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Summit Crafts the Spew Economy

On the table: how to dole out pollution offsets for big parts of Canada, US.

By Tom Barrett 29 Jul 2008 | TheTyee.ca

Tom Barrett is a Tyee contributing editor with a focus on global warming policy and politics.

image atom
Big emitter: coal-fired power plant.

Representatives from Canada and the U.S. are in San Diego today to discuss a cap-and-trade system that forms a key part of B.C.'s climate change strategy.

As they meet, several crucial questions and concerns surround the process.

The concerns have to do with when the program will be implemented, the amount of offsets polluters will be allowed to buy and what -- if anything -- industry will have to pay to pollute under the system.

The San Diego meeting is being held by the Western Climate Initiative, which includes four provinces representing about three-quarters of the Canadian economy, and seven states representing one-fifth of the U.S. economy.

Last week, the group released a draft document that outlined how the system is expected to work. Today's meeting is intended to give stakeholders a chance to discuss that document.

Overall, the draft was a disappointment, said Matt Horne, acting director, B.C. energy solutions, with the Pembina Institute.

"What's there at the moment on the table isn't going to help them live up to their ambitions, in my opinion," said Horne, who will be in San Diego today.

What is 'cap and trade'?

Cap-and-trade systems are hugely complex, and reducing emissions depends on getting a lot of things right in the system.

In essence, they work this way:

Governments place a limit, or cap, on the amount of greenhouse gases that can be emitted. Big emitters must obtain permits to cover their emissions. A company that reduces its emissions below the level of its permits will be left with excess permits -- which it can sell to companies that can't meet their targets.

For companies that go over their limit, the cost of having to buy permits on the market acts as an incentive to make long-term decisions that will reduce emissions.

Meanwhile, overall emissions are kept to a regulated level. Over time, governments lower the overall cap so that the big emitters produce less and less greenhouse gas.

The system has worked well in some instances. During the 1990s, the U.S. used a cap-and-trade system to limit the emissions that cause acid rain; sulphur dioxide emissions dropped by 45 per cent compared to 1980 levels.

But there are many details that have to be worked out.

Which sectors of the economy do you cover? How much greenhouse gas does a company have to emit to be covered? How do you make sure the permits accurately reflect emissions? Do you allow emitters to meet their targets by purchasing offsets? If so, how many offsets should they be allowed to buy? And how do you allocate the permits -- do you hand them out for free or do you auction them?

These kinds of details have thrown a wrench into some cap-and-trade systems. The European Commission set up a system in 2005, but discovered that its measurements were badly flawed; too many permits were issued and their value fell through the floor.

And if permits are too cheap, companies have less incentive to reduce emissions.

'Dismaying' delay: Suzuki spokesperson

Horne's biggest concern about the WCI's draft design document is the timeline.

"There's nothing up and running until 2012," he notes. And it's another three years after that before the WCI covers transportation fuels.

On the positive side, he said, covering transportation fuels at all is a welcome move -- something that had been rumoured among WCI participants but not confirmed until the release of the draft.

But this bright spot is still overshadowed by the length of time required to implement the scheme, Horne said.

Nicholas Heap, energy and climate policy analyst with the David Suzuki Foundation, called the 2012 implementation date "dismaying."

"There's no reason for that kind of delay," he said.

Heap said there's nothing in the WCI agreement that would stop the Canadian partners -- B.C., Manitoba, Ontario and Quebec -- from moving more quickly.

"There's no reason why the Canadian jurisdictions could not have an effective system in place in 2009," Heap said. "And we would very much encourage them to do so."

Competitive advantage missed?

A quicker start in Canada would give Canadian companies a "head start" that would produce a competitive advantage over their U.S. counterparts, he said.

"The climate can't afford to wait for five to eight years," he said. "This is a pressing issue and it needs to be dealt with now."

Heap said that, despite a number of concerns, the WCI draft is "promising."

"There is a lot of good stuff in here," he said.

Heap said the WCI began in the late 1990s as a collection of U.S. states that were frustrated with the U.S. federal government's inaction on climate change.

Canadian provinces have joined because of a similar frustration with their own federal government, he said.

And the WCI is gaining momentum quickly, he added -- with Ontario joining earlier this month, the WCI now covers about 80 per cent of Canada's population.

(Because Alberta -- which doesn't belong -- produces almost a third of Canada's greenhouse gases, the WCI covers only about half of this country's total emissions.)

