Matthew Bramley / Robert Hornung Pembina Institute, Ottawa May 2, 2003

1. Doing Their Bit:Ensuring Large Industrial Emitters Contribute Adequately to Canada’s Implementation of the Kyoto Protocol Matthew Bramley / Robert HornungPembina Institute, Ottawa May 2, 2003

2. (total Kyoto gap is 240 Mt)

3. Covenants/ET system • Targets (mostly emissions intensity) • Four ways to meet targets: • Internal reductions • Buy domestic credits (“offsets”) • Buy international units • Buy domestic permits • Price cap $15/tonne CO2e • Backstop = default covenant w. default target • Emissions reporting system

4. Is industry being asked to do enough? • Plan allocates 99 Mt out of 180 Mt to industry – consistent with 53% of Canada’s GHG emissions accounted for by industry • Industry must pay for the 55 Mt from covenants, cost sharing OK for the rest • If Kyoto gap increases, 55 Mt must increase • Backstop must add up to more than 55 Mt • Need tough compliance penalties • There should be at least a small percentage of permits auctioned

5. Emissions intensity targets • Environmental performance at risk • Government should pursue absolute emissions targets • Compromise: make intensity targets adjustable within some limits

7. Offsets • Double counting risk • Offsets only for activities going clearly beyond what is in the Plan • Offsets don’t provide strong incentives: $10/tonne = < 1 cent/kWh • Need strict rules, especially for additionality

9. Other measures for large industry • At least 42 Mt • Must be additional to the 55 Mt: • Adjust BAU downwards to include the 42 Mt • The 15% target for oil and gas must be relative to a BAU defined in this way • If the programs supposed to deliver the42 Mt aren’t up to it… upgrade them!

11. Electricity • 45 Mt CO2e available at a marginal cost of less than $10 per tonne (Jaccard) • Emission reductions from output reductions (renewables, DSM) must be fully additional to emission intensity reductions from covenants • Plan lacks any industrial DSM (need to work with provinces) • Covenants need to be tweaked to ensure no disincentive to industrial cogen

12. Allocation • Define sectors broadly: maximize incentives to fuel switch, restructure • Same logic: treat old facilities same as new to encourage capital stock turnover • Allocation among sectors must consider: • Sectoral emissions intensity • Rate of emissions growth since 1990 • Financial effort to reduce emissions • Sector’s competitive position (risk of leakage) • Availability of low-cost reductions • 15% intensity reduction for O&Gdoesn’t meet these criteria

13. “Small” industry • Includes some pretty big facilities! (automakers etc.) • Plan only seeks 3 Mt – should be upgraded • Fugitives – Plan seeks 4 Mt – need regulation or a threat of it (provinces)

14. Purchases of international units • Long-standing ENGO concerns: • Co-benefits • Hot air / bogus CDM credits • Emissions per capita inequity • Need to hold feds to the commitment to close half the Kyoto gap domestically • Need to hold companies to account for the quality of their purchases

15. Timing (1) • Advantages of starting in 2005 (less demanding targets initially): • Deadline for covenant negotiations • Companies forced to prepare • Likely to result in more domestic reductions • Iron out the bugs • It’s what the EU’s doing

16. Timing (2) • Covenants extending post-2012: • Why should taxpayers accept the liability? – Emissions trading market provides enough timing flexibility for companies • Why allocate 2nd CP emission rights now when we don’t know how many Canada will have? • NO WAY!

17. Process • Report to be completed, reviewed and approved by CANet • Soon ready for: • Public release • Lobbying • Education