Introduction to the Kyoto Mechanism and Future of Kyoto in Canada

Presentation to:

Canadian Bar Association’s National Business Lawand

National Environmental Energy and Resources Law Sections

April 25, 2007

Gray E. TaylorBennett Jones LLP

taylorg@bennettjones.ca(416) 777 5769

34th Floor1 First Canadian PlaceToronto, ON M5X 1A4

Other Bennett Jones LLP Offices:

4500 Bankers Hall East

855 – 2nd Street S.W.

Calgary, AB T2P 4K7

1000 ATCO Centre

10035 – 105 Street

Edmonton, AB T5J 3T2

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Outline of Presentation International Law

UNFCC, Kyoto Protocol and Marrakesh Accords Kyoto Protocol

General Mechanisms Compliance Requirements

Canada Kyoto Target and Gap Provincial Differences Harper Government’s Plan and Former Liberal Government’s Plan Current Canadian Bills and Legislation

Provinces Alberta’s Climate Change and Emissions Management Act and Specified

Gas Emitters Regulation Issues for Business Lawyers

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International Law

United Nations Framework Convention on Climate Change – 1992 approximately 190 parties have ratified, including the U.S. aim of stabilizing GHGs in atmosphere based on precautionary principle “common but differentiated responsibilities” – developed

countries to bear greater burden contemplated protocols (patterned on Vienna Convention

and Montreal Protocol)

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International Law (cont’d)

Kyoto Protocol negotiated – December, 1997 but ratified and in force only

on February 16, 2005 ratified by 84 countries

Marrakesh Accords agreed in 2001but only approved at COP/MOP 1 (Montreal)

in force in December, 2005 creates detailed “regulations” for implementing Kyoto

Protocol

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Kyoto Protocol

numerical limits (“caps”) on developed country GHG emissions on average for five-year period 2008-2012 (see next slide for numbers)

GHGs are CO2, methane, nitrous oxide, hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6)

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Kyoto Protocol (cont’d)

non-compliance leads to Facilitative Branch of Compliance Committee and/or

Enforcement Branch enforcement includes

loss of use of Kyoto Mechanisms requirement in next compliance period to achieve targets plus

130% of shortfall

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Country CAPS (% of 1990 (or other base year) emissions)

Australia 108** Greece 92 Norway 101 Austria 92 Hungary* 94 Poland* 94 Belgium 92 Iceland 110 Portugal 92 Bulgaria* 92 Ireland 92 Romania* 92 Canada 94 Italy 92 Russian Federation* 100 Croatia* 95 Japan 94 Slovakia* 92 Czech Republic* 92 Latvia* 95 Slovenia* 92 Denmark 92 Liechtenstein 92 Spain 92 Estonia* 92 Lithuania* 92 Sweden 92 European Community 92 Luxembourg 92 Switzerland 92 Finland 92 Monaco 92 Ukraine* 100 France 92 Netherlands 92 United Kingdom 92 Germany 92 New Zealand 100 United States 93**

*Countries that are undergoing the process of transition to a market economy**Countries that did not ratify Kyoto Protocol

Note: no “caps” for developing countries such as China, India, Korea, Brazil and Mexico.

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Kyoto Mechanisms

Emissions Trading On January 1, 2008, developed country parties are issued

Assigned Amount Units (“AAUs”) equal to cap Parties can sell unneeded AAUs Primarily “economies in transition”

(Russia, Ukraine, Poland, etc. have “hot air”) Other countries may trade too

rely on other Kyoto Mechanisms rely on buying later rely on domestic reductions

Reserve requirement (must keep 90% of original allocation or five times most recent inventory)

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Kyoto Mechanisms (cont’d)

Clean Development Mechanism (“CDM”) projects in developing countries that reduce GHG emissions

against baseline “baseline” is “what would have happened without project” generates Certified Emission Reductions (“CERs”) that can

be sold to developed country parties or authorized participants

sustainable development goals

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Kyoto Mechanisms (cont’d)

Joint Implementation projects in developed countries (including Russia and the

Ukraine) that reduce GHG emissions generates Emission Reduction Units (“ERUs”) host country converts AAUs into ERUs and assigns to

another party or authorized participant

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Kyoto Mechanisms (cont’d)

Private entities can participate directly in Kyoto Mechanisms (CDM or JI) if authorized by a party

Canada can authorize participation of Canadian subsidiaries of US companies entities from other countries provinces and cities NGOs

but Canada will be responsible for ensuring each such entity’s participation complies with Kyoto

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What “Kyoto” means to Ratifying Developed Countries

Allocation to developed country parties of “permits” (i.e. AAUs) to emit GHGs

First Commitment period is 5 years (2008-2012) Kyoto Registry

5 x “cap” allocated in AAU’s Cap is “Country Cap” % x 1990 GHG emissions (e.g.

