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The Canadian Bar Association
Canada’s Regulatory Framework
for Air Emissions:
A Business and Environmental Law
Perspective
Elisabeth (Lisa) DeMarco
May 9, 2007
Overview
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General Principles of Emissions Trading
Voluntary versus Compliance Markets
Canadian Emissions Context
The Canadian Framework for Air Emissions
Framework in International ET Context
Considerations for Business and
Environmental Lawyers
Macleod Dixon LLP
• Canadian based International law firm established 1912
• 300 lawyers, 420 total staff in 7 global offices
• Focus: natural resource law (oil, gas, electricity, water,
carbon and emission products)
• MD Climate Change Team: International Team, lead out of
Toronto serving domestic and international clients
• MD Climate Change lawyers at the leading edge of Canadian
and international emissions trading policy development since
1996 – more than a decade of proven ET Law experience
• Member of EMA, IETA, IETA CWGCM
• MD Climate Change Team has closed more than 50 MT of
carbon transactions
Macleod Dixon’s Offices
Calgary,
Toronto
Moscow
Caracas
Almaty,
Atyrau
Rio de
Janeiro
General Principles of
Emissions Trading
Environmental Kuznets Curve
Personal Income
I. The Theory: ET 101
150
150
Current emissions of X
120
120
Total emissions
of X = 450 tonnes
90
90
60
60
30
30
0
A
B
C
D
E
The Theory: ET 101
Government requires 10% reduction
162
15
135
108
81
Total emissions of X
= 405 tonnes
Total reductions
required - 45 tonnes
12
9
135
6
108
54
81
27
3
54
0
A
B
C
D
27
E
The Theory: ET 101
If the cost of reducing 1 tonne of X is uniform for all emitters and
equal to $20/tonne then, the individual and total costs of reduction are:
$300
300
$240
240
Total cost of reducing
45 tonnes of X is $900
$180
180
$120
120
$60
60
0
A
B
C
D
E
The Theory: ET 101
If the cost of reducing 1 tonne of X is not the same for all emitters and A can make
reductions for $1/tonne while B,C.D,E make reductions at $20/tonne. Then, the
individual and total costs of reduction are:
$240
240
$180
Total cost of
reducing 45 tonnes
of X is $615
180
$120
120
$60
60
$15
0
The Theory: ET 101
If A can make 42 T of emission reductions at $1/tonne, it can then sell
emission reductions at a profit to B,C,D,E at $10/tonne and decrease both
individual and total compliance costs.
Total cost of reducing
A: $15 compliance cost, $243 profit
45 tonnes of X using ET
B: buys 12T from A = $120 compliance cost
is $345; without ET
C: buys 9T from A = $90 compliance cost
D: buys 6T from A = $60 compliance cost
$900
E: makes 3T reductions itself = $60 compliance cost
___________________________________________
45T emission reduction goal achieved at $345 compliance cost
Exercise: Compliance Cost Curve
Source Rick Hyndman (CAPP)
$60
Emission reduction options identified in
Upstream Oil & Gas Options Report,
1999
$50
$40
C$/tCO2e
$30
Emission Cost Curve
$20
$10
$0
110
115
120
125
130
-$10
-$20
Emissions (Mega)tonnes CO2e/year
135
140
145
150
Voluntary vs. Compliance
Markets
Voluntary vs. Compliance
• The Differences
• the nature of the “product/rights”
• project-based vs. government allocated
• generally* contract-based vs. regulatory regime
• Examples
Compliance: EU ETS, US RGGI, US SO2,
units= allowances, permits
Voluntary: domestic offsets, CDM and JI
units= VERs, offsets, ERs, CERs, ERUs
• Significant difference but both have value
Example: Compliance Market
Reg 397/01 2007 NOx Allocations
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OPG – 16993
Kingston Cogen – 383
Transalta Sarnia- 1382
Brighton Beach – 640
Keele Valley LFG Power – 168
• http://www.oetr.on.ca/oetr/index.jsp
Example: Credit Creation
Process (Voluntary)
1
5
7
3
9
8
6
4
2
Source: Government of Canada
General Characteristics of an
Offset
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Real
Quantifiable
Verifiable (Verified)
Unique (No double counting)
Surplus (Additional)
Direct vs. Indirect Credits
Direct
CH4 reductions at LFG power
plant
Indirect
NOx, SO2, CO2 offsets from LFG
power offsetting higher emission power
relative to
system
supply mix
Environmental Attributes
• The “Greenness” of power or a product
(ethanol)
• Both quantifiable (# ERs, RECs) and diffuse
(all rights, benefits and interest – akin to
goodwill)
• Can be sold Bundled/Aggregated or
Separately/Disaggregated or partially
bundled***
