By: Tiffany Richmond

Quebec has officially announced that the province will be adopting the Western Climate Initiative’s (WCI) cap-and-trade system for greenhouse gas (GHG) emission allowances by 2013.

The WCI, a collaboration of independent jurisdictions who are working together to identify, evaluate, and implement emissions trading policies to tackle climate change at a regional level, central component is a flexible, market-based, regional cap-and-trade program that caps GHG emissions and uses tradable permits to incent development of renewable and lower-polluting energy sources.

Other jurisdictions that are partners with the WCI, but have yet to publicly announce commitment, include British Columbia, Manitoba and Ontario. The fifth partner, California, has already committed to the cap-and-trade system, like Quebec, and has been the front runner of this program since inception.

How the cap-and-trade system works:

• The government will set a cap on GHG emissions for all regulated emitters
• Each year, companies will receive a free allocation of emissions (also called ‘allowances’) corresponding to the amount of GHG emissions they may emit
• Companies who GHG emissions are greater than the number of units allocated will have to reduce their emissions, e.g. adopting clean technologies in their operations, or buy emissions rights at government auctions or on the carbon market
• Those whose GHG emissions are less than the number of units allocated they will be able to sell their excess carbon credits to other companies or the market

Details on Quebec’s cap-and-trade system:

• Participants include the industrial and electricity sectors only whose annual GHG emissions equal or exceed the amount of 25,000 CO₂e
• 2012 is the familiarization period – participants will be able to register with the system and take part in pilot auctions
• January 1st, 2013 – starting in 2013 emitters will be obligated to cap and reduce their emissions
• 2015 – companies that import or distribute in Quebec fuels that are used in the transportation and building sectors will be subject to the program

Since Quebec announced its commitment to the WCI’s program in mid-December, the rest of Canada is eagerly waiting to see if the remaining WCI partners will follow suit or not. With the clock ticking, only time will tell.

The Chicago Climate Exchange (CCX) recently announced that it will be shutting down its carbon exchange market at the end of this year, presumably in large part due to stalled cap and trade legislation which failed to pass in congress last week.

Had this legislation been passed it would have introduced a national regulated cap and trade market.   A cap and trade carbon market functions by setting annual emission reduction targets for each industry, and corporations must then attempt to meet those reduction targets.  Those corporations that emitted fewer carbon emissions than their target can sell their “excess” carbon credits to a corporation who were above target.   Conversely those corporations who did not meet their targets must purchase the excess carbon credits to offset their overage.

In the past similar legislation has been passed in some states, but the attempt to have greenhouse gas (GHG) emissions regulated at a national level has not been so successful.  While at first its success was hopeful with overwhelming support in the House of Representatives, upon arriving at the Senate the bill was met with opposition fully from the Republicans and some Democrats alike.  In addition to the lack of support at the Senate level, the recent mid-term election results eroded the unwavering support  the bill formerly enjoyed within the House of Representatives.

It was the position of members from both sides of Congress that the introduction of a legally mandated carbon market at the national level was not as economical and environmental as it sounded.  These members view the cap and trade system as a new method of taxation in which larger corporations would front the bill, redubbing the bill – ‘the cap-and-tax legislation’.  While this event has been viewed as a setback in the efforts to establish a national carbon trading market in North America there is still hope of cap and trade markets prospering.  While the Chicago Climate Exchange is closing its doors, cap and trade programs are planned in several states and four Canadian provinces as part of the Western Climate Initiative (WCI).  For example, the state of California recently reaffirmed its support of the cap and trade system when citizens voted against proposition 23 in early November, which would have blocked involvement in cap and trade.  The WCI has faced challenges as well, with Arizona pulling out of the cap and trade portion of the plan, citing the recession.

The WCI is one example of how cap and trade markets are still being considered as the basis for greenhouse gas reduction programs.  It is a collaboration of independent jurisdictions working together to identify, evaluate, and implement policies on climate change at a regional level.  US States such as California, Arizona, Washington, and Oregon, and Canadian provinces such as British Columbia, Manitoba, Ontario and Quebec are moving forward with the Western Climate Initiative all seeking to reduce their emissions by 15% from 2005 levels by 2020.  In addition to the partners there are fourteen other jurisdictions in North America acting in observer capacities that may at some point join the initiative as full participants.

