Josephine V. Yam

Is Canada Ready for the 2015 Paris Climate Change Conference?

At the 2015 Canadian Association of Environmental Law Societies Conference held at the University of Calgary last week, I presented a brief overview of global, Canadian and provincial developments in carbon pricing and greenhouse gas reduction policies.  One of the questions I sought to address was whether Canada can be expected to have a strong, ambitious national carbon pricing policy in time for the Paris climate change conference in December 2015.

Indeed, the Paris climate conference has been touted as the "world’s last best chance to reach an agreement on cutting carbon emissions."  As successor to the Kyoto Protocol, the international climate change treaty that emerges from Paris will consolidate all the Intended Nationally Determined Contributions (INDCs) of more than 190 developed and developing countries.  The INDCs are countries’ plans that articulate their greenhouse gas (GHGs) reduction targets and how these will be achieved, including the possible use of market-based mechanisms such as emissions trading and carbon taxes.

“Ambitious but achievable” are adjectives that the 
Guardian used to describe the upcoming Paris international climate treaty. Why? Last November 2014 in China, U.S. President. Barack Obama & China President Xi Jinping forged a historic deal that their countries, the two largest emitters in the world, would commit to significantly reduce their GHGs. For the U.S., Obama committed to cutting its GHGs between 26% and 28% by 2025 over the 2005 baseline period. For China, Xi Jinping committed to peaking its GHG emissions by 2030. China is also poised to officially launch a national emissions trading market in 2016. Not to be outdone, the European Union, which has the largest emissions trading scheme in the world with 30 countries participating, also committed to cutting its GHGs by 40% by the year 2030 using a 1990 baseline. Interestingly, even Pope Francis is scheduled to issue an encyclical this year to encourage his 1.2 billion Catholic followers to take action on climate change because it is a moral responsibility.

With bold, significant steps by the U.S., China and the European Union, the question arises: Will Canada follow suit and forge ahead with a strong, ambitious national climate policy in time for the Paris climate conference?  To address this question, it may be helpful to recall Canada’s historical record on the climate file.

In 1997, Canada made a binding commitment under the Kyoto Protocol to reduce its GHGs by 6% below 1990 levels by 2012. In 2011, Canada withdrew from the Kyoto Protocol because it had already emitted 30% more above its Kyoto obligation.  If Canada fulfilled its Kyoto obligation, the government claimed that it would cost Canada $14 billion or about $1,600 for every Canadian family.

Because the federal government knew that Canada would fail in its 2012 Kyoto obligation, as early as 2009, it committed the country to a non-binding commitment to reduce its GHGs by 17% below 2005 levels under the Copenhagen Accord.  As of 2014, however, Canada has already missed its Copenhagen target by 122 megatonnes of CO2e.

Given Canada’s dismal record of keeping its climate reduction obligations, it appears that Canada is not poised to emerge with a strong, ambitious national carbon pricing policy at the Paris climate conference. This conclusion is buttressed by Prime Minister Stephen Harper who 
avowed: “It’s not that we don’t seek to deal with climate change, but we seek to deal with it in a way that will protect and enhance our ability to create jobs and growth, not destroy jobs and growth.”

To fill in this void on federal climate policy, several provinces have gone ahead and established their own carbon pricing schemes. Alberta has its emissions intensity trading scheme, being the first jurisdiction to legislate on reducing GHGs in North America. British Columbia has a revenue-neutral carbon tax scheme, which has won praise from the OECD and the World Bank. Quebec has a cap-and-trade scheme which is linked with California’s scheme through the Western Climate Initiative. Ontario has cut its emissions by 6% below 1990 levels and will soon be implementing either a cap-and-trade scheme or a carbon tax this year.

But there is still time for Canada to act. It should seize this rare opportunity to repair its poor climate change reputation by joining the 
74 national governments that the World Bank has reported as supporting a strong carbon price. In doing so, Canada can manifest its climate leadership in time for the Paris climate conference. However, this can only happen if the Canadian government can muster within itself the strong political will and courage to do so.

