Bad-air barter

‘ Emissions trading’ cut acid rain. Can it reduce gases blamed for global warming? Canada’s banking on it. Critics fear it’ll be a lot of costly hot air By Peter Gorrie

Want a share of $ 1 billion, or much more?

Here’s how you might get it: ‰ If you own a business, add equipment that dramatically cuts electricity consumption. ‰ If you have access to breezy land, build a wind farm that generates pollution- free power. ‰ If you run a landfill site, install a system that collects methane given off by rotting garbage and burns it to generate electricity. ‰ If you’re a developer, construct energy- efficient homes. ‰ If you employ people, encourage them to take transit to work.

Basically, starting in a couple of months, if you come up with a scheme to cut emissions of greenhouse gases — the pollution blamed for climate change — you’ll be eligible to earn cash. The system is part of the carbon market, which Ottawa considers crucial to complying with the Kyoto Protocol. Under that agreement, by 2012, Canada must cut emissions of carbon dioxide, methane and other “greenhouse” gases that trap the sun’s heat in the atmosphere to six per cent below their 1990 levels.

In the market’s simplest form, companies and individuals will get credits for reducing emissions. They’ll be able to sell those credits to others who need them, or to a special government climate fund. The idea is being tried, in several forms, in many parts of the world. Canada’s scheme will be launched in January, although federal officials are still negotiating and writing detailed rules. Environment Minister Stephane Dion has high hopes. It will spur development of technologies that will combat climate change and boost the economy, he says. “Once you start it, you’ll see the imagination of Canadians . . . People will come from every corner of industry and community life.

“ You come with your reductions. Environment Canada recognizes the greenhouse gas emissions and gives you a credit. And you sell it.”

It could get expensive.

Ottawa’s Kyoto plan calls for $ 10 billion in spending. About half would support the climate fund and carbon market.

Others suggest the tab could go much higher.

Point Carbon, a leading analyst of the emerging global trade, predicts that even if the market were moderately successful, Ottawa would still need to buy at least 600 million tonnes of carbon credits from other countries to meet its Kyoto commitment. At the current price that cost alone could top $ 12 billion. But critics suggest even modest success is a long shot. The market system, they argue, is riddled with loopholes, won’t inspire innovation or create a true market, or produce the required pollution cuts.

“ I’m not sure we’ll see a very active emissions trading market,” says John Drexhage, of the Winnipeg-based International

Institute for Sustainable Development.

“ There’s no indication they’ll get close to ( the target),” says John Bennett, of the Sierra Club of Canada.

Generally, this is how the market is to work: The government will offer credits for projects that help Canada to meet its Kyoto commitment. The total required cut is 270 million tonnes a year, from 2008 to 2012. The credit and trading system is to account for up to 160 million tonnes annually.

Projects might reduce emissions directly, reduce greenhouse gases’ potency by burning them, or eliminate them via burial. They might also replace dirtier facilities — as when a wind farm or nuclear plant displaces power from a coal- fuelled electricity generating station. Once reductions are verified and approved, credits will be issued. If you’re a credit holder, you’ll have three choices:

Keep the credits. You’ll make no extra money but enjoy the glow from reducing emissions.

Sell credits to polluters. Your main potential customers are oil refineries, factories, electricity generators, mines and other major industries, known as Large Final Emitters. They must reduce emissions by 45 million tonnes. Some might end up with credits to sell, but market watchers say that’s unlikely.

Sell credits to the federal government, which has set aside an initial $ 1 billion “ Carbon Fund” for the purchases and says it might spend $5 billion by 2012.

If you’re among the enterprises facing pollution limits, you also have several options. You can:

Actually cut your own emissions. This will account for just 10 per cent of the total, industry people estimate. Ottawa expects bigger cuts, but federal officials won’t offer numbers.

Buy credits from projects — like those described above — that reduce emissions.

Contribute to a technology fund being created by the federal government to invest in clean coal and other innovations.

Buy allowances from Ottawa — akin to sending a cheque if you underpay income tax.

Ottawa has already said credits and allowances won’t cost companies more than $ 15 a tonne — even though the price for carbon emissions in Europe is already much higher. If necessary, it will subsidize the difference. The potential result of all this, observers say, is a system in which money flies around but that’s not an open market and is burdened with questions. Why the doubts?

After all, emissions trading helped to reduce acid rain over eastern North America. And carbon markets are already operating elsewhere; while some face start-up problems, most are expected to work well. The problem, critics say, is that Canada’s system is far more lax than those others. The acid rain plan imposed strict caps on emissions of sulphur dioxide and other acidfor forming gases from a few large polluters — mainly smelters and power plants. Those under their cap could sell credits; those over, had to buy. No limit was put on the price of emissions.

It quickly became cheaper to cut pollution than to buy credits, and emissions plummeted. As for the other new carbon markets, they’re more freewheeling than Canada’s. The European Union launched its system 10 months ago. It’s similar to the acid- rain scheme, and European emissions are falling as the cost of credits soars — they’re now equivalent to $27 per tonne of carbon dioxide.

Canada’s unique market will be, to some extent, isolated from these others. And that, critics argue, is just one reason it’s unlikely to succeed. It is also, they complain, full of features that appear destined to not only discourage trading but also restrict emissions cuts.

Industry officials insist the targets for large emitters are tough. The situation is “ entirely the opposite,” of what critics argue, says Don Wharton, director of sustainable development for Calgary- based TransAlta Corp. Few industries can make the fundamental changes needed big emission cuts by 2012, he says. “ That would be non- competitive and not smart. You don’t do that with large- scale capital stock. You run it flat out until it’s time to rebuild.”

