Archive for the ‘Canada’ Category

An update on climate legislation

This week the organisation known as GLOBE (The Global Legislators’ Organisation supports national parliamentarians to develop and agree common legislative responses to the major challenges posed by sustainable development) met in London and launched its biannual review of national climate legislation. The GLOBE Climate Legislation Study is up to its third edition and covers the ongoing efforts in 33 countries. Of these, GLOBE claims that 18 countries have made substantial progress, 14 have made limited progress and one country has been singled out for taking a backwards step, Canada, but more on that later.

In their press release, GLOBE state that:

“The tide is beginning to turn decisively on tackling climate change, the defining material challenge of this century. In the past year alone, as described in this latest study by GLOBE International and the Grantham Research Institute, 32 out of 33 surveyed countries have introduced or are progressing significant climate-related legislation. In 2012 alone, 18 of the 33 countries made significant progress. This is a game-changing development, driven by emerging economies, but taking place across each and every continent. Most importantly it challenges how governments look at the international negotiations up to 2015 requiring much greater focus by governments to support national legislation.”

The report is a substantial piece of work and it steps through the programmes in each country in considerable detail, although the pages of tables raise the question as to what exactly is “climate legislation”. Legislation is categorised under the headings “Pricing carbon”, “Energy Demand”, “Energy Supply”, “Forests/Land Use”, “Adaptation” and so on. Of these, “Energy Demand” is largely energy efficiency measures and “Energy Supply” focuses principally on renewables (and nuclear in some countries). These two categories alone cover all but one of the countries (Nepal) surveyed, yet for the most part none of this is “climate legislation”. Rather, this is legislation that impacts the energy mix, but this does not necessarily translate into a reduction in emissions on a global basis and in many instances does not even lower national emissions. It simply augments the energy mix or lowers the energy and CO2 intensity of certain processes, which in turn can lead to greater overall use of energy and therefore increased emissions over the longer term. I have explored both these issues in previous postings, here and here.

This is not the case for the carbon pricing category, which GLOBE link to 11 of the 33 countries covered. But 4 of these are part of the EU and of the remaining countries only Australia has actually implemented the carbon price (arguably so has Japan, but the level is close to insignificant at about $1.50 per tonne). GLOBE also claim India has carbon pricing, but there is no such mechanism within the economy (there is a heavy focus on efficiency and a certificate trading system to drive it). Others include Mexico, South Africa, South Korea and China, all of which are in various stages of developing carbon pricing but none actually have.

Finally, there is the story around Canada. They are singled out as the only country to take a step backwards because of their decision to abandon the Kyoto Protocol (the same treatment is not given to Japan and Russia though) and the absence of a nationally implemented policy framework. Perversely, Canada is one country that made real and tangible advances last year, although emissions continue to rise in this resource rich economy. Quebec implemented its cap-and-trade system, carbon pricing continued in British Columbia and Alberta and the Federal Government did introduce its carbon standards for power stations, which will mean no new coal plants (without CCS) –  even the EU cannot claim such an achievement. Most importantly, Canada managed to get a large scale CCS project approved and construction started – similar attempts in the EU failed disastrously in 2012. This point is worthy of note, although GLOBE don’t mention it, given the critical role that CCS needs to play in mitigating emissions throughout this century.

The steps being taken in many countries to better manage energy supply, demand and mix are welcome, but to argue that this marks a “decisive turn” on tackling climate change and is “game changing” seems to be overly optimistic. BP released their latest Energy Outlook 2030 this week as well, which sees CO2 emissions rising sharply to 42 billion tonnes per annum by 2030, this despite non-hydro renewable energy nearly quadrupling over that time period. In total, nuclear/hydro/renewables/bio moves from 16% to 23% of the energy mix.

Finally, a P.S. to my previous post on the observation by many that “global warming has stopped”. James Hansen has just published a good analysis of this  and finds that a number of factors are contributing to the lack of change in overall global average temperature. This includes the behaviour of the El Nino/La Nina system (ENSO) and aerosol loading in the atmosphere. But he also concludes that natural variability must be playing a role. Worth a read.

