Lavery Lawyers
  May 1, 2005 - Quebec

The Immediate Effects of the Kyoto Protocol and Canada’s Green Project: Through the Maze in 15 Questions and Answers
  by Hélène Lauzon and Mathieu Quenneville

The coming into force of the Kyoto Protocol on February 16, 2005 has generated intense discussion and left many unanswered questions for the industrial sector. Over the last two months, the federal government has published several documents that, to a certain extent, uncover its intentions regarding its stated objectives and its strategies for achieving such objectives. An analysis of these documents, specifically “Project Green—Moving Forward on Climate Change, A Plan for Honouring our Kyoto Commitment” and Bill C-431, raises several issues that merit clarification. The following 15 questions and answers summarize the underlying issues in a more intelligible fashion. 1. Which greenhouse gases (GHGs) are covered by the Kyoto Protocol and slated for reduction worldwide? The following six greenhouse gases are covered by the Protocol: • Carbon dioxide (CO2); • Methane (CH4); • Nitrous oxide (N2O); • Hydrofluorocarbons (HFCs); • Perfluorocarbons (PFCs); • Sulfur hexafluoride (SF6). 2. Why does the documentation on the subject refer almost exclusively to CO2 emissions, CO2 emission reduction and CO2 credits? In the interests of harmonization and simplification, the signatory countries of the Kyoto Protocol have agreed on a single conversion unit; namely CO2. Conversion tables indicate the amount of any of the five other GHG’s that corresponds to the CO2. 3. What is the Canadian GHG emission reduction target under the Kyoto Protocol? In order to comply with its international obligations under the Kyoto Protocol, Canada has undertaken to reduce its GHG emissions by 6%, using its 1990 emissions as the benchmark for comparison. 4. What is Canada’s timeframe for reducing its GHG emissions by 6%? Canada must achieve its objective of 6% in the first compliance period, which is 2008 to 2012. 5. How is Canada’s commitment to a 6% emission reduction translated into measurable GHGs? A 6% reduction in GHG emissions in relation to the 1990 reference year represents 270 megatons (Mt). This quantity corresponds to the difference between projected GHG emissions in 2010 if Canada maintains the status quo, and the target Canada has agreed to achieve under the Kyoto Protocol (i.e. the level of 1990 emissions minus 6%). 6. Who must reduce its GHG emissions so that Canada can meet its commitment under the Kyoto Protocol? Although 50% of GHG emissions in Canada are produced by the Large Final Emitters (LFEs), the entire Canadian population, including the various levels of government and the entire industrial sector, must do their share so that Canada can meet its 6% target commitment under the Kyoto Protocol. 7. Who are the Large Final Emitters? The Large Final Emitters are companies operating among the following sectors: • Thermal electricity production (coal, oil and gas); • Oil and gas; • Mining (metallic and non-metallic); • Metallurgy (iron, steel, etc.); • Pulp and paper production; • Cement and lime (calcium hydroxide) production; • Glass and glass container manufacturing; • Aluminum smelting; • Chemical production. Our understanding of the Green Project, published by the federal government, is that any company that carries on any activities in one of the above sectors will be regarded as a large final emitter subject to reduction obligations. To our knowledge, three Memoranda of Understanding have been signed to date with various Large Final Emitters2. 8. Does the emission reduction obligation apply only to Large Final Emitters within a particular industry? Through a mandatory reporting system3, the federal government is attempting to collect information from any person operating a facility emitting annually 100,000 metric tons or more of CO2 or CO2 equivalent. In all likelihood, the regulatory system aimed at achieving CO2 emission reduction objectives by industry category will govern not only Large Final Emitters but also any company emitting 100,000 Mt or more of CO2 equivalent. 9. What means are available for LFEs to achieve CO2 emission reduction objectives, currently set at 45 Mt (reduction of 36 Mt + investment in reduction of 9 Mt)? The Green Project states the government’s intention to compel large final emitters to reduce their CO2 emissions by 45 Mt, namely a minimum of 36 Mt from genuine reductions or from the purchase of offset credits and a maximum of 9 Mt correspond-ing to the amount invested in a technology investment fund promoting research and development. LFEs have several options for fulfilling their obligations: 1 - reduction of in-house emissions by investing in their own facilities or by reducing their production activities4; 2 - purchasing offset credits from other LFEs5; 3 - purchasing domestic offset credits from Canadian companies having voluntarily reduced their GHG emissions; 4 - purchasing international credits tied to verified and recognized emission reductions. They can be procured by one of the mechanisms provided for in the Kyoto Protocol, such as the clean development mechanism and joint applications, or acquired directly from a company whose head office is outside of Canada. Regarding the last possibility, until such time as the federal government enacts regulations, we will not know if Canada will retain that option and to what extent, if applicable, such CO2 credit transactions will be authorized; 5 - investment in technological development further to creation of the Greenhouse Gas Technology Investment Fund. It should be noted that credits granted to LFEs for CO2 reduction through implementation of reduction measures can be sold to other LFEs or Canadian companies, or on the international market or to the Canada Emission Reduction Incentives Agency. However, because Canada will certainly be a “buyer” rather than a “seller” of offset credits, the sale of credits generated by in-house reductions might be precluded on the international market. 10. How are the mandatory reductions for LFEs determined? There are two kinds of LFE emissions: fixed processes emissions and other emissions. Considering that emissions from fixed processes cannot be controlled other than by the company reducing its activities, the federal government, in order to maintain corporate economic development, has attempted, in the Green Project, to distinguish between emissions from fixed processes and other emissions. Unfortunately, the manner in which that distinction is drafted is rather unclear. The emission reduction targets for fixed processes are presently established at 0%, whereas other emissions have a reduction target of 15%. The government cannot however require reductions exceeding 12% of a company’s total emissions. Thus, the 12% target is for all practical purposes the maximum reduction that the government can require. The following examples should clarify the system. 