Other observers call the limits lax. Canada’s system is, “ basically . . . too lenient,” says Norwaybased Point Carbon analyst Kristian Tenben.

It “ isn’t stringent enough to make for a viable carbon market in Canada,” Drexhage of the Sustainable Development Institute says. “ There should have been clearer and stronger policy signals to industry.”

While individual caps for each emitter are being negotiated, the total limit is low. Ottawa originally wanted 55 million tonnes of reductions, but dropped to 45 million after industries protested. The technology fund — essentially a tax to pay for future research — cuts the effective total to 36 million tonnes.

“ Large final emitters are responsible for 50 per cent of Canada’s emissions,” notes Matthew Bramley, of the Pembina Institute for Appropriate Development, a Calgary-based research and education group. “ A lot of people have a hard time understanding why they’ve been asked to account for only 13 per cent of the reduction required.”

Worse, critics say, each of the large sources will be required to cut its emissions by a percentage based on its production, rather than on an absolute amount. The maximum will be 12 per cent.

It boils down to this: The government won’t order Company Xto cut emissions by, say, 5 million tonnes a year. Instead, it will ask: “ How much pollution would be generated if you carried on with business as usual?” and then: “ How much must you cut emissions to achieve a 12 per cent cut?” The effect is that for each source, the system doesn’t guarantee emissions will fall by a set amount. It assures only that they’ll rise more slowly than without any plan. The low targets mean the large sources will require relatively few credits. That, in turn, will cool competition and keep the price down. And price is crucial: The whole point of a trading system is to encourage or compel polluters to invest in technologies that reduce emissions. If it’s easier or cheaper to buy credits, that’s what they’ll do.

“ In emissions trading systems, what drives innovation is not targets, it’s the price ( of credits),” Bramley says. If it’s too low, “you’re essentially preventing any innovation from taking place.”

In fact, Ottawa has ensured price won’t drive the market: To appease business critics, it will cap the cost of credits at $ 15 a tonne. If the market takes it higher, taxpayers will subsidize the difference.

“ Industry people say the $ 15 cap is bad news for innovation,” Bramley says. The market is further hamstrung by a rule that says that Canadians can’t sell credits outside the country.

“ We’ve created an island here, with its own dynamic,” Wharton says. “ It will be a whole lot less liquid” than the European trading system.

It might be difficult to verify emission cuts, Bramley says.

Verifiers must look at every part of an operation that produces greenhouse gases — there are usually several — then calculate the emissions and required reductions. That’s a big, complex task. On top of that, federal officials suggest some of the information is confidential.

If it’s not available, the government and polluters can’t be held accountable, Bramley says. The carbon fund and its creditgenerating projects raise their own issues.

Rules must be set for how projects will be validated, certified and monitored.

“ There’s a lot of devil in the details,” says Steven Young, president of GreenhouseGasMeasurement. com, which aims to be among the companies hired to evaluate and verify emission reductions.

In general, credits are to be given only for cuts achieved only because the incentive is available. And a starting point must be determined. The rules must be generous enough to encourage investment in projects, but no so generous that emissions reductions are bogus.

Other trading systems require written assurance that a project depends on credits. Canada’s doesn’t.

“ There’s virtually nothing there to ensure that credits will be reserved for projects that go beyond business as usual,” Bramley says.

“ Environment Canada is worried about being able to get the volume of cuts needed. So it’s

very wary of anything

that might hurt the volume of credits available.

This leads to why they’re

having very lax rules:

They might have the volume, but if it’s not real, it

doesn’t get us anywhere.”

Despite the loose rules,

it’s not certain projects

will be proposed to hit

the reduction target. Federal officials say much interest has been expressed, but it’s too soon to say.

Small projects won’t be eligible: They’re not worth the cost. But what’s too small hasn’t been decided.

In the end, here’s how the system might look.

Across Canada, hundreds, perhaps thousands, of projects will attempt to achieve reductions. They’ll sell almost all their credits to Ottawa’s climate fund.

Large emitters will achieve some reductions, put as much as they can into the technology fund, buy a few credits from projects, and then balance their emissions and targets by buying allowances.

If — as most observers expect — all this falls short of the reductions required by Canada’s Kyoto commitment, Ottawa will buy credits on the international market. “The federal government will take the burden on themselves since they’re not prepared to offload it on to the large emitters, or the general public through a carbon tax,” Young says. Apart from the potentially high cost — and many observers suggest it would be political madness for a government to send so much cash out of the country — those purchases wouldn’t be automatic. Canada has said it wants money it spends on credits in Russia or other former Soviet states to be devoted to activities that benefit the environment. The selling countries would likely object.

If nothing else, the market appears set to create opportunities for consultants and emission accountants. And there are signs modest trading might develop.

Canada’s system lets companies, and the government, buy credits from projects in developing countries. Some firms are already doing so. As investment instruments “ they’re the top of the heap,” says Wharton, of TransAlta, which has purchased some from a project in Chile. A handful of large emitters have bought credits — for now, at a rock- bottom price — in anticipation of the new system. One deal was assembled by Baseline Emissions Management Inc., of Calgary, says company president Dave LaBarre. An Alberta utility bought credits from an oil and gas operation that just began to bury greenhouse gases underground.

“ A small number of companies are looking at the type of deals they could put together, in anticipation of legislation,” LaBarre says. But: “ a lot are hanging back, waiting to see what it looks like.”