Expectations for COP 18 in Doha

This week sees the start of the 18th Conference of the Parties of the UNFCCC, or COP18 for short, in Doha, Qatar. This should be a busy transitional COP, with much on the agenda to resolve and important steps forward being taken toward a long term international agreement. But procedural issues, agenda disagreements and fundamental sticking points could still dominate, leading to a two week impasse. Let’s hope not.

At the core of the process lie three work streams which have evolved over many years.

The oldest of these is the discussion on the Kyoto Protocol (KP), which has now been running in one form or another for most of the twenty year history of the UNFCCC. Discussion on a second commitment period (KP2) over the past years have embodied the toughest issues in the climate negotiations, such as the role of developing countries in reducing emissions, engagement with North America (neither Canada or the United States will participate going forward) and the need to put a robust price on CO2 emissions. I am a big fan of KP, despite its shortcomings. It was designed with carbon pricing as its central theme, allowed countries to trade to find lowest cost abatement pathways and through its architecture encouraged signatories to implement cap-and-trade based policy frameworks within their respective economies. The simple but clever ideas within it have not been matched since in terms of effectiveness and efficiency despite years of negotiations. Given sufficient willingness, there are clearly routes forward by which KP could evolve to become the much sought after “21st Century global agreement”, but instead it is reaching the end of its shelf life. There seems to be no resolution with North America under this banner, developing countries appear reluctant to let it be the approach to govern their much needed actions and even the country of its namesake city is unwilling to sign again on the dotted line. Australia and the EU remain as the KP bedrock, if for no other reason than to rescue the CDM and consummate their carbon market linkage with a common approach to accounting, offsets and single market currency (AAUs and CERs). The parties do need to agree on KP2, despite the lack of critical mass, and then roll forward its inherent carbon market architecture into the new grand design.

Next comes the discussion on long term cooperative action, or LCA, a workstream which appeared in 2007 at the Bali COP and is home to a broad range of developments from the Green Climate Fund (GCF), the Nationally Appropriate Mitigation Action (NAMA), the much discussed New Market Mechanism (NMM) and more recently the Framework for Various Approaches (FVA). It was meant to deliver the grand deal at Copenhagen in 2009 but didn’t and now labours on with many loose ends and partially thought through ideas which have not been implemented or even fully negotiated. Nevertheless it has been a useful testing ground for new thinking, but has not yet delivered any real mitigation action. It needs to stop now, but difficult issues remain such as the funding of the Green Climate Fund and the modalities for actually spending any money that may arrive in its coffers. These spinoffs from the LCA will need to continue under one of the Subsidiary Bodies or within the ADP (see below) discussions, but the parent discussion should be put to rest in Doha.

Now comes “the new hope”, the Durban Platform for Enhanced Action. For some, the parties at COP17 simply kicked the can 9 years down the road knowing that little new progress would be made, but for many this represents a much needed and major reboot of the process after years of making almost no progress at all on the respective roles of developed, emerging and developing economies. As Harvard’s Rob Stavins noted in his blog of January 2012;

Now, the COP-17 decision for “Enhanced Action” completely eliminates the Annex I/non-Annex I (or industrialized/developing country) distinction.  It focuses instead on the (admittedly non-binding) pledge to create a system of greenhouse gas reductions including all Parties (that is, all key countries) by 2015 that will come into force (after ratification) by 2020.  Nowhere in the text of the decision will one find phrases such as “Annex I,” “common but differentiated responsibilities,” or “distributional equity,” which have – in recent years – become code words for targets for the richest countries and a blank check for all others.

We should not over-estimate the importance of a “non-binding agreement to reach a future agreement,” but this is a real departure from the past, and marks a significant advance along the treacherous, uphill path of climate negotiations.