11. What is the Greenhouse Gas Technology Investment Fund? Bill C-43 provides for the enactment of the Act respecting the Greenhouse Gas Technology Investment Fund. If the Bill comes into force, LFEs will be permitted to invest in the fund in exchange for technology investment units. Access by LFEs to such investments would however be limited to 9 Mt. The proceeds from the purchase of technology investment units would then be redistributed, in the form of subsidies or contributions to other companies, for the following purposes: (i) conducting research into the development or demonstration of technologies or processes for reducing greenhouse gases or for removing greenhouse gases from the atmosphere in the course of an industrial operation, (ii) creating elements of the infrastructure necessary to support research into the development or demonstration of such technologies or processes. However, in the short-term this option does not allow for real GHG reductions but GHG reductions equal to 9 Mt are taken into account to evaluate if LFEs respected the 45 Mt goal. Accordingly, the federal government plans to set up a database system for recording technology investment units. If no amendment is made to the Bill, the purchase of every technology investment unit, the cost of which may not exceed $15, will be equal to an emission reduction of one ton of CO2 or CO2 equivalent. 12. What is the Canada Emission Reduction Incentives Agency? Other than creating the Technology Fund, Bill C-43 also provides for enactment of the Act respecting the Canada Emission Reduction Incentives Agency, which creates the agency of that name. The Agency, also known under the “Climate Fund”, who’s mission will be to promote the reduction or removal of greenhouse gases through the purchase of greenhouse emission reduction and removal credits on behalf of the federal government. Canadian companies will not be required to sell their credits to the Agency. First, the Agency can acquire credits created in Canada as part of a competitive purchasing process. Secondly, it can acquire international credits resulting from the application of one of the mechanisms under the Kyoto Protocol if it is convinced that to do so will serve the interests of Canada, taking into consideration various factors to be determined by Regulation. Bill C-43, does not authorize the Agency to sell credits. As such, it could not act as an intermediary or a vendor in credit trading among companies, and is only authorized to act as a purchaser on Canada’s behalf. In that capacity, the Agency would withdraw credits from the market, while at the same time helping Canada meet its commitment under the Kyoto Protocol, thereby promoting further GHG reduction efforts. All credits purchased by the Agency will be recorded in a database. 13. What are the criteria for creating credits? The federal government has yet to determine the criteria for creating credits. In our opinion, in order to ensure that offset credits have the same value as credits created by GHG emission reductions in other Kyoto signatory countries, the objective criteria established by the clean development mechanism6 will be adopted by Canada precisely because of their objectivity. Thus, for an emission reduction to result in the creation of offset credits, the following would be considered, • whether the reduction in emissions is voluntary; • whether there is a real reduction in emissions; • the measurability of the reduction in emissions; • the verifiability of the reduction in emission; • whether the reductions are additional to those that would occur in the absence of the reduction activity. A reference year would therefore be established to determine if a reduction of CO2 emissions gives rise to the creation of offset credits. For example, if the federal government determines 2002 as the reference year, offset credits could be created for GHG reductions achieved in 2003. However those same reductions in 2001 would not give rise to the creation of offset credits, as the reference date is later than the reduction date. 14. Would credits still be created for GHG reductions achieved pursuant to regulation or certificate of authorization? Currently, the federal government does not foresee the creation of offset credits for emission reductions achieved under regulatory measures. Thus, the creation of offset credits should result in voluntary reduction of GHGs over and above regulatory standards. However a question remains : do GHG reductions imposed by a provincial governmental agency, such as the Ministère du Développement durable, de l’Environnement et des Parcs7, in connection with issuing a certificate of authorization, permit the creation of offset credits. The conditions imposed regarding the certificate of authorization constitute a reduction of emissions arising from a legal obligation. The federal government should therefore determine the parameters within which such a reduction would allow for the creation of offset credits. Thus, credits would not be granted unless the emission reduction is greater than that imposed in the certificate of authorization. However, thresholds could be set, according to activity sector, beyond which a reduction would allow for the creation of credits even where there is a certificate of authorization. 15. The federal government has undertaken to maintain the price of credits at a maximum of $15 per ton until 2012. Will this undertaking be respected? Currently, the federal government says that it will maintain its undertaking through the Greenhouse Gas Technology Investment Fund in which the price of each unit does not exceed $15. Regarding other credits (eligible domestic credits and Kyoto credits), various measures may ultimately be provided to help Canadian companies fulfill their obligations. These measures have yet to be determined. A company’s activities generate 100,000 tons of CO2: • If 100,000 tons of CO2 come from a production process that is not fixed, the company must reduce its emissions by 12%, because the government cannot require a reduction greater than 12% of the company’s total emissions. The company must therefore reduce its emissions by 12,000 tons of CO2; • If 100,000 tons of CO2 come from a fixed production process, the company will not be required to reduce its emissions because the emission target for fixed processes is 0%; • If 50,000 tons of CO2 come from a production process that is not fixed, and 50,000 tons of CO2 come from a fixed production process, the emissions from the processes that are not fixed would have to be reduced by 15% (i.e. 7,500 tons), because that represents a reduction that is less than the target of 12% of the company’s total emissions; • If 95,000 tons of CO2 come from processes that are not fixed, and 5,000 tons of CO2 come from a fixed production process, the emissions from the processes that are not fixed would have to be reduced by 12,000 tons. A reduction of 15% (i.e. 14,250 tons) of its emissions would exceed the maximum 12% of total emissions. We have attempted, in this bulletin, to summarize the answers to the questions we are most frequently asked regarding application of the Kyoto Protocol. We are aware that until Bill C-43 comes into force, modifications may yet arise. We are also aware that the regulatory framework planned by federal government for applying the Protocol and achieving compliance with its objectives in Canada, will undoubtedly result in further reflection on our part, which we would be pleased to share with you at such time. Meanwhile, we invite you to submit any questions that you may have concerning the Kyoto Protocol.


