor in any such action. We also recommend reforming the law relating to nuisance to relax limits on the standing of the public to bring actions in nuisance. [(471) -- 471. See Ann Hillyer et al., "Recommendations for the Proposed British Columbia Environmental Protection Act" (Vancouver: West Coast Environmental Law Association, June 22, 1993) [unpublished].]

Efficient Administration and Coordination

A trading permit system will function most effectively if most administrative functions are under the authority of a single regulatory body. On the other hand, often there will be a need for these administrative functions to be delegated to other departments or even other governmental bodies that are in a unique position to perform certain functions. For instance, if a tradeable permit system were established in the Lower Fraser Valley and mobile sources were included, regulators should be able to delegate the testing of mobile sources to Air Care branches. There are no constitutional impediments to delegating functions from a federal body to a provincial body as long as they are not delegated to the provincial legislature. [(472) -- 472. Peter Hogg, Constitution Law of Canada, 2d. (Toronto: Carswell, 1992) at 14-29.]

Any legislation should specifically allow for regulations allowing the delegation of functions to third parties. Where a statute gives a power to delegate, it also should provide that the delegation is subject to directions from the central regulator to ensure that functions are carried out in a coordinated manner and that there is satisfactory quality control. Where two jurisdictions act together in creating a tradeable permit system the statutory authority to delegate should allow delegation to a joint body which would coordinate the system in both jurisdictions.

Relation of Permit Trading Systems and other Environmental Regulations

It is essential that any tradeable permit legislation clarify the application of other legislation and regulations. For instance, the United States sulphur dioxide trading legislation provides that it shall not be construed as affecting the application of other provisions in the Clean Air Act, including provisions relating to national ambient air quality standards and state clean air implementation plans. Tradeable allowances only supersede emission limitations previously in effect under that part of the Act. [(473) -- 473. 42 U.S.C.S.§7651 b(f) and (g). ]

Legislation should specifically provide that it does not affect any permit restrictions on the creation and discharge of toxic substances. This would help ensure that regulations limiting or prohibiting the production of a specific toxic substance are not overridden by tradeable permits allowing releases of a class of substances to which the specifically regulated toxic substance belongs. [(474) -- 474. See CCME Working Group, above at footnote 393, at 29-30.] For instance, restrictions on emissions of benzene should not be affected by permits to release volatile organic compounds; and permits for nitrous oxides aimed at acid rain reduction should not affect restrictions on emissions of nitrous oxides aimed at avoiding urban smog.

Ability to Levy Pollution Charges and Administrative Fees

Various commentators have underlined the need for the administrators of an emissions trading program to levy appropriate fees, noting that programs which lack resources for proper implementation will fail. [(475) -- 475. See Barakat, above at footnote 410.]. Recovering the full cost of administering the system is essential under the polluter pays principle, and any enabling statute should give regulators the authority to levy administrative charges for processing transactions as well as the ability to levy discharge fees. Such fees should be statutorily dedicated to administration of the trading program. [(476) -- 476. See Barakat, above at footnote 410.]

Summary

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