U.S., China Forge Historic Deal on Climate Change

"Groundbreaking" is the appropriate word to describe the United States - China deal recently forged to jointly combat climate change. Being the world’s two biggest economies and greenhouse gas (GHG) emitters, their monumental “call to action” to reduce GHGs will be undertaken "by advancing cooperation on technology, research, conservation, and alternative and renewable energy."

The National Post article reported that this deal was reached during U.S. Secretary of State John Kerry's visit to China this weekend. Kerry is known to be a staunch advocate for advancing U.S. policies on GHG reduction and climate change.

The U.S.-China joint statement forcefully enunciated that both countries “consider that the overwhelming scientific consensus regarding climate change constitutes a compelling call to action crucial to having a global impact on climate change.” Moreover, they recognize that an “urgent need to intensify global efforts to reduce greenhouse gas emissions… is more critical than ever” and believe that “such action is crucial both to contain climate change and to set the kind of powerful example that can inspire the world.”

Noted Alden Meyer, representative for the Union of Concerned Scientist in the United States: By “pledging to set the kind of powerful example that can inspire the world," both countries "raise expectations" that they "will move more forcefully to confront the threat of climate change."

Yet, as we all know, the devil will surely be in the details. So we wait in anticipation as the U.S. and China discuss the details of this historic deal in an upcoming Strategic and Economic Dialogue meeting later this July.

The Accelerated Growth of Carbon Markets

"Right now, the carbon markets of the future are under construction in all corners of the world", enthused Rachel Kyte, Vice President of Sustainable Development at the World Bank, in a recent Huffington Post article.

According to Kyte, at least 35 countries, 18 sub-national jurisdictions in the U.S. and Canada, and 7 Chinese cities and provinces will eventually be launching their own carbon markets to reduce their greenhouse gas emissions (GHG).

For example, China has vocally expressed its resolute determination to use the "magic of the market" of emissions trading as a way of greening its robust economy. The Chinese government believes that the creation of its own national carbon emissions market will serve as a very efficient strategy to achieving a sustainable green economy.

The linking of carbon markets with one another is crucial to achieving cost efficiencies in reaching a global carbon price for carbon credits. To this end, the World Bank established the Partnership for Market Readiness (PMR) in 2011, which has brought together over 30 developed and developing countries to consolidate their efforts in creating market-based instruments for GHG emissions reduction, including the creation of emissions trading schemes. Indeed, this bottom-up approach may prove to be a more effective way to successfully combat climate change.

US is Global Leader in Cutting Greenhouse Gas Emissions

In his New York Times article, "A Model for Reducing Emissions", Eduardo Porter reports that the US has cut its CO2 emissions by almost 13 percent since 2007. The Americans have reduced their total energy use in the past 5 years by 5 percent. Surprisingly, this reduction is likely the most substantial GHG cut among developed countries and even more than what Europe has achieved.

The most compelling driver for the incredible decline in CO2 spewing is neither regulation nor increased citizenry initiatives to combat climate change. It is simply the interplay of market forces: low energy prices and technological innovation. In other words, the reasons are economic, not political.

Undeniably, the depressed economy has caused the lower production of goods and services, which in turn has decreased the Americans' use of energy. But a breakthrough in hydraulic fracturing of shale rocks has also produced massive amounts of cheap natural gas, which is significantly cleaner than coal. This in turn has caused electric utilities to switch from coal to natural gas, increasing the latter's overall proportion from 21 percent to 30 percent of total electricity produced from power plants.

Will these market forces continue to bring into fulfillment President Obama's goal of cutting CO2 emissions by 17 percent by 2020? Maybe. But until there is a carbon price that internalizes the escalating environmental damage and climate threat that carbon imposes on humanity, only then will there be a genuine driver that effectively dampens massive CO2 spewing.

Time to Confront Climate Change

The New York Times editorial “Time to Confront Climate Change” recalls that during his first term, President Obama described climate change as one of humanity’s most pressing challenges. He pledged an all-out effort to pass a cap-and-trade bill that would limit greenhouse gas (GHG) emissions. Unfortunately, during that period, many political obstacles blocked Mr. Obama’s administration from successfully passing a cap-and-trade bill.

