By Shane Pepin

With Canada's current failure to meet its commitments to reduce greenhouse gas (GHG) emissions under the Kyoto Protocol, domestic and international pressure on our government to combat climate change is mounting. In fact, more than ever, there is scientific, political, corporate and public consensus on the need to reduce GHG emissions and combat global warming. Under pressure from all sides, climate change is an issue that the Canadian government must address.

In response, the federal government has been working on its own strategy to combat global warming. The recent announcement of the federal Conservative Party of Canada's "Turning the Corner" plan is an attempt to address this important issue on a national scale. The plan calls for GHG reductions of 20% by 2020, when compared to 2006 levels. Borrowing from the original Kyoto Protocol, the plan provides a number of tools that Canadian companies can use to meet their GHG reduction targets:

• In-house reductions
• Contributions to a technology fund
• Emissions trading
• Offsets
• Access to Kyoto's Clean Development Mechanism

While all of the proposed mechanisms have a role to play in meeting Canada's targets, the remainder of this article will focus on the emissions trading and offset mechanisms.

Emissions Trading

The Conservative Government's proposed nationwide emissions trading market would set firm carbon emissions caps only on companies from the following industries (‘regulated companies'):

• electricity generation produced by combustion;
• oil and gas;
• forest products;
• smelting and refining;
• iron and steel;
• certain mining applications;
• cement, lime, and chemical production.

Under the proposed market, regulated companies from the above industries will be allocated allowances, with each allowance representing a single tonne of carbon dioxide equivalent. Emission trading allows companies to emit in excess of their regulated limits by purchasing additional allowances from the market. Conversely, a company that emits less than its regulated limit can sell its surplus allowances. The result is a market in which firms that can only reduce their emissions at relatively high cost can purchase their additional required emissions credits from firms that can reduce their emissions at relatively low cost. The net effect is a mitigation of costs associated with reducing GHG emissions at both the organizational and aggregate level.

Offsets

While direct participation in the market is limited to regulated companies in the industries listed above, there is an opportunity for Canadian companies from other sectors to participate in this program through the creation of "offset credits". Under the proposed plan, unregulated companies that can demonstrate measurable GHG emission reductions may be eligible to create offset credits for these reductions. Once created, they can then sell the credits to regulated companies in the emissions trading market. As with the emissions trading market allowances, one offset credit would be equal to a reduction of one tonne of carbon dioxide equivalent. Reductions created through specific activities will be included, such as energy efficiency projects, captured methane from landfill gas that is subsequently used to generate electricity, and carbon sequestration projects. The potential value of an offset credit is still unknown, but based upon projections by the current government, they could reach prices of $15/tonne or more, presenting significant financial opportunity for companies willing to reduce their GHG emissions.

Although exact details as to how this offset market will function are not yet released, some valuable information has been made available. Offset credits, which will be created from GHG emissions reduction projects, will need to be measured and verified by an independent third party. Once verified, the credits would be eligible for purchase in the marketplace. Consequently, it is very important that the initial measurements of potential offset credits are correct. A professional and detailed approach can help get the most out of any emissions reduction project.

The Canadian government has also indicated that aggregation of offset credits will be encouraged. This should reduce transaction costs increasing the economic return from even the smallest of reductions. Additionally, it is important to note that offset credits will be issued only for verified reductions in GHG emissions that are incremental to what would have happened without the regulatory system or other government programs.

The Conservative Government has also stated that the offset market will begin prior to the introduction of the emissions trading market. Opening the offset market early will allow companies wishing to participate the time to generate, measure, and verify their emission reductions for sale to emissions market participants.

A number of questions remain. For example, the federal government has not been clear on whether emissions reductions prior to the market's baseline year of 2006 will be eligible for offset credit generation. Also, statements released concerning projects that have received government funding or incentives imply that these would not be eligible for offset credits.

Despite the commitments proposed by the Conservative government, the plan has its fair share of detractors. Opposition parties and environmental groups alike have stated that the targets set by the government are not strong enough and fall far short of our commitments to Kyoto. They argue that tougher, more immediate targets should be set. The issue has proved to be fractious to an already fragile government, once again raising suspicions that it may result in a new election. While an election may ultimately prove to put the current "Turning the Corner" plan on hold, opposition parties have proposed similar or tougher actions with respect to climate change. This makes it clear that a federal plan to combat GHG emissions is a reality for the Canadian marketplace.

Specific information will continue to flow from the government as time progresses, but one thing is already clear: Canada is now on the move towards regulating GHG emissions on a national scale. Every party is in agreement that action must be taken and that it must be taken now. This change presents an opportunity for companies that can demonstrate real and measurable reductions in their GHG emissions.

For further information on how you can better understand and adapt to Canada's newly proposed climate change legislation, please contact Energy Advantage Inc at 1-800-354-1266.