On March 31st, Representatives Henry Waxman and Edward Markey released a draft U.S. climate change bill entitled "The American Clean Energy and Security Act of 2009." The draft bill is likely to make it through the house and set the standard for U.S. policy. What could this bill mean to Canadian companies? There was much discussion of the bill and its implications at Insight’s recent 3rd Annual Cap and Trade Forum, held in Toronto.

This discussion draft borrows significantly from recommendations set out by the U.S. Climate Action Partnership, and shares many similarities with the Dingell-Boucher draft climate change bill released last October. This latter point is significant because the new bill was created by representatives from very liberal states (California and Massachusetts), while Dingell and Boucher hail from Michigan and Virginia. For this reason, it’s likely to see favour across the spectrum of Democrat house members.

Waxman-Markey Basics
The proposed bill would create a cap and trade program for greenhouse gas (GHG) emissions that would account for about 85 per cent of current emissions. It would take effect in 2012 with a cap 3 per cent below a 2005 baseline of GHG emissions. Reductions would be 20 per cent below 2005 in 2020 and 83 per cent below 2005 emissions in 2050.

The draft doesn’t explain how allowances would be auctioned or distributed, or how allocated allowances would be distributed.

The proposed bill discourages the use of offset credits to a certain extent, by discounting the value of them by 20 per cent compared to emission allowances. A limit is also imposed, which would increase over time according to a certain formula.

The banking of allowances to meet future obligations is allowed, as is "borrowing" allowances one year in advance, although some limitations are suggested for these.

International offset credits will only be recognized if an appropriate bilateral or multilateral agreement with the host country exists. (More about this below.)

The Waxman-Markey draft does attempt to mitigate against the trade impacts of the introduction of this program. For instance, U.S. industries with a certain level of GHG intensity and exposure internationally would receive "rebates" financed by appropriations. If this system does not protect these industries, importers to the U.S. may be required to submit "international reserve allowances" for the emissions attributable to the goods.

The bill, if passed, would preempt state-run trading schemes, like the Western Climate Initiative or RGGI for a period of seven years. However, states can still implement their own motor vehicle emission requirements and low-carbon fuel standards.

Electricity suppliers are given a target of six per cent renewables by 2012, increasing to 25 per cent in 2025. The bill also sets strong efficiency standards for commercial and residential buildings, and for lighting and various appliances. It pushes for the implementation of carbon capture and sequestration, and for higher performance standards for new coal-fired power plants.

Perhaps most importantly for Canada, it introduces a low carbon fuel standard, which states that the Environmental Protection Agency (EPA) gradually reduce the average lifecycle GHG emissions of transportation fuels over the next two decades.

Show me the money
As David Hunter, Director of US Policy at the International Emissions Trading Association noted at the forum, this is "a very exciting time to be in the carbon markets." Change is happening at every level of the U.S. government every day on this critical issue. And as Hunter noted, the similarities of this proposal and the Dingell-Boucher proposal of late last year suggests "there is a broad degree of consensus on cap and trade and on most of the major provisions."

At the same time, Waxman-Markey is interesting because as Jurgen Weiss, Co-Founder and Managing Director of Watermark Economics LLC noted, the cap and trade debate right now will focus on the money.

"If you listen to the hearings (taking place the week of April 21st), the questions are all around ’will this increase energy costs for the average American taxpayer?’" explains Weiss. "And there is very little appetite to say ’yes, it will but it will help them in the long run.’"

The role of offsets is important for keeping the price of cap and trade down, as Martin Gitlin, Managing Director, Carbon Credits USA for Noble Carbon Credits Group noted in his presentation. He also stressed that offsets are key for getting political support for the bill.

Gitlin insisted that it is highly unlikely that there would be an integrated Canada / US or Canada / US / Mexico trade system - "it’s just politically too difficult," he explains. But offsets, he believes, can create "linkages" among the countries.  

However, at the same time it’s difficult to see what sort of offsets would be valid. The bill suggests that offsets would have to come from developing countries, so an offset created in Canada wouldn’t be allowed. Could that be adjusted under NAFTA, or through, as Gitlin put it, "a JI-like linkage"? It will be interesting to see.

Canada: do we have comparable compliance?
Elisabeth DeMarco raised some critical points about how Canada will be affected that she labeled "cap, gap, leverage, offsets and small p politics."

Leverage and the issue of "comparable compliance" were the two key points she raised.

"How are we going to measure whether or not we have a comparable compliance system with the U.S.?" she asked. "Because in sections 4.12 to 4.16 in Waxman-Markey, it says very clearly the U.S. has complete authority to impose border tariff adjustments on exporters that are exporting products to the U.S. that do not have a comparable compliance system. How are we going to measure that. Based on your cap? Based on the rules of your cap and trade system? Based on GHG emissions per capita? "

As noted above, the bill allows the U.S.to maintain a pool of international reserve contracts allowances that exporters to the U.S. have to purchase if particular industry sectors are considered to be at threat in the international market due to the cap and trade system.

"The U.S. controls the size of the pool and effectively the price of the pool," explains DeMarco. "That’s big leverage, a big ability to shape and form the comparable compliance system in jurisdictions that are key trade partners."

DeMarco also addressed the issue of the requirement of bilateral agreements being required to negotiate for the use of a specific country’s international emission reductions. As she puts it, "it’s going to take a long time to negotiate" such agreements.

The question is, will the federal government here in Canada change its practices to harmonize them with the U.S.? As DeMarco notes, this isn’t easily answered. For instance, federal relations with the states, and the federal government’s ability to preempt state cap and trade systems south of the border would not be possible here in Canada.

"Based on a host of Supreme Court decisions, the federal government has the ability to regulate GHG emissions, but so do the provincial governments," she points out. Offsets are even trickier. Many offsets relate to forestry, natural resources and energy efficiency - all of which fall solidly under powers of the constitution reserved exclusively for the provinces.

Errick "Skip" Willis, Principal of Willis Climate Group believes the biggest difficulty that arises from Waxman-Markey and the Obama administration’s drive for clean energy generally is the Low Carbon Fuel Standard.

"It sets an implied level of carbon allowed in refined petroleum products coming into the U.S., and it’s a standard that oil sands production does not come close to meeting," explains Willis. "Now you are looking at a tariff on oil sands production until such time as we have carbon capture and sequestration in place so that the carbon content in that fuel can beat the standard."

As Willis went on to explain, Canada wanted to get a free pass on that until 2018, which is the time frame that the federal government’s Turning the Corner plan suggests we can get CCS going, but "they said no sale" says Willis.

But Willis is positive about one thing - he sees us adopting a cap and trade system sooner rather than later.

"I think part of the reason we go right to a cap and trade system is that industry has said, ’this cap and trade thing isn’t so bad’, because in a recession you can beat the caps without doing anything whereas if you’re on an intensity-based system you still have to do something," says Willis. "Suddenly the industry opposition is evaporating."

Whatever the reason, any sort of harmonization between the Canadian and U.S. markets may help Canadian businesses with the new U.S. system. Stay tuned for more information on the issue as it arises.

For more on Insight events, visit www.insightinfo.com.

< Prev		Next >