Canada is 94% x approximately 596 MT = approximately 560 MT)

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What “Kyoto” means to Ratifying Developed Countries (cont’d)

Total GHG emissions in First Commitment Period cannot exceed AAU’s

UNLESS country uses the Kyoto Mechanisms

Total GHG emissions to be less in total than all AAUs + CERs + ERUs + RMUs*

*RMUS are “removal units” generated by a land use, land use change or forestry sinks in a developed country during a commitment period

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1990 2000 2010

approximately596

approximately 830

GHG Emissions in Megatonnes (millions of tonnes) of CO2 equivalent 2003 GAP

180 MT

“Business as Usual” Gap is approximately 265 MTon average over 2008-2012

2003 Emissions:740 MT

Kyoto Target Analysis for Canada

“Business as Usual” Compared to Kyoto Commitment*

approximately560 MT

* Based on 2006 data

850

20122008

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Canada’s Kyoto Challenge (as seen in 2002)

1990 1995 2000 2005 2010 2015 2020

500

550

600

650

700

750

800

850

Mt

CO

2 e

qu

iva

len

t

Source: Canadian Climate Change Secretariat, January 2002

1990Emissions607 Mt

1999705 Mt

2010Emissions800 Mt

Kyoto Target571 Mt

BAU GAP238 Mt or 30%

Business asUsual

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National Unity: GHG Emissions by Province, 2004

* Will Alberta or other Provinces challenge constitutionality of federal Kyoto legislation?

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Harper Government’s Plan Bill C-30 and Notice of Intent to Regulate (October, 2006)

mixed regulation of GHGs with regulation of air pollutants targets

2010-2015 target setting based on emissions intensity 2020*-2025 more stringent emissions intensity targets 2050* absolute reductions of 45% to 55% against 2003**

levels cost Rona Ambrose her job

Canadian public, even in Alberta, is pro climate change regulation and largely pro Kyoto

* What happened to 2015-2020 and to 2025-2050?**Kyoto Protocol uses 1990 and this got Canada a “fossil of the day” award in Nairobi at COP/MOP2

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Harper Government’s Plan (cont’d)

New Plan to be announced this week(?) according to Environment

Minister Baird “made in Canada” solution clearly hostile to “country to country” AAU emissions trading

as may involve “hot air” likely hostile to Joint Implementation trading as may involve

“hot air” possibly open to Clean Development Mechanism trading on

a limited basis

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Reductions (Annual) (2008 to 2012)

Large Final Emitters (LFE) (intensity-based using emissions trading and offset)*

36 – 45 MT —

Climate Fund (Domestic Offset and International Kyoto Units Purchases)

75 – 115 MT $4 - $5 billion (about $50 per tonne)

Partnership Fund (with Provinces) 55 – 85 MT $2 – $3 billion

Automobile Industry 5.3 MT —

Renewable Energy 15 MT $1 billion

One Tonne Challenge 5 MT $120 million

Existing Federal Programs 40 MT $2.8 billion

“Business as Usual” Sinks (e.g. Forestry and Agriculture)

10 MT – 30 MT** —

Total 240MT - 300 MT $9 billion - $11 billion(about $40 per tonne)

Canada: Principal Elements of Project Green (May, 2005) – Former Liberal Government

* cap of $15/tonne on cost of shortfall credits**doubtful because of mountain pine beetle

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Canadian Statutes

Clean Air Act: Bill C-30 government vs. opposition

both deal with GHGs and air pollutants (constitutional issue?) opposition prescribes

meeting Kyoto targets use of Green Investment Bank to issue credits at $20/tonne in 2008, $25/tonne in

2009 and 2010 and $30/tonne in 2011 and 2012 and reduction targets for 2020, 2035 and 2050 of 20%, 35% and 60%-80% from 1990

levels (see revised Bill C-30 at http://cmte.parl.gc.ca/cmte/CommitteePublication.aspx?SourceId=198462)

government argues this is cost prohibitive (see “The Cost of Bill C-288 to Canadian Families and Business” at http://www.ec.gc.ca/doc/media/m_123/report_eng.pdf

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Canadian Statutes (cont’d)

Kyoto Implementation Act: Bill C-288 requires Government to submit a plan to meet Kyoto targets

within 180 days passed Commons and now in Senate (Baird testimony)

Canadian Environmental Protection Act, 1999 GHG reporting already GHGs already declared “toxic” and can be regulated

(including emissions trading provisions) may be used as Harper government will not likely proceed

with Bill C-30 and detests Bill C-288

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Alberta

Climate Change and Emissions Management Act Program

Specified Gas Reporting Act Bill 3 (now law) and Specified Gas Emitters Regulation

(pending)

Other Provinces Ontario, Manitoba and British Columbia Voluntary Emissions Reductions (VERs)

standards, trading

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Where Did We Start in Alberta?