• Quantified units: RECs, TRCs, green tags
• Diffuse units: enviro. attributes, benefits
Canadian Emissions
Context
Canada’s GHG Emissions
Source: Environment Canada
Emissions by Sector
The Canadian Framework
for Air Emissions
The Framework: General Views
• The Framework as the First Step Forward
• Theory of the Second Best
• Framework vs. Kyoto
• Framework: 150 MT decrease from estimated
2006 GHG levels (780MT) = 630MT by 2020
• Kyoto: 220 MT reduction from estimated 2006
GHG levels (780MT) = 560 MT by 2012
• Framework is not Kyoto: it continues Canada's
move toward a "made-in-Canada" approach to
climate change
Greenhouse Gas Targets
• Short-term:
• Emissions intensity targets
• Targeted reductions relative to 2006 emissions
• 2010 implementation date
• by 2010:
• -18% (combustion & non-fixed process emissions)
• 0% (predefined fixed process emissions)
• -2% emission intensity per year (2010-2020)
Goal (2020): 20% absolute emissions reduction
Greenhouse Gas Targets
• Sectorally, basic approach is -18% emission
intensity by 2010
• Variable goals for fixed process emissions
• New facilities (1st-year operation 2004+)
• 3-year grace period to reach normal operating
levels
• Initial target based on cleaner fuel standards
• -2% annual emissions intensity (to 2020)
GHG Compliance Mechanisms
• Engineered in-house reductions
• Energy efficiency and management improvements
• Technological advances – e.g., C-capture and storage
• Domestic trading
• Between regulated Canadian companies
• Bankable credits created by a company exceeding its
intensity target
• Domestic offset system
• Regulated purchase from unregulated
• Verified Emission Reductions (VERs)
GHG Compliance Mechanisms
• Kyoto Protocol’s Clean Development
Mechanism (CDM)
• International CDM credits may comprise ≤ 10%
of firm’s total target
• Credit for early action (1992-2006)
• One-time allocation of credits for verified
emissions reductions, to max 15 Mt CO2e
GHG Compliance Mechanisms
• Climate Change Technology Fund
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Companies may pay for not meeting intensity targets
2010-2012: $15/t CO2e
2013: $20
2013-2020: adjusted at growth rate of nominal GDP
Declining %age of total target:
• 70-50% (2010-2014; -5% p.a.)
• 40% (2015)
• 10% (2016-2017), and 0% thereafter
• Purpose
funding of emissions reduction technology
deployment and related infrastructure
Air Pollution Targets
• Fixed national emission caps (20122015)
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NOx (600 kt; -40% )
SOx (840 kt; - 55%)
Particulate matter (160 kt; -20%)
Volatile Organic Compounds (360 kt; 45%)
• Reductions relative to 2006 emissions
Air Pollution Targets
• Other pollutants in specific sectors, e.g.:
• Hg from electricity generation
• benzene from refineries & natural gas
production/processing
• Fixed sectoral caps (2012 and 2015) to
be validated by June 2007
J. Kellerman, Environment Canada. National Energy, Environment and Resources Law Summit, 28 April 2007
Montréal, PQ.
AP Compliance Mechanisms
• Domestic emissions trading system
• Cap-and-Trade for SOx and NOx
• regions that do not meet national air quality
objectives will have limits on use of credits from
elsewhere
• On-going discussions with USA on crossborder trading system (SOx & NOx)
• Verification and enforcement under CEPA
1999
Framework in International
ET Context
Global Carbon Market
• Kyoto came into effect and became international law February
16, 2005 creating binding obligations (Canada must reduce 6%
from 1990 by 2012)
• EU pre-compliance market: EU ETS started January 2005
• Two main markets: EU ETS and Kyoto Mechanisms with links
• Commodities:
• EU allowances, CDM (CERs), JI (ERUs), and AAUs
• all generally traded in units of CO2 equivalents
• International Carbon market activity (CDM and JI) has
increased dramatically since Fall 2004, related prices also rose
very sharply and dropped sharply in April 06 and are rising
again
• Prices: EUA @ 19 Euros for 2008 (crash on 2007); Volumes:
significant increase in last 12 months
• Current prices and volumes published by a number of
emission brokers (Evolution, Natsource, Point Carbon)
Global Performance (based on 2004 inventories)
source
Environment Canada
Market Dynamics: Volumes (2006)
* based on volume estimates from Point Carbon, Natsource and extrapolations based on completed
transactions. 2006 Figures significantly higher.
