A Focus on Canada: Challenging Times Ahead

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.