Although there have been some opening salvos fired in the ADP (Ad-Hoc Working Group on the Durban Platform for Enhanced Action) in various inter-sessional meetings this year, the heavy lifting for this work stream needs to start at COP18. In recent months the IEA, the World Bank, PWC and others have all made it abundantly clear that unless some truly meaningful progress is made in the sort term, the 2 deg.C goal will pass us by (it may already have) and that before we know it we will be looking at a 4 deg.C outcome, along with all its consequences. Even the timetable for the ADP, which seeks to reach agreement by 2015 for implementation in 2020 is problematic in terms of the need for immediate action, but it is what it is.

The ADP needs to define a work programme that embraces the five primary strands of action coming out of the KP and LCA, namely;

  • National action defined through specific targets, goals and actions, but aligned with the overarching mitigation objective. This would also include REDD.
  • An underlying carbon market infrastructure as currently embodied by the KP but adapted to the applicable framework for mitigation action. Without an evolving price on carbon in the international energy markets, mitigation action will stall. This work stream should also pick up the NMM discussion.
  • A funding mechanism that can leverage private sector finance for kickstarting technologies and helping less developed economies invest in a low carbon pathway forward. This is the GCF.
  • A continuation of the work of the TEC and CTCN to share knowledge and best practice arising from technology implementation.
  • A robust approach to adaptation.

Recently the World Business Council for Sustainable Development resurfaced work that it undertook back at the start of the LCA, but which is highly relevant to the first of the two prospective work areas above. “Establishing a Global Carbon Market” looks at how the substance of the KP carbon market can be applied much more broadly to an evolving world of various approaches.

The above represents a tall order for two weeks work, but with some 10,000 people in tow there is certainly enough labour at hand to get this heavy lifting done. A refined single track approach will bring much needed focus back to the discussions which then paves the way for at least some hope that the 2015 goal for a new agreement can be met. In summary, the big asks for this COP are:

  1. Agreeing a continuation of the Kyoto Protocol through to 2020 and then politely ushering this Grand Dame of the UNFCCC off the stage with some reverence and applause.
  2. Bringing closure to the LCA work programme and shifting some key components (e.g. GCF, TEC) into the formulation of the ADP.
  3. Establishing a clear work programme for the ADP, which incorporates as a priority, the foundations for a continuing and evolving global carbon market.

Good luck and success to all the delegates.

A CCS project for Canada

I don’t normally use this blog to write about Shell, but last week saw an announcement that is very relevant and worthy of some further elaboration. Shell Canada, as operator of the Athabasca Oil Sands Project joint venture (with Chevron and Marathon), announced plans to proceed with a carbon capture and storage project (Quest) within the current oils sands project. This is a project that has been under discussion in one form or another since almost day one of production from the facilities, but the lack of a workable economic justification for the project has been the major impediment to progress.

In recent years the story has changed though. The Government of Alberta has developed a carbon pricing system which provides a level of underlying support for the project. The World Bank “State and Trend of the Carbon Market 2012” report describes the Alberta system (on page 89) as follows:

Alberta is Canada’s largest greenhouse gas (GHG) emitting province, accounting for 34% of the country’s total GHG emissions in 2010. This represents 235 MtCO2e, a 41% increase from 1990 levels, driven primarily by increased production activity in its oil and gas sector. On July 1, 2007, Alberta launched a mandatory GHG emission intensity-based mechanism, enacting the first GHG emissions legislation in Canada. Approximately 100 entities with annual emissions exceeding 100,000 tCO2e (ktCO2e), are required by the legislation to reduce their emission intensity by 12% from average 2003-2005 levels. Entities that do not meet reduction requirements on a given year may choose to meet these obligations by:

  • Trading “Emissions Performance Credits” (EPC) that are awarded to covered entities that reduce emissions below their set target;
  • Paying CN$15 (US$15.2) into a technology fund; and/or
  • Purchasing Alberta-based offsets issued by the Alberta Offsets Registry under an approved protocol.

N.B. The World Bank chart below shows the number of offsets retired annually through the system with an estimate for 2011 (not announced at the time the report was published). The price has remained very close to the technology fund alternative.

