Large Industrial Emitters
Emissions Trading
Natural Resources Canada
March 14, 2003
Objectives
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The LIE World
Federal Framework
Context
Role of Emission Trading
Developing a Domestic Trading
Market
The LIE World
Backstop
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Measurement/
Verification
Targets
Reporting
Compliance
Penalties
Audit
Covenants
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Targets
Reporting
Compliance
Penalties
Performance
Target x output
– emissions=
Credit (+)/Deficit(-)
Offsets
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Not a positive list
Encourage supply
Carbon Market
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Compliance
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Carbon market
Offsets
Restoration rate?
Linked to “world”
Exchange-traded
Price Cap
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Terms &
conditions
Fiscal implications
Federal Framework
Agreed Elements:
1. 55 Mt in emission reductions •
equivalent on average to 15% below
projected “Business-as-Usual”
2. Emissions Intensity Approach
3. Emissions Trading
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both domestic and international
4. $15/tonne cap
The Context
• Maximum compliance cost
equivalent to about 0.0025 of sales
• Impact will be uneven – greatest for
low-margin commodity producers
• Need to accommodate
competitiveness with firm principles
Timelines
• 2008-2012 1st Kyoto commitment
period
• Implementation will take time
• Spring 2003 model covenant
• Then start negotiations
• 2004 aim to complete covenants
Proposed Role of Emission
Trading
• Goal: Keep costs of cutting emissions
down and protect industry’s
competitiveness
• Protocol includes international emissions
trading between states
• Plan combines covenants/backstop with
emission trading for individual firms
– covenants/backstop provide impetus for
reducing covered industrial emissions
– emissions trading lets firms minimize the cost
of cutting those emissions.
Vehicles for Emission Trading
Under Kyoto
• Permit trading between firms covered by
the covenants
• Linked to international trading of assigned
units with industrial countries that have
ratified Kyoto
• And credits created through project-based
investments
– internationally, through projects in LDCs (the “Clean
Development Mechanism”) and in other industrial
countries (Joint Implementation) that have ratified
Kyoto.
– domestically, through offset investments in areas not
included in the covenants
Current State of the Carbon
Market
• International market showing signs of
growth.
– UK covenant/emissions trading system
– consideration of a 2005 emissions trading
system for the EU
– Project-based transactions involving LDCs
• However, market is still at a very early
stage
– while growing, trading volumes are still small
– high degree of market segmentation
Developing a Domestic Market
• Clean Development Mechanism and Joint
Implementation Office established in
DFAIT
– will assist Canadian companies to access
international projects
• Covenants/backstop key catalyst for 20082012 domestic trading
• Work still needed on how a domestic
emission trading system might operate in
practice
Designing a Domestic
Emissions Trading Market
• Thinking still at early stage, but:
• Linked to “world” market
– international links, however, must be Kyoto
compliant
• Maximize domestic opportunities to find
low cost compliance options
– gets costs down as low as possible
– develop competitive new technologies
Creating an Institutional
Framework
• Private sector - driven
• Government should set the basic rules
– permit allocation, backstops, offset creation,
permit transfers, emission monitoring and
reporting requirements, etc
• Over time, market likely exchange-based
• Important for any framework to support a
broadly-based and integrated carbon
market.
Offsets
• Role: Can expand access to low cost
abatement and removal opportunities
• But need to define the rules, e.g.
– appropriate baselines, measurement
criteria
• Need to take into account the
administration burden
Offsets: Process
• Interdepartmental federal working
group
– examining criteria for recognizing
domestic offsets
– workshops and consultations
– decisions this year
• Assessing the scope for avoiding an
exclusive list of eligible
industries/activities
Emission Trading: Way Ahead
• Design a backstop system and
negotiate GHG covenants
• Create rules for the trading regime
• Set out rules for creating offset
credits