Since his re-election in November 2012, President Obama identified climate change as one of his top priorities in his second term. In his interview for TIME’s Person of the Year award, he cited the economy, immigration, climate change and energy at the top of his agenda for the next four years.

The article then raised a very important question: Will President Obama bring the powers of the presidency to bear on the climate change problem?

President Obama has strategic “weapons” within his reach to tackle climate change and reduce emissions while reasserting America’s global leadership, the article notes.

One weapon he has is to ensure that natural gas, which is hugely abundant in the U.S., is extracted without risk to drinking water or the atmosphere. Indeed, the U.S. has natural gas in abundance, a boon considering that it emits only half the GHG emissions as coal does. This can be undertaken by the Obama administration through national legislation to replace the inconsistent, patch-work requirements of various state regulations.

Another weapon President Obama has is to enact and implement policies both in well-known clean energy technologies (i.e. wind power and solar power) as well as in basic research, next-generation nuclear plants and promising technologies that could lead to a low-carbon economy.

Moreover, another weapon within President Obama’s arsenal is to call on the Environmental Protection Agency (EPA)’s authority under the Clean Air Act to limit emissions from stationary sources, mainly coal-fired power plants. The EPA has already proposed strict emission standards for new power plants that can only be built when they have installed carbon capture and sequestration technologies. The problem that the EPA will need to deal with is what to do with existing coal-fired power plants, which still generate about 40% of U.S. electricity power.

At the Copenhagen climate meeting back in 2009, President Obama committed that the U.S. would reduce its GHG emissions by 17% below 2005 levels by 2020. With the abundant supply and strong demand for cheap natural gas as well as the EPA’s newly established fuel standards and mercury rules, among others, the U.S. is now on its way to achieving a 10% GHG reduction by 2020.

Thus, it appears that reaching President Obama’s 17% goal is within the realm of the possible after all. That is, if he courageously uses the powers of his presidency to wield the strategic weapons he has to tackle climate change.

5 Steps for Business-friendly Climate Agenda

Eric Pooley provides five steps that President Obama should take to address climate change in his second term. In his Harvard Business Review article, “A Business-Friendly Climate Agenda for Obama's Second Term”, Pooley outlines how the president can fulfill his promise to ensure that America "isn't threatened by the destructive power of a warming planet". He emphasizes that the following 5 steps can only be successful with the active support and participation of private industry.

1. Feed the conversation. President Obama can start by simply by talking about the issue and helping Americans see the relationship between emissions, climate change and extreme weather. This conversation is crucial as it engages the voices from private industry, including insurance companies, pension funds, banks and small business. To be politically viable, climate solutions must be economically sustainable.

2. Reduce climate accelerants. President Obama can take immediate steps to reduce potent greenhouse gases other than carbon, such as methane and fluorinated gases used in refrigerants and industrial applications. Although carbon is most ubiquitous, these substances are "climate accelerants", which means that they accelerate global warming the same way gasoline fuels a fire.

3. Start a clean energy race. President Obama can reduce subsidies for fossil fuels, continue tax credits for renewable energy while increasing R&D funding. Congress should pass national clean energy standards, which would require states to get more energy from renewables. Obama should also encourage private capital to invest in low-carbon energy by removing barriers to investments in efficiency and renewables.

4. Use the Clean Air Act. President Obama should use the Clean Air Act to reduce greenhouse gas emissions, under authority confirmed by the U.S. Supreme Court in Massachusetts v. EPA. This means vigorously defending the clean-air rules that his administration has already put in place, including the historic higher fuel economy standards for new cars and trucks and restrictions on the emission of mercury and other toxic air pollution for power plants. His administration should also set CO2 emission standards for new and existing power plants through flexible and economically efficient approaches.

5. Put a price on carbon. President Obama should heed the call of economists from across the political spectrum that believe that the most economically efficient way to cut carbon pollution is by imposing a price via a carbon tax or through cap and trade. Either would be a powerful incentive to produce cleaner power and could be accompanied by lower taxes on labor or capital, easing the impact on working families and business. As the U.S. moves toward a fiscal cliff, there is slew of discussions in Washington about raising revenue through a carbon fee. It could be in the form of a carbon tax starting at $20 per metric ton and rising at 6% a year that could raise $154 billion by 2021.