As such, this system provides an underlying base level of support of some CAN$15 per tonne of CO2 for the CCS project. In addition, in 2011 the Alberta Government announced a further support mechanism for CCS though the system, which now grants a second bonus credit for CCS projects meeting certain criteria. The Canadian based Pembina Institute published the diagram below, challenging the environmental integrity of the approach, but it also gives a simple explanation of how the mechanism works. In a completely closed system the environmental integrity  argument would be correct, but in the open ended Alberta system with payment into a technology fund as a compliance option, the argument is hardly valid. 

A further, but much less quantifiable, price signal is that coming from the California Low Carbon Fuel Standard (LCFS) and to a much lesser extent the EU Fuel Quality Directive (FQD). These mechanisms place a carbon footprint target on the fuel in the transport sector with a starting baseline about equal to the carbon footprint of oil products processed through a conventional production and refining route and then declining by about 1% per annum. When oil sands products arrive in these markets, their higher carbon footprint generates a penalty on the use of the component in the fuel pool which manifests itself as a price on carbon emissions associated with the production and use of the product. Of course the product may be targeted at other markets, but even a small location constraint on a product can lead to a trading discount in some market circumstances. This is also a carbon price of sorts. In any case, the prevalence of LCFS type approaches could well increase over the years ahead, which could penalize oil sands relative to some other production routes.

The combination of Provincial and Federal grants, a Province based carbon pricing system and its bonus credits and consideration of the role played by fuel standards in export markets in the future has allowed the project to get the green light. This should be seen as good news. CCS is the critical technology for real long term reductions in emissions – I have argued in the past that it may well be the only technology, so supporting it now and getting at least some early projects up and running should be an essential policy goal. Support remains a dilemma for policy makers, particularly in challenging economic times. However, there is a valid role to play here in that almost every carbon roadmap to 2030 and beyond shows CCS being required, yet there is currently no carbon price signal strong enough in any jurisdiction to actually build one now and therefore begin the process of demonstration and commercialization.

The project itself is medium in scale, storing about one million tonnes per annum of CO2 coming from the Hydrogen Manufacturing Unit (HMU) linked to the oil sands bitumen upgrader. The HMU produces hydrogen by steam reforming of natural gas, with a nearly pure CO2 stream as a byproduct. At high temperatures (700–1100 °C), steam (H2O) reacts with methane (CH4) to yield syngas.

 CH4 + H2O → CO + 3 H2

 In a second stage, additional hydrogen is generated through the lower-temperature water gas shift reaction, performed at about 130 °C:

 CO + H2O → CO2 + H2

 Heat required to drive the process is supplied by burning some portion of the natural gas. A very simple overview of the process is shown below.

 

The capture plant is located in Fort Saskatchewan, approx 50 km N.E. of Edmonton, Alberta. The CO2 will be transported by 12 inch pipeline to storage, approximately 65 km north of the upgrader site. The CO2 will be stored in a saline aquifer formation called Basal Cambrian Sands (BCS). At 2,300 metres below the surface it is some of the deepest sandstone in the region, with multiple caprock and salt seal layers and no significant faulting visible from wells or seismic activity. The BCS is well below hydrocarbon bearing formations and potable water zones in the region. Relatively few wells have been drilled into the BCS and none within 10 km of the proposed storage site.

It’s been a long road from initial discussion, to early concept and finally the investment decision last week. But the end result is a real CCS project!!

In a recent New York Times opinion piece, NASA climate scientist James Hansen again puts forward his very compelling argument for strong action on limiting global CO2 emissions. Some observers have challenged his thinking, but the warnings he has given over the last thirty years have proven to be pretty much on the mark as observations show that the world is warming.

In the most recent piece, Hansen links the production of synthetic crude from oil sands bitumen in Alberta as a game changer for the climate. He states;

That is why I was so troubled to read a recent interview with President Obama in Rolling Stone in which he said that Canada would exploit the oil in its vast tar sands reserves “regardless of what we do.” If Canada proceeds, and we do nothing, it will be game over for the climate. . . . . . . The concentration of carbon dioxide in the atmosphere has risen from 280 parts per million to 393 p.p.m. over the last 150 years. The tar sands contain enough carbon — 240 gigatons — to add 120 p.p.m.

