April 18, 2005

New national Kyoto plan seeks balance between environmental protection, competitive economy

An updated plan for meeting Canada's Kyoto commitment will balance improved environmental quality with a competitive, sustainable economy, according to the three federal ministers who last week publicly presented Moving Forward on Climate Change: A Plan for Honouring our Kyoto Commitment.

The plan calls for federal investments in the order of $10 billion between now and 2012 in order to achieve anticipated reductions of about 270 megatonnes (Mt). Funding will be reallocated as necessary to ensure that measures are effective and cost-efficient, and that only actions resulting in greenhouse gas (GHG) reductions are being funded. The plan also commits the government to annual assessments of climate change initiatives and investments, with progress reports beginning in 2008.

The leading industrial sources of GHG emissions--known as Large Final Emitters (LEFs)--will have a potentially more achievable reduction target of 36 Mt (down from the 55 Mt called for in the 2002 Climate Change Plan for Canada). In addition, LFEs will be able to invest in the Greenhouse Gas Technology Investment Fund, and count those investments for purposes of compliance for up to nine Mt.

The plan incorporates measures in the 2005 budget, notably the creation of the Climate Fund and the Partnership Fund, and enhancements to the government's renewable energy incentives and the EnerGuide for Houses program. It sets in place a new regime for emissions reductions from vehicles and increased individual action through an enhanced One-Tonne Challenge program.

Environment Minister St√ąphane Dion called the plan "pragmatic and results-driven," while Natural Resources Minister John Efford stressed the need for all sectors to play a role in carrying it out. Industry Minister David Emerson said the plan "demonstrates how a strong focus on the environment can parallel a commitment to economic growth and a competitive economy.

"Canadian industry," he added, "is seeing the positive business advantages and opportunities that environmental action can provide. By continuing to develop and deploy clean technologies and practices, Canadians will enjoy dual economic and environmental benefits."

Moving Forward is the first stage in Project Green, a government-wide set of policies and programs aimed at supporting a sustainable environment and a more competitive economy. The plan's components are summarized as follows.

Large Final Emitters (LFEs)

The overall reduction target for the large final emitters--the oil and gas, thermal electricity, mining and manufacturing sectors--is 45 Mt. This includes 36 Mt achieved through direct measures, plus up to nine more Mt counted through LFE investments in the Greenhouse Gas Technology Investment Fund.

There are numerous compliance options available to LFEs such as: adopting upgrades to achieve in-house reductions; purchasing emission reductions from other LFEs; investing in domestic offset credits; and purchasing international credits, provided these represent verified emission reductions. Taken together, these options will allow Canada's 700-plus LFEs to achieve some 36 Mt in GHG emission reductions.

Investments made by LFEs in the Greenhouse Gas Technology Investment Fund for purposes of compliance will be directed by the Fund to technology projects aimed at facilitating Canada's transition to a low-carbon economy. Since investments in the Fund are not expected to generate emission reductions within the Kyoto 2008-2012 timeframe, these nine megatonnes have not been included in the plan accounting.

Climate Fund (reduction target=75 to115 Mt)

Announced in the 2005 budget, the new Climate Fund is a market-based institution for the purchase of emission reductions and removals on behalf of the federal government. It will purchase domestic GHG reductions from farmers, businesses, communities, Canadians, and other innovators, and secure qualifying international emissions reductions which will help Canada meet its Kyoto target.

Automotive Industry (reduction target=three Mt)

The reductions in greenhouse gases from the automotive sector will be achieved through a Memorandum of Understanding (signed earlier this month-ELW April 11) between the federal government and the Canadian automotive industry.

That agreement, to reduce GHG emissions from light-duty motor vehicles operating in Canada, sets out commitments by the auto sector to achieve emissions reductions through the deployment of more fuel-efficient and less GHG-intensive technologies and vehicles. Examples include improved fuel efficiency, advanced emission and diesel technologies, and alternative fuel and hybrid vehicles.

Rigorous monitoring and reporting requirements will be put in place to ensure that targets are reached. The federal government notes that it will be prepared to take legislative and regulatory action as needed.

The 2005 budget noted the need to study incentives for purchasing fuel-efficient vehicles. Suggestions will be provided to the Finance Minister ahead of the 2006 budget.

Partnership Fund (reduction target=55 to 85 Mt)

Through this initiative, also announced in the 2005 budget, the federal government will work with provinces and territories to:

*strike new agreements and improve existing ones with provinces and territories;

*determine strategic investments on the basis of mutual priorities; and

*finance, on a cost-sharing basis, major technology and infrastructure investments determined in collaboration with provinces and territories. Examples include clean coal, phasing out coal-fired power plants, carbon dioxide capture and storage pipeline, and extending the east-west electricity power grid.

GHG Reduction Programs (reduction target=up to 40 Mt)

A number of federal programs already in place are proving their effectiveness. For example, the EnerGuide for Houses Home Retrofit Incentive program has proven so effective that the government, in its 2005 budget, increased its investment in this initiative by $225 million over five years to encourage up to half a million homeowners to increase the energy efficiency of their homes.

