Cablegate: Canada Announces Greater Detail On Climate Policy

DE RUEHOT #0446/01 0922111
R 012111Z APR 08





E.O. 12958: N/A

REF: A. 07 OTTAWA 1798

B. 07 OTTAWA 0795
C. 06 OTTAWA 3182

Sensitive but Unclassified. Protect accordingly.

1. (SBU) Summary: On March 10 Canada's federal government
provided significant additional detail on its "Turning the
Corner" climate change plan released last year. This latest
iteration announced the government's intent to establish a
clear price signal for carbon and greater detail on plans to
establish a domestic trading scheme for GHG emissions. Draft
regulations will be developed and put out for public comment
in fall 2008. Final regulations should be approved by the
fall of 2009 and come into force on January 1, 2010. The
federal plan does not mesh evenly with current provincial
climate change approaches, likely leaving gaps and varying
standards in place across the country. End Summary.

2. (U) On March 10 the federal government unveiled further
details of its regulatory framework for greenhouse gas (GHG)
emissions. The framework, originally announced in April 2007
(Ref B), is intended to reduce GHGs by 20 per cent below 2006
levels by 2020 and cut emissions by 60-70 per cent by 2050,
initially via emissions-intensity reduction targets and after
2025 through fixed emissions caps. If these targets are met,
Canada would produce in 2020 about 610 megatons (Mt) of
carbon dioxide (CO2) equivalent GHGs, 330 megatons less than
under a business as usual scenario. The final regulations
are intended to apply to about 700 facilities in 16 key
industrial sectors, including power generation, oil and gas,
pulp and paper, iron and steel, smelting, and refining. Some
industrial facilities with emissions under 50 kilo-tons (kt)
per year of CO2 equivalent will be exempt, as will "fixed
process" facilities, whose emissions are not combustion
related. According to government calculations, the plan will
have a measurable negative economic impact, which is not
estimated to exceed 0.5 percent of Canada's projected real
GDP in any single year between 2010 and 2020.

3. (U) The federal government calculates that federal
measures alone will reduce GHG emissions in 2020 by
approximately 230 megatons (with 165 megatons of this
reduction attributable to measures in "Turning the Corner").
Independently, provincial and territorial governments have
already committed to targets implying a further reduction of
around 300 megatons. There is overlap with federal efforts,
but the government believes provincial and territorial
initiatives already underway will supply incremental
reductions of 40 megatons, and expects provinces and
territories to introduce additional measures yield
incremental reductions of another 35 megatons. With an added
25 megatons from the efforts of a federal-provincial-industry
clean electricity task force, the federal government believes
the targeted reductions of 330 megatons (20 percent) from
2006 levels are within reach.

New Details
4. (U) The additional detail announced on March 10 elaborated
on the emissions reduction targets released almost a year
ago. All covered industrial sectors (see full list in para
17) will be required to reduce their emissions intensity from
2006 levels by 18 percent by 2010, with 2 percent continuous
improvement every year after that. These intensity targets
will be applied at the facility, sector or corporate level as
determined after consultation with the affected industries,
Qdetermined after consultation with the affected industries,
and minimum thresholds for application will be set in five
sectors. For chemicals, nitrogen-based fertilizers, and
natural gas pipelines the threshold will be 50 kt CO2
equivalent per year. The threshold for the electricity
sector will be 10 MW generating capacity. For upstream oil
and gas, the targets will apply to facilities with 3 kt of
emissions per year and 10,000 barrels of oil per day.
Although the federal thresholds for upstream oil and gas are
more stringent than those announced by the province of
Alberta in its 2007 "Specified Gas Emitters Regulations," the
federal government says it is committed to a "common
threshold and reporting regime in Alberta."

5. (U) As announced in April 2007, "Fixed Process" emissions
will receive an exemption (technically an intensity reduction
target of 0 percent), but the March 10 announcement provides
a more precise definition of fixed process emissions.

