Large Industrial Emitters

Emissions TradingNatural Resources Canada

March 14, 2003

Objectives

• The LIE World• Federal Framework• Context• Role of Emission Trading• Developing a Domestic Trading

Market

The LIE WorldBackstop

• Targets• Reporting• Compliance• Penalties

Covenants• Targets• Reporting• Compliance• Penalties

Measurement/

VerificationAudit

Performance Target x output – emissions= Credit

(+)/Deficit(-)

Compliance• Carbon market• Offsets• Restoration

rate?

Carbon Market• Linked to “world”• Exchange-traded

Price Cap• Terms &

conditions• Fiscal

implications

Offsets• Not a positive

list• Encourage

supply

Federal Framework

1. 55 Mt in emission reductions -• equivalent on average to 15%

below projected “Business-as-Usual”

2. Emissions Intensity Approach3. Emissions Trading

• both domestic and international

4. $15/tonne cap

Agreed Elements:

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 2008-2012 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