A Case for Clean Subsidies

In his Harvard Business Review article entitled “The Case for Clean Subsidies”, James Bacchus argues that the rules of the World Trade Organization (WTO) should be amended to create an exemption for green energy. These type of exemptions are not new. Many years ago, exemptions that helped achieve ”new environmental requirements” were agreed upon during the Uruguay Round of trade negotiations for subsidies. Unfortunately, these exemptions expired in 2000.

Due to the proliferation of governmental subsidies for clean energy worldwide, Bacchus notes that international trade disputes over green energy have been noticeably accelerating at the WTO. This is because these type of subsidies “distort trade by lowering costs for local manufacturers, thus reducing access to local markets for foreign companies and giving local manufacturers an unfair advantage in exporting to other markets.”

Yet, because fossil fuels are so much cheaper than renewable energy and and because greenhouse gas (GHG) emissions from fossil fuels are accelerating climate change, market forces cannot be relied upon to determine the world’s future energy use. Verily, there is far more at stake than a simple price tag.

While imposing a carbon tax that puts a price on carbon could be effective, such initiative could be politically unworkable. Thus, he proposes that “the only practical political alternative for producing renewable energy competitively seems to be subsidies” because they “ease the necessary shift to low-carbon economies”. However, these subsidies cannot succeed so long as the WTO rules make them illegal under international law. Consequently, amending the WTO rules to make an exemption for green subsidies appears imperative in order to successfully address climate change.

Energy and Climate Change in Obama's To-Do List

In the New York Times article, “A To-Do List for the Next For Years”, Carol Browner proposes the need for President Barack Obama to finally execute on a climate change agenda. Ms. Browner was former director of the White House Office of Energy and Climate Change Policy from 2009 to 2011 and the administrator of the Environmental Protection Agency (EPA) from 1993 to 2001.

“Energy and climate change, two issues that deeply divide the country, stand out as major pieces of unfinished business for the Obama administration,” she notes. Nevertheless, she points out that President Obama has unequivocally stated that “even for those who don’t believe climate change is real, the benefits of clean energy -- cleaner air, energy independence, American jobs and enhanced global competitiveness -- are just too important to ignore.”

How then can President Obama execute on a climate change agenda? By using his executive authority and by leverage existing energy laws.

The U.S. Supreme Court has affirmed the EPA’s authority to limit greenhouse gases that endanger public health. Browner recalls that during his first term as president, Obama used an energy bill signed by George W. Bush to reach an agreement on cleaner, more fuel-efficient cars. Car manufacturers had business certainty, consumers saved money at the pump and the environment became cleaner. She notes that President Obama can use this existing authority to work with the electric utilities to reduce carbon pollution and secure greater energy efficiency while providing business certainty.

Ms. Browner also recommends that given the abundance of natural gas, the Obama administration must ensure that “fracking” is done in accordance with strong public health standards. Also, instead of 20 to 30 different state regulations that are imposed on fracking businesses, the Obama administration should just develop one set of national requirements based on the best available science and technology while leaving the oversight and enforcement up to the states.

Indeed, by executing on a strong climate change agenda in the next 4 years, President Obama can ensure that the U.S. moves steadily and unconditionally towards a sustainable, clean energy future.

New Sustainability Metric: Total Return on Resources

The Boston Consulting Group (BCG)'s recent report stated that, in order to succeed in this new world of sustainability, companies will need to treat "resource management" as essential to their business. To do this, companies must focus on their “total return on resources” in order to optimize their inputs and outputs to maximize profits.

For inputs, companies will need to monitor the payback from natural resources in order to minimize the consumption of scarce supplies. Thus, power companies, for example, put a lot of money in improving the efficiency of their generating plants to reduce how much coal or natural gas they need in order to produce each megawatt of electricity.

For outputs, companies will also need to manage the "putback", which is the effect of their actions on the future supply of natural resources and on the climate so as to limit damage to the larger ecosystem. In such cases, for example, power companies put a lot of money in scrubbers and other processes to reduce the harmful emissions they release into the air.

