Dec 02, 2008 -- Datamonitor

Achieving climate change ambitions is more likely if regulatory consistency can be established across major polluting nations on a global scale. However, the proposed Canadian federal emissions trading framework could undermine such efforts by failing to open to the wider carbon marketplace.

Although Canada is party to the Kyoto Protocol, the country is pursuing an alternative greenhouse gas (GHG) emissions reductions schedule, having postponed reaching its Kyoto target to beyond 2020. Among the Kyoto ratifying parties, Canada is very obviously not on track to meet its GHG emissions target of 6% below 1990 levels, given that its GHG emissions have been steadily increasing since 1990 and were recorded at 24.7% above 1990 base levels (equivalent to 747 MtCO2e) in 2005.

Instead, on April 26, 2007, the Federal Government of Canada released its Climate Change Plan, which proposes to reduce Canadian GHG emissions by 20% below 2006 levels by 2020. The plan also includes emissions trading provisions at a federal level to control GHG emissions from the industrial sector, which account for approximately 50% of all emissions sources. The plan proposes to control GHG emissions by setting mandatory intensity targets which are to be met by tightening fuel efficiency standards. These tightened standards will be achieved through the growth and adoption of technology and initiatives (with an emphasis on carbon capture and storage) as well as by increasing the use of renewable fuels.

In a recent report entitled "The development of pan-regional and national allowance-based carbon marketplaces", Datamonitor concludes that while federal emissions trading is still under consideration in Canada, the likelihood of such a scheme opening to the wider carbon marketplace remains very low. Firstly, the integration with initiatives at the province level will be challenging given the large variety of approaches followed by the various provinces. Moreover, the use of relative intensity targets in Canada would make linking with US and other markets worldwide more difficult as these rely largely on absolute emissions targets.

Finally, given that the use of Clean Development Mechanism (CDM) credits - known as Certified Emission Reductions (CERs) - for compliance purposes is capped at 10% of each Canadian installation's total target, it is quite unlikely that a substantial demand for such offsets will materialize in the next 10 years or so in Canada. Where demand does occur, domestic offsets will be prioritized over international offsets, particularly if CER prices remain higher than the Canadian carbon fund price ceiling.

Prices for international CER offsets are currently trading around the E14 mark, against a current carbon fund price ceiling of C$15. While the carbon compliance fund fee is to gradually increase from C$15 to C$20 at the end of the decade, this may still not be high enough to trigger a sufficiently high level of low-carbon investment decisions, particularly if CER prices remain higher than the Canadian price ceiling.

It is widely recognized that, in the context of the current economic turmoil, governments worldwide must act decisively to implement long-term regulatory regimes that underpin a market-driven cost of carbon while encouraging the development of alternative technologies. Successful regulatory frameworks must have clear, comprehensive procedures to incentivize industry and create long-term capital formation across the globe. Indeed, for the worldwide carbon marketplace concept to become reality, the notion of a low-carbon economy as an engine of productivity and economic growth must first be reinforced, with appropriate policies enacted.

It appears unlikely that a substantial demand for international CER offsets will crystallize over the next 10 years or so in Canada. In essence, this means that the sizeable Canadian carbon market will fuse only partially with surrounding carbon marketplaces. As such, Canada is yet another barrier standing in the way of a truly 'global' carbon market, with potential dire consequences for the meaningful and uniform carbon price signal required to stimulate competition and deliver emission reductions cost-effectively in countries and sectors.

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