Similarly, incentives have encouraged the retrofit of almost 5,000 commercial and institutional buildings, with resulting energy savings averaging 20%. Other programs are contributing to emission reductions in areas such as the transportation sector and the use and availability of cleaner, alternative fuels.

The new plan recognizes that to remain effective, efforts need to evolve over time and to build on what works, reallocating from initiatives deemed less effective and taking advantage of new possibilities and technologies.

To ensure maximum results from climate change investments, the government will review all programming before releasing any new funds in 2007. Any resulting savings will go to new measures or to strengthen existing successful programs.

Carbon Sinks (reduction target=up to 30 Mt)

Business-as-Usual (BAU) sinks are those stores of carbon in the soil and forests that Canada will have simply by continuing existing practices. It is projected that up to 30 Mt of GHG emissions can be reduced by 2012 through existing farming and forestry practices. The Climate Fund can contribute additional tonnes by purchasing carbon sequestered through farming and forestry management projects.

Renewable Energy (reduction target=15 Mt)

Included in this component are investments and initiatives unveiled in the 2005 budget, notably a commitment of more than $1.8 billion for the next 15 years to: quadruple the Wind Power Production Incentive to 4,000 megawatts (enough energy to power one million Canadian homes); and create the Renewable Power Production Incentive to develop other renewable sources including solar, small hydro and biomass. The budget also introduced significant and innovative tax measures to promote energy efficiency and renewable energy.

Greening Government (reduction target=one Mt)

The federal government will reduce its own GHG emissions by approximately one-third, primarily through reallocation of existing funds. Specific measures will include:

*putting in place a green procurement policy to govern all purchases, including power, by 2006 and to make its central heating and cooling plants more energy-efficient;

*ensuring that new office buildings meet the Leadership in Energy and Environmental Design (LEED) Gold Standard (thus they will use approximately half the energy now needed per building on average); and

*replacing its vehicles over time with more efficient alternatives, including hybrids.

Consumer Action (reduction target=five Mt)

To increase information and incentives to support Canadian's greener purchasing decisions, the federal government will increase technical advice and services to individuals, businesses and communities. It will also continue raising awareness, through the One-Tonne Challenge, of simple, cost-effective, energy-efficient actions individuals can take. In addition, the National Round Table on the Environment and Economy will consult Canadians on the viability and effectiveness of further green consumer initiatives.

The various mechanisms outlined in the plan, such as the Climate Fund, the Partnership Fund, new and existing tax incentives and the existing greenhouse gas emission reduction programs, are all interdependent. For that reason, the megatonne targets are in some cases specific, (e.g. for the automotive industry), while in other cases they are expressed in ranges--all with the goal of reaching and, where possible, surpassing the 270 Mt overall target.

The implementation of some of the plan's elements will be determined through consultations with provinces, territories and other stakeholders. In particular, discussions on the mandates of both the Climate Fund and Partnership Fund, along with the LFE system and offset system rules will begin this spring.

The federal government will put in place regulations to allow for compliance monitoring and emissions trading. The preferred regulatory tool is the Canadian Environmental Protection Act (CEPA) and its approach to efficient and effective regulation. CEPA allows for federal-provincial-territorial equivalency agreements. Accordingly, provinces, territories and industry stakeholders will be engaged in the development of the proposed system during 2005.

Initial reaction

Commenting on the plan, Vicky Sharpe, president and CEO of Sustainable Development Technology Canada (SDTC), said, "The Moving Forward on Climate Change Plan will accelerate demand for clean technologies, including those being developed with SDTC support. Our role at SDTC," she continued, "is to bridge the gap between research and commercialization. This plan builds other links to move those technologies into the marketplace so that their commercial and environmental benefits can be fully realized."

The Forest Products Association of Canada (FPAC), representing the first industry sector to enter into a climate change MOU with the federal government (in November 2003), was also supportive of its Kyoto plan. "The industry is encouraged by the tone of the government's climate change plan and while important details still need to be resolved, we find this plan, combined with earlier policy announcements outlined in the budget, to be very positive," said FPAC president and CEO Avrim Lazar.

Since 1990, the Canadian forest industry has reduced its own greenhouse gas emissions by 28% while increasing production by over 30%, surpassing its Kyoto targets by more than four times. The association attributes this success to continuous improvements in manufacturing methods and management practices.

Maintaining this momentum, however, requires capital investment in energy efficiency, renewable energy technologies and innovation. FPAC said the most important thing government can do to facilitate this is to end policy uncertainty by implementing a clear, fair and predictable policy framework for the treatment of industrial emissions.

The Canadian Chamber of Commerce expressed concern about the cost of the plan, noting that the price tag has more than doubled since the 2005 budget. The costs will continue to grow and the plan will create significant competitive challenges for business in Canada, it said.