The BCG report cites many stellar examples of companies focusing on their “total return on resources”. One of them is the Florida Ice & Farm, a Costa Rica-based beverage company. Its highly visionary CEO, Ramón de Mendiola Sánchez proclaimed that 40 percent of the variable portion of executive pay would be dependent on the company’s performance on environmental and social measures. He established a framework of strict measurements and strong managerial focus on environmental metrics, such as solid waste, water use and carbon dioxide emissions. The company set very lofty goals of achieving zero net solid waste by 2011, becoming water neutral by 2012 and carbon neutral by 2017. Thus, it comes as so no surprise that one of its bottling plants has become the most efficient in the world in terms of water usage. At the same time, the company’s revenues and market share have continued to grow through a tough economy. Mendiola firmly believes that this commitment to sustainability is the only way to achieve continued growth and to sustain Florida’s position as one of the most influential and admired companies in Costa Rica.

Indeed, the BCG report notes that, as resource supplies fail to keep up with burgeoning demand, companies will start treating sustainability as a central part of management rather than thrust it to the amorphous office unit of corporate social responsibility. The world as a whole is on the verge of a new wave of innovation in resource management, the report observes. And, as with all innovation, this will create opportunities for companies to teach others how to thrive in a carbon-constrained, resource-constrained world.

Designing Carbon Pricing: Questions that Policymakers Should Address

In its 2012 publication entitled "Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers", the International Monetary Fund (IMF) stated that revenue-raising carbon pricing is the instrument that effectively addresses climate change. It noted that carbon pricing can either be in the form of carbon taxes or cap-and-trade systems with allowance auctions. What is crucial is that it is well-designed in terms of comprehensively covering emissions.

Thus, in designing carbon pricing legislation, the IMF suggested that policymakers give due consideration to the following questions:
  • How strong is the case for carbon pricing instruments over regulatory approaches (e.g., standards for energy efficiency or mandates for renewables)? How do carbon taxes and cap-and-trade systems compare? What might be some promising alternatives if “ideal” pricing instruments are not viable initially?
  • How is a carbon pricing system best designed in terms of covering emissions sources, using revenues, overcoming implementation obstacles (e.g., by dealing with competitiveness and distributional concerns), and possibly combining them with other instruments (e.g., technology policies)? How might pricing policies be coordinated across different countries?
  • How should policymakers think about the appropriate level of emissions pricing?
  • How important is inclusion of the forest sector in carbon pricing schemes? How feasible is this in practice?
  • What should be the priorities for developing economies in terms of fiscal reforms to reduce emissions?
  • From the perspective of raising funds from developed economies to fund climate projects in developing economies, what are the most promising fiscal instruments? How should they be designed?
  • What lessons can be drawn from experience with emissions pricing programs, like the European Emissions Trading System (ETS) or the various carbon tax programs to date?

The IMF argued that the choice between carbon taxes and emissions trading systems is generally less crucial than implementing one of them and getting the design details right. What is important is that carbon pricing must comprehensively cover emissions and avoid wasting its revenue potential by granting free allowance allocations in cap-and-trade systems or allocating revenues for unimportant policy outcomes.

World's Largest Carbon Market: Linking Australian & EU Emissions Trading Systems

Last week, the Australian Minister for Climate Change and Energy Efficiency, Greg Combet, and the European Commissioner for Climate Action, Connie Hedegaard announced that Australia and the European Union (EU) will be linking their emissions trading systems.

Commissioner Hedegaard said: "We now look forward to the first full international linking of emission trading systems. This would be a significant achievement for both Europe and Australia. It is further evidence of strong international cooperation on climate change and will build further momentum towards establishing a robust international carbon market."

Minister Combet said: "Linking the Australian and European Union systems reaffirms that carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions."

A link between emissions trading systems allows companies in one system to use units from another system for compliance purposes. The advantages of linking include:

  • reducing the cost of cutting carbon pollution because enterprises will have access to more and lower cost emissions abatement units;
  • increasing market liquidity, which in turn offers a more stable carbon price signal;
  • increasing business opportunities to trade because companies with excess units will have access to more buyers and companies that need more units can purchase them from a wider range of sellers; and
  • supporting global cooperation on climate change.