There is no doubt that the oil sands bitumen reserves in Canada are very significant. In a recent report the Alberta Energy Resources Conservation Board (ERCB) estimates that provable reserves stand at some 170 billion bbls, with a potential total reserve of some 1.7 trillion bbls. The first figure represents the current estimate of recoverable oil on the basis of existing technology, whereas the latter is indicative of the total amount of oil in the region, recoverable or not. The second figure is the one that equates to 240 gigatons of carbon quoted by James Hansen.

But actual production of oil from the region gives rise to a completely different set of figures. Production of oil sands bitumen started in the late 1960s and by 2010 had reached some 1.6 million bbls per day (ERCB figures). ERCB estimates production at about 3.6 mbbl/day by 2020. Assuming an increasing trajectory which sees production doubling again by 2050 (to 7 million bbbls/day), total cumulative production over 80 years would be 74 billion bbls, which equates to some 35 billion tonnes of CO2 emitted through the production and use of the oil. This equates to an increase in atmospheric CO2 of about 2 ppm (by contrast, Saudi production over the same period could contribute about 6 ppm). If production continued through to 2100 and reached 10 million bbls/day, cumulative production would exceed current proven reserves (so assuming technology improvements) and would equate to an increase in atmospheric CO2 of about 7 ppm over 130 years of production. The resource may be vast, but production is limited by the rate at which new projects come on stream. Given a scenario of complete inaction on climate change over the very long term, it may well be that oil sands might eventually contribute some 100 ppm to atmospheric CO2 levels, but that could take 1000 years. Current trends would likely have us hitting a climate induced “brick wall” long before that.

The point here is not to argue that this is all OK or that James Hansen is wrong, but to illustrate that the issue of CO2 emissions and the resulting climate impact cannot be linked to any individual fossil fuel extraction. Each and every major reserve on the planet can clearly only contribute a few ppm at most over the coming 50 to 100 years, but so goes the tragedy of the commons. This of course highlights the critical need for collective action.

The point that Hansen is really making is that oil sands is illustrative of an ongoing global trend to extract or mine increasingly challenging reserves of oil, gas and coal and bring them to market. Global energy markets are driving this behaviour and will probably continue to do so as population increases and economies develop. Put simply, energy is in demand and the market will respond.

Given the recent change in estimates for global natural gas supply, there is now evidence that the availability of fossil fuels may not be self limiting, at least for a century or so (and possibly much longer as extraction technology improves). This argues strongly for the introduction of carbon pricing, which Hansen also calls for in his opinion piece.

Carbon pricing is the essential precursor to technologies such as carbon capture and storage (CCS), which may be the only available route forward to allow both energy demand to be met and CO2 emissions reduced. Alberta has at least started down this route, with a C$15 price driving behaviour in oil sands operations. That price, in combination with a technology incentive package, should see CCS activity emerge as part of future oil sands development.

Two steps forward, one back

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2011 turned out to be a busy year for the development of carbon pricing. Long the cornerstone of EU climate policy, the approach continues to find favour with governments focused on the issue of managing emissions, rather than those trying to manage the shape of the entire energy mix. Since the EU system was introduced in 2005, carbon pricing has appeared in Alberta and British Columbia in Canada, in the North Eastern US states and remains under consideration in South Korea. Several other governments have raised the possibility of a carbon pricing system of some sort.

At the outset of the year there appeared to be little prospect for much movement forward, with some worrying signs that a retreat was possible. Proposition 23 may have been defeated in California, but other legal challenges had surfaced and the new Australian government was not expected to raise an issue that had only a few months earlier led to the fall of the Prime Minister.

But by year end Australia had a carbon price mechanism in place, South Africa had announced its intention to implement a carbon tax, China was apparently moving forward with a variety of pricing mechanisms and California was finalizing the details of its cap-and-trade system. In addition the inclusion of aviation in the EU-ETS had withstood numerous legal challenges and looked likely to go ahead in 2012.