With this being said organizations such as the WCI indicate that despite the recent closure of the CCX, efforts to implement carbon management will continue.  A cap and trade scheme may find more acceptance with regional implementation, where states and provinces that are more receptive implement it first, and others come on board later.

The topic of climate change has been hotly debated for the past 20 years. Until recently, scientists, politicians and business leaders, especially in North America, have not been able to agree on the existence of the problem let alone what measures should be taken to mitigate it. It is only recently that consensus levels have dramatically increased. Even the Terminator, Arnold Schwarzenegger, admits that climate change is real when he says, “The facts are there, that we have created… a self-inflicted wound through global warming.” It is now generally accepted that climate change is real, immediate and requires substantive action.

Why is this important to organizations? Since the production and use of energy accounts for 80 per cent of carbon emissions, energy is the major contributor to global warming and climate change. Most organizations know that they can have a significant impact on the levels of carbon emissions by how they source energy and how efficiently they use this resource. If organizations have this ability then why are we not seeing it happen? The answer is quite simple — money. Up until now, no cost or value has been placed on the carbon that is being pumped continuously and increasingly into the atmosphere. The potential economic impact of climate change on biodiversity, agricultural production, human health, and business is huge and yet none of these costs (referred to as externalities) have been assigned to the production or use of energy.

Since 1997 and the introduction of the Kyoto accord, there has been a recognition that financial mechanisms are required. These mechanisms offer various forms of a carrot and stick approach that is, rewarding those who reduce emissions and penalizing those who do not. A carbon tax on energy is one type of financial mechanism. This is currently being tried in British Columbia. Arguments in favour of carbon taxes include:

• Higher cost savings for energy efficiency projects;
• Predictability;
• Fast implementation;
• Transparency and simplicity;
• Less opportunity for manipulation; and
• Possible rebates to taxpayers.

The main detriment would be the unwillingness of politicians to introduce new taxes, which could have a substantial negative economic impact on companies or organizations incapable of responding in a timely manner. There are also concerns that the increased tax revenue will not be used as effectively or wisely by the government as it could be in the private sector.

This leads to the introduction of carbon markets to curb emissions using a mechanism commonly referred to as ‘cap and trade’.

A functioning carbon market has three primary participants — the buyer, the seller and the regulator. The buyer is typically an organization mandated by a regulatory body to achieve a certain level of greenhouse gas reduction or maintain emissions below a certain threshold. The seller is normally a regulated organization that has exceeded its targets, resulting in emission reduction credits which can be sold in a carbon market. The seller can also be a non-regulated organization that has created offset credits through direct emission reduction projects.

The attractiveness of this system is that it directs the emission reduction activity to those most able to cost effectively implement the reductions. Those who are unable to make reductions in a timely or economic fashion are able to purchase credits in the marketplace to meet their regulated obligations. Ideally, the price per unit for a carbon credit would be less than the equivalent cost to make the reduction from directed action for the buyer. This process provides a mechanism for the market to quickly and economically achieve targeted emission reductions.

The sulfur dioxide cap-and-trade system instituted in the United States in the early 1990s was effective in efficiently reducing acid rain emissions from power plants. Although a cap and trade system for carbon will be significant larger and more complex than the sulfur dioxide system it is intended that, if designed properly, the following benefits will be realized:

• Certainty on the level of emissions reductions achieved;
• Reductions are attained at the lowest cost;
• The development of new cost effective technological solutions; and
• Lower cost to governments to implement.

From an organization’s perspective either approach, carbon tax or cap and trade, will improve the economics of alternative energy and energy efficiency projects. Applying a value to carbon emission reductions associated with energy use presents a greater opportunity for organizations to meet or exceed their energy management objectives while making a significant contribution to saving the planet.