OTTAWA 00000446 002 OF 004

Greenhouse gas emissions from a "fixed process" are a direct
result of the production process, not a result of combustion
or from the processing of crude oil or natural gas. Fixed
processes account for about 60 percent of GHG emissions from
the iron and steel sector and the cement sector, 50 percent
from the aluminum sector, 40 percent from the fertilizer
sector, and smaller shares in other sectors. The non-fixed
process portion of GHG emissions in all regulated industrial
sectors will be subject required emission reductions.

6. (U) The most significant modification in the March 10
update is that all oil sands up-graders and in-situ plants
and all coal-fired electricity plants that come into
operation in 2012 or after will be required to meet stricter
emissions targets (using carbon capture and storage or its
equal in effectiveness ) or pay C$15 per ton of CO2
equivalent GHGs emitted over their limit. (The effective
"price" of a ton of excess CO2 equivalent GHG emissions is
expected to grow to about C$65 per ton by 2018-20). In order
to ensure that carbon capture and storage (CCS) is
"widespread by 2018," the plan envisions that firms will be
credited for investments in "pre-certified CCS projects" for
up to 100 percent of their regulatory obligation through
2017. (Comment: The devil is in the details, as Canadian
Association of Petroleum Producers president Pierre Alvarez
pointed out. "We'll have to figure out what it means" since
the plan remains "thin on detail" with no specifics on which
carbon capture and storage projects might qualify. End

7. (U) This CCS approach does mesh well with the call in
January 2008 by the joint Canada-Alberta Carbon Capture and
Storage Task Force for the immediate creation of a C$2
billion government fund to kick-start development of carbon
capture and storage projects in Canada. So far, Alberta has
committed "up to" C$500 million, while the federal budget of
February 2008 pledged C$250 million. However, almost all of
this federal money is for a zero-emissions coal-fired power
plant in Saskatchewan.

8. (U) The March 10 release also provided additional
information on the availability of Clean Development
Mechanism (CDM) and domestic offsets. Firms may use credits
from the Kyoto Protocol's CDM for up to 10 percent of their
regulatory obligation. The domestic offset system will be
administered by Environment Canada. Domestic offset projects
must take place in Canada and achieve reductions in one or
more of carbon dioxide, methane, nitrous oxide,
hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), or sulfur
hexafluoride. Each offset credit will represent one ton of
carbon dioxide equivalent. The plan notes that consideration
will be given to recognizing reductions originating in the
U.S., "once the United States has a regulatory system in
place," and goes on to state that a good example of emissions
that could be covered by such an arrangement are those stored
by the Weyburn-Midale CCS project. The government expects to
publish detailed guidance for project proponents and
verification bodies this spring and summer, and Environment
Canada will begin reviewing project applications in the

9. (U) The announcement further defined "Credits for Early
Action." Firms that took verified early action to reduce
emissions between 1992 and 2006 will be eligible for a total
Qemissions between 1992 and 2006 will be eligible for a total
of 15 Mt in credits (5 Mt per year in 2010, 2011 and 2012).
These credits will be bankable and tradable. The government
is seeking feedback until May 18, 2008, on the proposed
eligibility and allocation rules for the credits.

Establishing a Carbon Price Signal
10. (U) In early January 2008, in response to a government
request for advice on reducing GHG emissions over the longer
term, Canada's arms-length advisory body, the National
Roundtable on the Environment and Economy (NRTEE),
recommended the federal government "implement a strong,
clear, consistent and certain GHG emission price signal
across the entire Canadian economy as soon as possible in
order to successfully shift Canada to a lower GHG emissions
pathway" and institute an "emission tax or a cap-and-trade
system or a combination of the two." This newest iteration
of the "Turning the Corner" plan emphasizes the government's
intent to take up the NRTEE recommendation and establish "a
market price for carbon."