While this is a positive set of developments, it can’t counter the fact that there was a major step backward during the year as well. The price weakness in the EU-ETS at the end of the year and the related difficulties facing the Clean Development Mechanism (CDM) are worrying developments. Although COP 17 in Durban saw a lifeline of sorts thrown to the Kyoto Protocol (and therefore the CDM) and a key committee of the European Parliament voted in favour of a mechanism to bolster the ETS price, both these mechanisms remain in the balance.

2011 also saw a number of US States pull out of the Western Climate Initiative and New Jersey pull out of RGGI.

2012 could well be a pivotal year for a market-based approach to managing emissions.But with the prospect of new negotiations for an international agreement, the possibility of giving new life to carbon pricing is also with us.

 

The nature of uncertainty

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As the debate continues in Australia with regards the implementation of a carbon price, the issue of investor uncertainty has risen up the agenda. A recent interview conducted by ABC (Australian Broadcasting Corporation) illustrates the point:

One of Australia’s largest home and business electricity suppliers has warned that household power bills will double in six years after a carbon price is introduced and uncertainty over its implementation might lead to power shortages.

The gas and electricity giant’s chief executive said uncertainty over what the long-term carbon price might be has stalled capital investment in the industry and halted construction of new power stations. “Capital is not being invested so we haven’t seen new power stations built,” the CEO told ABC TV today.

Electricity regulator Australian Energy Market Operator (AEMO) had forecast shortages of baseload power for Queensland in 2013 and 2014, with Victoria and NSW experiencing shortages in 2015 and 2016, he said. “Given the timeframe for building new power stations, we’re concerned that we need that certainty today so we can build power stations to meet that coming gap in the market,” the CEO said.

He said that gap had resulted in electricity prices rising by 40 per cent in the past three years as a result of network investment. Rising fuel and gas prices would cause them to increase by another 30 per cent over the next three years, the CEO said. The mooted carbon tax of between $20 and $25 a tonne of emissions would not change industry behaviour but would double electricity bills for households over six years given the 30 per cent rise, he said.

Without wanting to comment on any of the figures in the interview, it is nevertheless clear that uncertainty surrounding the implementation of policy is a problem for some, but should it be?

When it comes to power generation on a national scale, arguably the uncertainty question is about the exact nature of the policy rather than the existence of carbon policy at all. Although some will still choose to disagree, there really is very little uncertainty around the need to reduce CO2 emissions, so it is much more about how and when rather than if.

The “when” question is perhaps less uncertain than we might imagine. In the context of major power projects with planning, approval and construction periods of up to ten years, exposure to a carbon price during the operational lifetime of the facility (i.e. the 2020s and 2030s) becomes a near certainty. Although there is concern as to the lack of policy development in key regions today, it is also true that in the last ten years there has been a spectacular shift in the policy agenda. Carbon markets are a reality, global carbon trade exists, carbon targets are the stated goal of dozens of economies and most financial institutions now operate carbon business units of one sort or another (from trading to analysis). By 2020 and beyond, as the environmental picture becomes clearer, policy implementation will likely accelerate, even if it still isn’t sufficient to address the issue head on. So the working assumption should be that a carbon policy framework will be in place during the operational life of a project just starting out today.

So the real issue is “how” (in actual fact “how much”) – i.e. what will the policy look like and what sort of price signal will it send? This was probably at the root of the decision by a number of coal fired generators to actively engage in the formulation of US cap-and-trade policy in 2009 and 2010 – it wasn’t a burst of environmental enthusiasm that brought them to the table, but the sobering reality of a regulatory future that might be created without their input. Many companies now address this aspect of uncertainty with assumed carbon prices, as is the case in Shell today. From a planning perspective looking out 10-20 years, the actual shape of the policy isn’t that important, the key issue is the carbon price it might deliver. Even this can be picked apart based on signals from legislators today and arguments put forward by academia. For example, it is clear from signals in the EU and the UK that in the EU-ETS covered sector the desired outcome is a noticeable shift in the type of generating capacity, so we therefore shouldn’t imagine that a price of €5-10 will somehow suffice. Equally, there are enough technology options in play at the moment to offer significant emission reduction opportunites below €100 per tonne of CO2.