Climate Change and Emissions Management Act (CCEMA) – in force 2003

CCEMA provided a legislative framework to regulate GHGs, but was very dependent upon future regulations

Specified Gas Reporting Regulation (SGRR) – in force 2004

SGRR requires specified gas reports from large GHG emitters

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What’s New?

Bill 3 - Climate Change and Emissions Management Amendment Act (announced March 2007 and in force April 2007)

Bill 3 is largely an amendment to the enforcement provisions of the CCEMA Broad inspection and investigation powers Compliance orders Administrative Penalties/Offences/D&O Liability Limited appeals to Environmental Appeals Board

Specific regulation of GHGs is covered in the new proposed regulation

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Specified Gas Emitters Regulation (SGER)

Basic Obligation – 12% Emissions Intensity Reduction Applies to “facilities” that release 100,000 tonnes or more

of specified gases into the environment in a year 2007 Emissions Intensity Limits – “net emissions intensity”

for “established facilities” must be 88% of “baseline emissions intensity” (“BEI”) for the period July 1, 2007 to December 31, 2007

2007 Emissions Intensity Limits – vary for “new facilities” “New facilities” may include currently operating facilities

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Baseline Emissions Intensity (BEI)

Part 4 of SGER Application for BEI

apply for BEI by September 1, 2007 if established facility or in fourth, fifth, sixth, seventh or eighth year of commercial operations in 2007

thereafter all new facilities must apply by June 1 of fourth year (starting 2008)

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Baseline Emissions Intensity (BEI) (cont’d)

BEI Established facility BEI is either

average of 2003, 2004 and 2005 emissions intensities not production weighted average so anomalous years impact

baseline; or alternative method approved by Alberta Environment

consider applying for alternative if early action reduced emissions

New facility emissions intensity for 3rd year of commenced production

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Baseline Emissions Intensity (BEI)

Alberta Environment has ability to give different BEI than requested may consider

technologies used by others at comparable facilities (laggards may be punished)

BATEA for the facility (potential to set higher BEI to reward BATEA implementation and protect new facility from intensity improvement requirements immediately?)

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Baseline Emissions Intensity (BEI) (cont’d)

New BEI Determination (Section 25) Alberta Environment may review BEI, order a new

application or require a new BEI if BEI is inaccurate facility has “expanded or significantly changed” otherwise appropriate in Alberta Environment’s view

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SGER – Net Emissions

“net emissions intensity” based on a formula set out in section 4(3) for 2007 requirements (Half year emissions – “offsets and credits”)/production

“net emissions intensity” for 2008 and beyond based on formula in section 5(3) Intensity targets appear to stay at 12% for “established

facilities” – however Minister may set additional NEI Intensity targets for “new facilities” ramp up to 12% in 2%

annual increments

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Net Emissions Intensity Calculation

FormulaNEI = (TAE – (EO+FC+EPC))

PwhereNEI is net emissions intensity;TAE is total annual emissions;EO is allowable emission offsets applied by the person

responsible;FC is allowable fund credits applied by the person responsible;EPC is allowable emission performance credits applied by the

person responsibleP is production for the year.

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Total Annual EmissionsNEI = (TAE – (EO+FC+EPC))

P

where

NEI is net emissions intensity;

TAE is total annual emissions;

EO is allowable emission offsets applied by the person responsible;

FC is allowable fund credits applied by the person responsible;

EPC is allowable emission performance credits applied by the person responsible

P is production for the year.

TAE is defined as total direct emissions (TDE), not including industrial process emissions (IPE)

TDE is total of direct emissions (DE) includes GHG emissions “from sources actually located at a facility” (emphasis

added) excludes indirect emissions excludes mobile sources (?) such as vehicles (?)

TAE excludes IPE IPEs are emissions from an industrial process involving chemical reactions other

than combustion where the process’ primary purpose is not energy production e.g. exclude CO2 from lime production e.g. many refinery/upgrader operations (but not distillation)?

