By Shane Pepin, Senior Manager, Client Services Delivery

Just over a year ago, John Baird, Canadian Minister of the Environment, unveiled the Harper government’s vision for a national climate change management program: Turning the Corner: An Action Plan to Reduce Greenhouse Gases and Air Pollution. Met with mixed reviews, the government nonetheless pushed forward with the plan and promised the release of a set of legal specifics in the form of draft regulations by this spring.

Spring is upon us and unfortunately, no legal specifics have materialized. Instead, the deadline has been extended to this fall. In March, however, more details were provided, painting a clearer picture of what is expected of Canadian industries in the years ahead concerning greenhouse gas emission reductions. As in 2007, reactions remain varied, with some calling the requirements overly strict and others claiming exactly the opposite. This article will focus on the new details provided by the federal government and explore how Turning the Corner will play out from a carbon trading and offset credit generation perspective, leaving commentary regarding the efficacy of the program aside.

Canada has stated an absolute goal of 150 megaton reduction of GHG by 2020. This target translates into a 20 per cent reduction in greenhouse gas emissions, using 2006 levels as the base year. In order to achieve this goal, a number of initiatives are planned to assist Canadian industries in making the necessary reductions. Figure 1 and Figure 2, both taken from a presentation from the Environment Canada website, demonstrate the share of action taken by different levels of government will take to reduce emissions and the emissions reductions from various sectors in the economy, respectively. Table 1 lists and describes the measures, identifies when they come into effect and any additional rules that may accompany them.

Figure 1

Figure 2

Table 1: Turning the Corner measures to reduce GHGs

Under Turning the Corner, the federal government is enforcing emissions reductions for 16 sectors of the Canadian economy. ‘Regulated firms’ refer to firms that exist within these sectors. ‘Non-regulated firms’ refer to companies who are not directly affected by this plan. While all of the Turning the Corner initiatives (Table 1) will have a direct impact on regulated industries, non-regulated firms can gain by creating carbon credits to feed into the market through carbon offset projects. The offset system will issue credits for incremental real, verified domestic reductions or removals of GHG emissions in activities outside the regulations.

Of primary concern for non-regulated firms is the ability to participate in carbon credit trading through the use of emissions offset credit creation. Under the federal plan, it appears as though the usual means of offset credit creation will be acceptable, including energy efficiency measures, methane capture, fuel switching and other measures designed at limiting carbon emissions. In addition, the recently established Montreal Climate Exchange (MCeX) is set to begin futures trading on May 30th. MCeX creates the institution necessary for large scale carbon market transactions in Canada. Given the creation of a carbon market, the first question to ask is: what will be the price of carbon credits in the short and long term as the Turning the Corner plan is put in place?

The primary driver determining prices over time will be the supply and demand dynamics of carbon credits for both regulated and non-regulated Canadian organizations. Under Turning the Corner, the required reductions will create some upward pressure on price, as regulated industries are asked to make emissions reductions. The second question is: whether or not the rules that have been announced will create a sufficient demand for carbon credits to make emissions reductions for non-regulated firms a valuable exercise.

For example, the existence of the Technology Investment Fund (TIF) allows for an initial 70 per cent of total emissions reductions to be met through direct investment. This is a clear substitute for the purchase of carbon credits in the marketplace. What this does is effectively limit the short term price on offset credit revenues to $15/tonne. As the TIF is phased out, so to should the downward pressure on carbon credit prices.

As with the TIF, the pre-certified investment credits present short-term price pressure for carbon credits in Canada. The federal government is allowing exemption from emission reductions targets for certain industries where there is large investment in carbon capture and storage technologies, including the Canadian Oil Sands. This exemption applies up until 2018, giving firms—in what could be considered to be the most emission rich industry—short term exclusion from the market. This will affect pricing signals until nearly a decade from today and will likely artificially lower demand for carbon credits in the marketplace, again placing short term price pressure on carbon credits until the exemptions end.

Taken together, the federal government is demonstrating that they wish to divert real action on climate change by industry until large emitters have sufficient time to prepare. While this temporarily looks after the economic interests of many Canadian industries, it fails to do two things: First, it fails to provide sufficient price incentive to non-regulated firms to make the large scale emission reduction investments that may have otherwise existed in a more stringent framework. Second, it appears to ignore the urgent call for action to combat climate change from the international community.

From the perspective of non-regulated firms, the plan put forward by the current Canadian government will provide, for the first time, a true market for carbon credits and offsets with real, measured demand. It remains to be seen if the incentive will be enough to make the task of reducing climate change impacts a viable financial exercise for Canadians. Much remains unclear for the future of Canadian climate change legislation as all interested parties apply pressure in attempts to change, or uphold, the current proposed plan and all its respective rules and incentives. Only time will tell if the final result will be something that reflects the best interest of all Canadians, and for that matter, the rest of the world.