"In just seven weeks the government has increased its spending estimates on climate change from just over $4 billion to $10 billion, and it is likely that this amount will continue to grow in the future," Canadian Chamber president and CEO Nancy Hughes Anthony pointed out. "It is very unclear to me where the government intends to find the money to pay for this plan and it is also unclear how accountable the government will be to Canadians on the use of these funds."

The plan's continues to set targets and timelines for Canada are far more ambitious than those for most countries, the Canadian Chamber added. "This plan will make it more difficult for business in Canada to compete internationally when other countries do not have such strenuous targets, or have none at all," said Hughes Anthony.

The plan does, however, demonstrate the government's recognition of the Canadian Chamber's long-held view that there must be further investments in technology to help find solutions to climate change.

In a statement, Ann MacLean, president of the Federation of Canadian Municipalities (FCM) and Mayor of New Glasgow, Nova Scotia, said the FCM has supported the implementation of the Kyoto Protocol since 2002, and supports Canada's plan to reduce greenhouse gas emissions.

Municipal governments play a significant role in protecting the environment through their management of drinking water, sewage treatment, solid waste, pesticides, land use, transportation and energy planning. Municipalities also directly control or influence more than half of Canada's total GHG emissions, MacLean noted.

For these reasons, she said municipalities take their environmental responsibilities seriously. FCM programs, including the Green Municipal Funds, Partners for Climate Protection and InfraGuide, support and enable the municipal sector and the federal government to work in partnership to protect the environment and combat climate change.

New opportunities presented by the climate change plan through its Climate Fund and Partnership Fund will further strengthen municipal efforts to reduce greenhouse gases and combat climate change, MacLean continued, adding, "Since these and other significant benefits can only be realized if the federal budget is passed, we urge all parties in the House to bring this about as soon as possible."

The Canadian Gas Association (CGA) believes the federal government's climate change plan can be made to work, but a realistic policy framework is still needed to ensure its long-term effectiveness. The plan establishes a basis for industry-government co-operation and is a good starting point for CGA members to help Canada move toward its climate change goals, said CGA president Michael Cleland.

He said the CGA is prepared to work with the government on its proposals to regulate large industrial emitters, likely using the Canadian Environmental Protection Act. However, he noted, the association believes the government must respect existing commitments, including taking an emissions intensity approach, capping cost exposure, being flexible in implementation, and respecting the extensive groundwork already done with Natural Resources Canada at the level of individual sectors.

"There is nothing inherently wrong with a regulatory approach," said Cleland, "provided that the regulatory framework reflects energy and industry realities."

The CGA also welcomed the additional focus on and funding for innovation and research and development, through the announced technology investment fund.

Commentary

$10 billion to meet Kyoto will be money well spent

Much of the coverage of Canada's new Kyoto Plan has focused on the cost. Ten billion dollars certainly sounds like a lot of money, even when spread over eight years.

While meeting Kyoto objectives should not need so much government investment, the fact is that $10 billion is comparable to the amount the federal government has spent on innovation and capital spending over the last eight years. Often the federal government was spending that money without any co-ordinated national objective.

According to the Auditor General of Canada, spending on the Canada Foundation for Innovation, Sustainable Development Technology Canada, the Green Municipal Funds, Technology Partnerships Canada, health technology development, and other initiatives totalled close to $9 billion in the period from 1996-97 to 2003-04. If that kind of funding is now directed towards reducing greenhouse gas emissions we can still achieve the previous objective of assisting the economic development of Canada while at the same time helping to address one of the most pernicious environmental problems of our time.

One of the fundamental problems in developing a more innovative and climate-friendly Canadian economy is that we have become a country where little gets done unless the government provides funding. Industry and municipalities should not need government money to modernize and to upgrade infrastructure. These are initiatives that in many cases will produce a quick payback. Energy efficiency and reducing use of fossil fuels will save money and improve the competitiveness of those who take the actions.

Unfortunately, even when the net savings are obvious, decision-makers often resist making the switch until the government provides a financial incentive. Waiting for the government grant has become a chronic national ailment.

The growing industrial sectors of Latin America and Asia are well plugged in to eco-efficiency. Their growth industries are often much more energy-efficient, and therefore climate-friendly, than ours. Even in the U.S., many are moving more quickly to reduce fossil energy consumption than our industries. One can argue that in some cases it is due to higher energy prices but, whatever the reason, the reality is that our competitors will become more climate-friendly and more competitive than our industries unless we start down the same path soon.

Much of the government's $10-billion Kyoto investment should be viewed as an investment in keeping our economy competitive and in maintaining our quality of life. It is unfortunate that we have to do that through subsidies to industry, but if that's what it takes to motivate managers and decision-makers who have resisted eco-efficiency opportunities for far too long then Canada's Kyoto plan funding will be money well spent.

~Colin Isaacs

Colin Isaacs, head of the CIAL Group and publisher of the Gallon Environmental Letter, reviews environment-related trends in policy (government and corporate) and legislation for ELW. Comments may be E-mailed to cisaacs@compuserve.com.

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