Although it all looks messy today, there is reason to believe that this issue is far more certain than it appears. Even in Australia, both parties now have carbon price policies of some sort whereas neither really did ten years ago. In Canada, there is the proposed moratorium on unabated coal which certainly injects a carbon price into the power sector and in the USA the progressive implementation of rules under the Clean Air Act may well persuade legislators to look again at a more comprehensive approach. Even if they don’t the CAA alone delivers a pretty powerful signal.

Of course, once governments start to collect significant revenue from carbon pricing policies, certainty abounds.

The recent G8/G20 in Canada and the relatively small amount of time spent discussing climate change has again brought some to question the intent of the Canadian Government with regards the issue. The reality is that successive Canadian Governments have struggled to formulate a policy mix which will suit the country, but at the same time Canada has been a great champion of overtly climate change technologies such as carbon capture and storage (CCS). As such, it is worth spending some time giving thought to the dilemma that is the Canadian economy and greenhouse gas emissions, particularly as the government continues to seek a policy mix that will deliver a meaningful reduction in emissions over the coming decade – at least as a first step.

This posting looks at the history (which we don’t always like, but it is what it is) and its potential implications – in the weeks to come I will focus on the “what now” as Canadian Federal policy makers look again at domestic legislation.

Canada is a Kyoto country, meaning that it has signed and ratified the Kyoto Protocol and agreed to cut emissions by 6% for the period 2008-2012 relative to 1990 under the governance of the Kyoto rulebook (i.e. with the benefit of international trade in allowances and the use of offsets). By contrast, actual emissions have risen by some 30+% over the period. It might be argued that in the grand scheme of things Canadian emissions are relatively small (CO2 emissions from energy use are about 2% of the global total), so what does it really matter? But in the Kyoto world it does matter, which in turn makes Canada a key player in any new global agreement that might emerge from the UN process.

The Kyoto Protocol is a compliance based system, which means that participants with caps (signatory developed countries) must ensure one allowance (AAU or Assigned Amount Unit) or equivalent unit (e.g. CER offset from the Clean Development Mechanism – CDM) is held in the national register for every tonne of CO2 or equivalent (e.g. methane with a multiplier of ~21) emitted to the atmosphere. Canada has been granted some 2.82 billion allowances for the five year compliance period and must purchase more on the international market if it wants to emit more than this amount. This is the basis of the international carbon market that the Kyoto Protocol seeks to foster. But it is now impossible for Canada to comply without a massive inflow of external allowances. According to estimates on the Environment Canada website this could be as many as 1 billion units for the period 2008-2012.

The future of the international climate change talks may well depend on the fate of the Kyoto Protocol, even though the USA is not a signatory party and many of those that are would rather see the world move on to new approaches. Any new approach could still have the legacy of Kyoto within it, particularly given the strong backing for the Protocol from developing countries. For them, it embodies the critically important principle of “common but differentiated responsibility”. Even the Copenhagen Accord endorsed by many nations in December recognizes the Kyoto Protocol and proposes that new 2020 targets for developed countries “will thereby further strengthen the emissions reductions initiated by the Kyoto Protocol”.

The prospects for a developing global carbon market may also rest with the fate of Kyoto and the way in which it can eventually morph into a new agreement. Non-compliance can always be dealt with, but even that has a process attached to it which requires the participants to follow yet another set of rules. The recent global financial crisis was an abject lesson in non-compliance, but it has still been resolved within a tough rule framework in order to maintain structure and credibility and to preserve the integrity of the system which then forms the basis for a redesigned future framework. Without such a solution, true financial collapse may have been the result.

Unresolved non-compliance could result in a truly failed first attempt at collective action on climate change. That would make the already difficult steps to a final global framework, particularly one underpinned by a carbon market, all the more challenging. Therein lies the dilemma for Canada, the difficult domestic decisions it will have to make and also its critical role in the international process.