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Allowable Emission Performance CreditsNEI = (TAE – (EO+FC+EPC))

P

where

NEI is net emissions intensity;

TAE is total annual emissions;

EO is allowable emission offsets applied by the person responsible;

FC is allowable fund credits applied by the person responsible;

EPC is allowable emission performance credits applied by the person responsible

P is production for the year.

EPC (see Sections 10 and 11) created when Actual Emissions Intensity (AEI) is less than required NEI AEI also excludes IEPs 2007 EPCs may be banked 2008 EPCs may not be banked all must be used by other facilities, thus EMISSIONS TRADING likely necessary guidelines may be issued which must be complied with to use EPCs if jointly held, holders use pro rata, thus ownership/disposition provisions in joint

venture agreements desirable

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Allowable Offset CreditsNEI = (TAE – (EO+FC+EPC))

P

where

NEI is net emissions intensity;

TAE is total annual emissions;

EO is allowable emission offsets applied by the person responsible;

FC is allowable fund credits applied by the person responsible;

EPC is allowable emission performance credits applied by the person responsible

P is production for the year.

OC (See Sections 8 and 11) means off-facility site reduction in GHG emissions, thus EMISSIONS TRADING likely necessary note that reductions in IPE not offsets (e.g. CCS not available for IEPs) note facility definition is broad and flexible (opportunity?) must be a reduction in Alberta again pro rata use by joint holders guidelines may be issued by Alberta Environment which must be complied with NB – credit for actions from January 1, 2002 project types

press release mentions only low tillage agriculture other possibilities

lower N2O use; animal management (diet); manure and other agricultural waste management; forestry (afforestation, reforestation, preservation?); biofuels, energy efficiency; CCS (?); landfills (?); Demand Side Management (?)

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Allowable Fund CreditsNEI = (TAE – EO+FC+EPC))

P

where

NEI is net emissions intensity;

TAE is total annual emissions;

EO is allowable emission offsets applied by the person responsible;

FC is allowable fund credits applied by the person responsible;

EPC is allowable emission performance credits applied by the person responsible

P is production for the year.

FC (See Sections 9 and 11) one credit of one tonne of reductions for each $15 contributed must be contributed by March 31 of year following year of use

January 1/March 31 only for previous year guidelines may be issued by Alberta Environment and must be complied with

Note:

-the Fund is created by the Climate Change and Emissions Management Act and specifies categories of use for funds

-government indicates Carbon Capture and Storage (CCS), such as CO2 pipeline, may be funded projects

-is there room for private sector involvement in management of Fund?

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ProductionNEI = (TAE – EO+FC+EPC))

P

where

NEI is net emissions intensity;

TAE is total annual emissions;

EO is allowable emission offsets applied by the person responsible;

FC is allowable fund credits applied by the person responsible;

EPC is allowable emission performance credits applied by the person responsible

P is production for the year.

Production quantity of “end product” produced by a facility, expressed in “the applicable unit of

production” end product not defined Climate Change and Emissions Management Act focuses on GHG Emissions per $ of

Gross Domestic Product goal is 50% of 1990 levels

should “end product” be measured in $? or “widgets”? or “BTUs”? multiple product facilities need clarity

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SGER – True-up

True-up – concerns the availability of “offsets & credits” to the “person responsible” for subtraction from annual or half-year emissions

“Offsets & credits” that may be used are those that are available on the earlier of Date compliance report is submitted; and Deadline for submitting a compliance report

Use ‘em or lose ‘em?

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SGER – Duty to Comply

Responsibility for compliance rests with the “person responsible”

If more than one “person responsible” during a designated period, then compliance duty rests with the “person responsible” as of December 31

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SGER – Reporting/Confidentiality/Audits

“person responsible” on December 31 of a year must submit a compliance report by March 31 of following year

Compliance report must Confirm that NEI have been met or provide a plan to meet; Be certified; and Be verified by a “third party auditor”

Director may be required to make CR available to the public

Confidentiality Third Party Auditors

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Issues for Business and Environmental Lawyers

Issues Reporting

CEPA 1999 notice requires GHG reporting Ontario and Alberta have provincial reporting and now Alberta

SGER securities laws – disclosure of “risks” to financial health of

business Transactions

allocate liability and credits in large emitters deals

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Issues for Business and Environmental Lawyers (cont’d)

Offsets value and deal with “offset” opportunities regarding broad

sectors of economy Litigation

tort actions underway in US CEAA and Provincial Environmental Assessments

need to incorporate GHG issues

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THANK YOU

Gray E. TaylorBennett Jones LLP

taylorg@bennettjones.ca(416) 777 5769

34th Floor1 First Canadian PlaceToronto, ON M5X 1A4

509585