Footnotes:
1 An Act to Implement Certain Provisions of the Budget Tabled in Parliament on February 23, 2005, 1st session, 38th Parliament, 53-54 Elizabeth II, 2004-2005, adopted in second reading on May 19, 2005,. Specifically, see Parts 13, 14 and 15 of Bill 43.

2 Memorandum of Understanding addressing climate change signed by the Government of Canada and the Forest Products Association of Canada on November 6, 2003, Memorandum of Understanding signed by the Government of Canada and the Canadian Steel Industry Producers Association on January 10, 2005, Memorandum of Understanding signed by the Government of Canada and DuPont Canada Inc. on November 19, 2003. It should be noted that the Canadian automobile industry is subject to a reduction obligation of 5.3 Mt under a Memorandum of Understanding signed with the Government of Canada on April 5, 2005.

3 Canada Gazette, Part I, vol. 138, No 11 – March 13, 2004, p. 564 and Canada Gazette, Part I, vol. 139, No 11 – March 12, 2005, p. 703.

4 Emissions can also be reduced by removal of CO2. However, recognized and efficient removal technology is scarce at present.

5 To facilitate comprehension, contrary to the various documents prepared by the federal government, we prefer using a single term to refer to all permits and credits that are obtainable further to GHG emission reduction.

6 Article 12 of the Kyoto Protocol.

7 L.R.Q., c. Q.-2.


Read full article at: http://www.laverydebilly.com/pdf/bulletins/050503a.pdf