Looking for answers today

Horne, of the Pembina Institute, said he'll be looking for answers to three questions in San Diego today.

He's curious about the assumptions that will go into the setting of caps.

He's also curious about the level of offsets that will be allowed. Offsets allow a company to buy credits from an activity that reduces greenhouse gases -- planting trees for example -- rather than reduce its own emissions.

The draft document says the WCI is considering allowing companies to buy offsets representing up to 10 per cent of their total emissions.

That, Horne said, could add up to half of a company's required reductions.

The Suzuki Foundation's Heap shares Horne's concern.

"A limited number of high-quality offsets makes a good deal of sense," he said.

However, he said, "we need to see limitations in terms of both quality and quantity for offsets. Firstly and fundamentally, you want to make sure the offsets you're purchasing are really achieving emissions reductions."

And if there are too many offsets available in the system, Heap said, industry loses an incentive to become more carbon efficient.

"In a world where we're all going to need to be a lot more efficient, that's just a really poor idea."

Auction permits open to scams?

Horne also hopes to find out what the WCI intends to do about auctioning permits. Auctioning is a controversial topic; companies would naturally prefer to get their permits for free, but environmentalists would prefer they pay for them through a bidding system.

Unless companies are made to pay for their permits, a polluter could take its free permits, sell them off and then shut down, some groups worry.

Environmentalists also argue that an auction system would discourage companies from jacking up their emissions before cap and trade comes into effect.

An earlier design draft, issued in May, made it appear that the WCI was willing to leave the auction question up to member jurisdictions to a great extent.

"The WCI recommends each partner auction a minimum percentage, between 25 per cent and 75 per cent, of its allowance budget through a co-ordinated regional auction process," it said.

But that language is missing in last week's draft. Instead, the new draft says:

"The issue of establishing a minimum percentage of allowances subject to auction by each partner is still under discussion by the partners. The partners expect to make a recommendation on this issue by fall 2008."

Horne says he doesn't know what happened to the previous language.

"I've heard different rumours that that's an indication some [jurisdictions] want it lower and some want even higher minimums," he said.

Confusing landscape: BC Business Council

Jock Finlayson, executive vice-president for policy at the B.C. Business Council, said his organization will be studying the draft and will submit a written response to the WCI.

He noted that federal emissions standards are coming soon in Canada, which complicates things for his members.

The federal plan involves intensity targets rather than the hard caps envisioned by the WCI. Under the federal plan, a polluter's greenhouse gas targets are set in relation to its output; if output increases, the company can reduce the intensity of its emissions while still producing more emissions overall.

"Although they're intensity-based targets, most of our large emitters [in B.C.] are not expanding production," Finlayson said. "So an intensity-based target actually translates into a real, hard, absolute reduction obligation under the law.

"So if you're a smelter or a pulp and paper mill or a cement plant here in Vancouver, you're actually going to be required under this federal scheme to start reducing your emissions fairly quickly."

The various schemes create uncertainty for business, Finlayson said.

"All we know is we're going to be in a carbon-constrained world. But exactly what that means from the point of view of what the requirements are going to look like and which levels of government are going to be in the driver's seat -- at this point I think there's a big question mark over all of it."

What about the USA?

Then there's the question of what will be coming from the U.S. federal government next year, as both Barack Obama and John McCain favour some sort of national U.S. cap-and-trade scheme.

"One would presume that there could be something coming forward fairly quickly that would put in place a national regulatory framework south of the border," Finlayson said. "If that happens, my own view is that it changes the equation quite a bit on our side of the border."

He said a national U.S. system would "put a bit of a question mark over" regional schemes like the WCI.

"Will they actually go ahead, given that you're going to have a national scheme in the United States?"

But the Suzuki Foundation's Heap said he thinks the WCI will influence future national schemes, rather than the other way around.

"At this point, I think the momentum is with the WCI," he said. "And I think a lot of people who are engaged in this process realize that in the relative policy vacuum, this is where the energy is."

SOME WCI FACTS:

WCI members:
B.C.
Manitoba
Ontario
Quebec
Arizona
California
Montana
New Mexico
Oregon
Utah
Washington

Deadline for comments on the WCI's draft design document:
August 13

Final design recommendations expected:
Mid-September

Expected implementation date for a cap-and-trade system:
January 1, 2012

Related Tyee stories:

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