A full two-way link between the EU and Australian cap-and-trade systems will start by July 1, 2018. Under this arrangement, private industry will be able to use carbon units from the Australian emissions trading scheme or the EU Emissions Trading System for compliance under either system.

An interim link between the two systems will be established allowing Australian businesses to use EU allowances to help meet liabilities under the Australian emissions trading scheme from July 1, 2015 until the full link is operational in 2018.

According to the EU website, this linking arrangement “represents the first step towards linking the established carbon market in Europe with developing carbon markets in the Asia Pacific. Together, the linked Australian and European emissions trading systems will be the world’s largest carbon market and a major driver of the global transition to a low carbon economy.”

U.S. Adopts Stricter Fuel Efficiency Standards

The Obama administration recently issued final rules that would require automakers to nearly double the average fuel economy of new cars and trucks by 2025, reported The New York Times. This new fuel efficiency mandate requires an average fuel economy of 54.5 miles per gallon (mgp) for the 2025 model year. Existing rules for the Corporate Average Fuel Economy (CAFÉ) program require an average of about 29 mpg, with gradual increases to 35.5 mpg by 2016.

Obama announced that the stricter fuel standards represent “the single most important step” his administration has ever taken to reduce U.S. dependence on foreign oil. The benefits are numerous: reduction in oil consumption by 12 billion barrels; savings of $1.7 trillion in fuel costs; average savings of more than $8,000 a vehicle by 2025; reduction in greenhouse gas emissions by half by 2025 through the elimination of six billion tons over the course of the program; and creation of hundreds of thousands of jobs by increasing the demand for new technologies.

Republican presidential candidate Mitt Romney criticized the new fuel efficiency standards as “extreme” as they “would limit the choices when consumers shop for a new car.” Remarked Romney’s camp: “The president tells voters that his regulations will save them thousands of dollars at the pump, but always forgets to mention that the savings will be wiped out by having to pay thousands of dollars more upfront for unproven technology that they may not even want.”

Nevertheless, in a New York Times’ Op-ed article entitled “Cleaner Cars, a Safer Planet”, it was noted that this fuel efficiency mandate is “an important step on America’s path to a lower-carbon and more-secure energy future…. They may also serve as proof that well-tailored government regulation can achieve positive results and that consensus among old enemies — in this case environmentalists and the car companies — is possible even at a time of partisan discord.”

Sources:

The Issue of Double Counting in the Monitoring and Reporting of Greenhouse Gas Emissions (MRG)

There is a complexity inherent in MRGs, especially in respect of consistency of reported information. One related issue relates to international offsets and double counting.

The issue revolves around the following questions:

How will offsets be accounted for in reporting and reviewing countries’ progress toward meeting their emission-reduction targets under the Cancun Agreement? Will both developed (buyer) and developing (seller) countries be able to count emission reductions from offset projects towards their respective pledges? Or will only the buyers get to count them, as is currently the case under the Kyoto Protocol and domestic emissions trading systems?

Currently, there is uncertainty in the existing agreements. Most countries have not taken an official position on what they would be doing.

A Stockholm Environment Institute paper and policy brief entitled “The Implications of International Greenhouse Gas Offsets on Global Climate Mitigation” addressed this issue when the paper was presented at a carbon markets and accountability seminar hosted by the OECD and the International Energy Agency in April 2011.

The paper concluded that the use of international offsets, if counted both by the supplying (developing) and buying (developed) country, could effectively reduce the ambition of current pledges by up to 1.6 billion tons CO2e in 2020. It suggested that the current pledges could significantly fall 10% lower than the total abatement required to stay on a path consistent with limiting warming to 2°C. The paper assumed that each ton of offset credit represents a ton of emissions benefit. To the extent that offsets do not represent real, additional reductions, then the effective dilution of pledges could be even greater.

It would be highly beneficial if this double counting issue of international offsets is settled uniformly across the EU and globally in order to preserve the environmental integrity of the EU ETS and the upcoming emission trading systems around the world.

Written: 2012 March
Reference: Stockholm Environment Institute, “The Implications of International Greenhouse Gas Offsets on Global Climate Mitigation (2011)