EU ETS
Estimated
Estimated Total
Financial size
Volume (MT)
(million Euros)
1100
25,000
CDM (CERs)
475
5260
JI/AAU
16
141
Other
30
200
Total
1621
30,601
System
Market Dynamics
• Estimated Global Supply
• 250 MT to 350 MT/ year over 2008 to 2012
• compliance instruments
• other
• Estimated Global Demand
• 2.5 BT to 4BT over 2008 to 2012
• contingencies
• EU NAPs and Phase II, Canadian commitment and
position (300 MT/yr swing); Japan DET
• Second Commitment Period
• Asia Pacific Partnership and US position
• AAU trading
Pricing Differences
• Prices currently showing an upward trend
• Higher prices for compliance-grade commodities
• Differences between CER and ERU prices reflect
greater risk in less developed countries (JI projects
are in Eastern Europe)
• Other price determinants:
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Creditworthiness and experience
Confidence in counterparty and project
Structure of contract
Cost of validation and certification
ER vintage and seniority
Regulatory Risk***
Additional environmental benefits
Market Pricing (January 2005-2006
in US$/tCO2e)
Source: IETA
EUA Prices
Sources: IETA, PowerNext, ECX
International GHG Emissions
Trading
Annual volumes (Mt CO2e) of project-based emission reductions
transactions
Source: State and Trends of the Carbon Market 2007.
Increases in volumes and values of
transactions on the Main International
Allowances Markets
2005
2006
Volume
Value
Volume
(Mt CO2e) (MUS$) (Mt CO2e)
Value
(MUS$)
321
7,908
1,101
24,357
New South Wales
6
59
20
225
Chicago Climate Exchange
1
3
10
38
UK ETS
0
1
na
na
328
7,971
1,131
24,620
EU ETS
TOTAL
State and Trends of the Carbon Market 2007.
Considerations for Business
and Environmental Lawyers
Domestic Regulatory
• Host of new regulatory obligations for clients
• is facility/corp. a large industrial emitter?
• can it create offsets?
• what 2006 data/analysis required under s. 71?
• what is GHG sector-based intensity target
applicable to facility?
• what fixed AP caps apply to sector? facility?
allocation?
• what emissions covered (fixed process vs. nonfixed process?
• compliance strategy (short and long term)?
• provincial equivalency (AB, ON, QC)
• treatment of any emissions book under CEA?
• new facility, timing of implementation of GHG
control measures
Domestic Commercial
(Emissions Transactions)
• Scenario planning to determine likely market
boundaries (provincial? national? US? Mexico?)
• Facility based cost compliance curves
• Forward price curves for GHG and AP
• Compliance strategy in light of evolution and
integration of Tech Fund
• Offset purchasing strategy
• Impact on existing ERPAs and future ERPA
language
• CDM portfolio (?)
• Trading in Tech Fund credits?
• Arbitrage on existing CEA book?
• Cross border trading? (DeMarco et al. 2002)
International Trade and Treaty
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Impacts of CDN Kyoto non-compliance
NAFTA / WTO vs. Kyoto
Product impact (import taxes and duties)
Cross border emissions trading in NOx and SO2 –
extra-territorial incompetence
• Legality of limits on types (jurisdictions?) of CDM
projects and interpretation of supplementarity
• Impact on inter-provincial trade and AIT (DeMarco
et al. 2004)
• International carbon market impacts (alters 2008 to
2012 demand by at least 250 MT/yr)
• Pricing impacts
Contact Information
Elisabeth (Lisa) DeMarco
Partner, Macleod Dixon LLP
Head International Climate Change &
Toronto Energy Groups
Direct Telephone: (416) 203-4431
Facsimile: (416) 360-8277
Email: [email protected]