CBA/Justice Annual Meeting National Environmental Energy and Resources Law Section Ottawa, ON

1. Climate Change: Proposed Policy Framework for Large Final Emitters (LFEs) CBA/Justice Annual Meeting National Environmental Energy and Resources Law Section Ottawa, ON October 22, 2004 Joanne Kellerman Senior Counsel Legal Services, Natural Resources Canada

2. LARGE FINAL EMITTERS • Large Final Emitters (LFEs) include: • oil and gas production • upgrading and refining • pipelines • thermal power generation • Mining • In 2000, LFEs were responsible for 46 percent of Canada’s total GHG emissions. • In 2010, their share of Canada’s total GHG emissions is project to increase to approximately 50 percent. • steel • aluminum • chemicals and fertilizers • pulp & paper • cement and lime 1

3. Climate Change Plan for Canada • The Climate Change Plan for Canada established a three-pronged approach to Large Final Emitters (LFEs): • targets for emission reductions of 55 Mt from 2010 “business as usual” • access to emissions trading, domestic offsets, and international permits to provide flexibility; and • complementary measures, including cost-shared investments in innovative technologies, to reduce emissions. 2

4. Policy Principles • Covenants with a regulatory or financial backstop • Targets will be based on emission intensity – the ratio of emissions to physical output. • The system will not disadvantage firms that have taken early action • Competitiveness of Canadian industry will be protected. • No one region will bear an unreasonable burden. • Pre-approved commitments of larger reductions over the longer term in lieu of near term reductions will be explored. • The target will not be more than 55 Mt. 3

5. Additional Policy Commitments • In a letter to the Canadian Association of Petroleum Producers in December, 2002, the former Minister of Natural Resources stated: • that during the first compliance period, the Government will ensure that Canadian companies would have the opportunity to meet their obligations at a price no greater than $15 per tonne; and • to set emissions intensity targets at a level no more than 15 percent below projected 2010 levels. • In a subsequent letter to CAPP in July, 2003, the former Prime Minister reiterated the above commitments and further accepted: • qualifying research and development incentives will be built into compliance mechanism; and • long-term emissions targets to be locked-in in advance for new projects. 4

6. Progress to Date • Extensive, ongoing meetings with provinces and territories, as well as stakeholders. • Discussion papers shared on a number of key design elements. • Agreement with industry reps (IETA/CWGCM) on principles for a Canadian carbon market. • Memoranda of Understanding with Dupont Canada and with the pulp and paper sector in expectation of legislative authority to establish covenants. 5

7. LFE Obligations • LFEs will be prohibited from emitting GHGs without an equivalent number of permits. • LFEs will be required to quantify and report their GHG emissions on an annual basis. • Government will provide a number of permits through a distribution method defined by regulation. • At the end of each year, LFEs will be required to remit a permit for each tonne of CO2 equivalent that they released. • Companies that do not have enough permits at this point will have to buy additional ones on the market. 6

8. Quantification and Reporting • On March 12, 2004, the Government announced the start of mandatory reporting of GHGs by Canada’s major emitters. • Initial reports of GHG emissions for 2004 will be due June 1, 2005 • Many of those affected already report their GHG emissions though mandatory and voluntary initiative in several provinces • Lays foundation for mandatory reporting for the LFE program in 2008 (and for the national GHG inventory). • Offers a one window approach to emission reporting. • Via a joint federal/provincial/territorial system • This first phase focuses on: • emission sources of at least 100 kilotonnes of CO2 equivalent annually. 7

9. Allocation • The federal government will allocate permits free of charge during the first commitment period: • equal, on average, to 85% of forecast 2010 emissions; which corresponds tothe 15% emissions intensity target required to reach 55 Mt goal. • The allocation of free permits is based on emission intensity targets, meaning that the exact number of permits a company receives will depend on its level of production. • Permits will be electronic and will reside inside an emission trading registry managed by the government. • Permits will be distributed at the end of the year, after companies report to government (ex post distribution): • however, a partial distribution of permits earlier in the year is being considered to facilitate early emissions trading (partial ex ante allocation). 8

10. Variation by Covenant • Covenants might vary the number of permits allocated to a company free of charge: • for example, the government could agree to reduce the magnitude of a company’s obligation by increasing its allocation of free permits. • The government will only negotiate covenants with industry to address specific issues: • competitiveness; • early action; • Strategic capital turnover. • The authority to enter into a covenant on behalf of the Government of Canada will likely rest with the Governor in Council. 9

11. Additional Flexibility Mechanisms • $15 per tonne Price Assurance Mechanism: • the government will share the financial risk faced by LFEs by ensuring that they are able to purchase permits at $15 per tonne. • at the beginning of each year, companies may choose to contract with government to provide a certain number of $15 permits. • the number of $15 permits available to a company will be limited to the gap between their free allocation and their target, and these will not be tradeable. • Incentives for research and development: • most appropriate mechanism still under development. 10

12. Emission Trading • Companies will be free to trade emission permits at any time. There will also be a period between allocation and “true-up” for companies to obtain the exact number of permits they are required to remit. • It is expected that, over time, a mature market will develop to includedifferent types of transactions like forward contracts, etc. • It is also expected that the emissions trading exchange or platform will be developed and operated by the private sector. • The government does not intend to regulate the market, but will simply track the transfer of permits between different accounts in the registry. • The government will monitor international transactions to ensure that Canada respects its obligations under the Kyoto Protocol. 11

13. Compliance • LFEs are free to pursue whatever strategy they choose in order to meet their compliance obligations: • implement efficiency and process gains in their own operations; • buy Kyoto permits from companies in surplus or from international sources; and/or • obtain domestic “offsets” – permits that represent a net reduction or removal of GHG in uncovered activities. • LFEs that don’t remit required permits will be subject to penalties. • Offences and penalties will apply equally to LFEs covered by covenants and those covered by the backstop regime. • Companies in covered sectors with very low emissions may not be subject to legislative obligations. • A de minimis threshold is being considered. 12

14. Timeline Monitoring and Quantification Reporting Year 1 of Compliance Period Ex post Allocation True-Up Jan. 1, 2008 Jan. 1, 2009 Jan. 1, 2010 Monitoring and Quantification Reporting Ex post Allocation Year 2 of Compliance Period Emissions Trading 13

15. Web resources: • Large Final Emitters website: • http://www.nrcan-rncan.gc.ca/lfeg-ggef/English/lfeg_en.htm • http://www.nrcan-rncan.gc.ca/lfeg-ggef/Francais/ggef_fr.htm • Discussion papers • http://www.nrcan-rncan.gc.ca/lfeg-ggef/English/papers_en.htm • http://www.nrcan-rncan.gc.ca/lfeg-ggef/Francais/papers_fr.htm