OTTAWA 00000446 003 OF 004

11. (U) Under the Regulatory Framework, firms are offered
several different options to meet their emissions intensity
targets: they may undertake in-house abatement, or they may
contribute to the new government-managed "Technology Fund,"
acquire emission credits from other domestic regulated
industries, purchase offset credits from domestic sources
outside of regulated sectors, or use CDM. In the
government's economic modeling, the lowest cost option, the
Technology Fund's contribution rate of C$15 per ton CO2
equivalent in 2010-12, has the effect of moderating the price
in the early years of the regime; the cost of contributions
to the Technology Fund then rises to C$20 per ton in 2013 and
beyond, but at the same time the maximum allowable Fund
contributions decline from 70 percent of a firm's regulatory
obligation in 2010 to zero by 2018. Receipts into the Fund
will be invested in qualifying GHG emissions reductions
technology projects.

12. (U) This structure, coupled with the required emissions
intensity improvements rate of 2 per cent per year after
2010, means the carbon price signaled by the overall
framework to industry increases steadily. As a result, by
about 2015, the Fund is beginning to play a marginal role in
setting that price signal for industrial reductions, and it
is instead the market price of emissions (i.e., what it costs
firms to achieve actual reductions) that drives the selection
of compliance options in the model. By 2018, firms will be
responding to carbon (CO2 equivalent) prices expected to be
in the range of C$65 per ton. The government anticipates
that at this price in-house reductions and purchase of
offsets from outside the regulated sectors will be
cost-competitive options. (Note: Although the government has
yet to fully address how it will enforce compliance, we note
the Minister of the Environment has certain administrative
authorities granted by the Canadian Environmental Protection
Act (1999) that may be applied. End note.)

Market Balkanization?
13. (SBU) Through the domestic offsets mechanism noted
earlier, the plan "takes the first step to set up a carbon
emissions trading market," the second key NRTEE
recommendation. However, as the federal government moves
forward with plans to create a trading system for greenhouse
gas emissions, significant hurdles remain. For example, the
federal plan anticipates a market for emissions credits
across Canada, irrespective of provincial boundaries, but
Alberta insists companies in Alberta can only purchase
offsets to meet their emissions targets from suppliers in
that province. As Alberta Premier Stelmach noted, "We're
not....looking at an interregional transfer of wealth."
Meanwhile Manitoba and British Columbia are collaborating in
developing a regional emissions markets with a number of
American states in the Western Climate Initiative. Quebec
and Ontario are observers in, and eventually want to join,
the Regional Greenhouse Gas Initiative (RGGI) of northeastern
and mid-Atlantic states. "Turning the Corner" notes that
Canada would consider recognizing reductions originating in
the United States if the U.S. establishes a comparable
regulatory system.

Just Another Step in a Long Process
14. (U) This version of the regulatory framework is but
another step in this government's iterative process to
Qanother step in this government's iterative process to
develop a workable climate change policy that began in
October 2006 with Bill C-30 and the affiliated "Notice of
Intent in Regulate" (Ref C), followed by the unveiling of the
original Turning the Corner plan in April 2007 (Ref B). The
government has also announced a grab bag of federal grants
and policy initiatives across the climate change spectrum
(Ref A). We understand, however, that this edition of the
framework is the final post-consultation version with
validated targets and measures, and will be translated into
regulatory language. Draft regulations are expected to be
published in the Canada Gazette, Part I, for public comment
in the fall of 2008. The final regulations are expected to
be approved and published in the Canada Gazette, Part II, in
the fall of 2009 and come into force on January 1, 2010.

15. (U) The April 2007 Turning the Corner plan covered other
air pollutants (SOx, NOx, and volatile organic compounds) as
well as greenhouse gases. The government anticipates adding

OTTAWA 00000446 004 OF 004

the air pollutant regulatory elements to the draft
regulations for publication in the Canada Gazette, Part I,
this fall.

16. (SBU) Effective climate policy in Canada still faces a
number of conceptual and practical hurdles, and the prospect
of federal -- and provincial -- regulation introducing
serious unintended consequences is very real. The keystone
of the government's plan is a technology solution (carbon
capture and storage) whose effectiveness on a large scale has
not yet been demonstrated. Key CCS parameters are
ill-defined, including the list of "pre-certified CCS"
projects that can be used to offset emissions. And the
development of a GHG emissions trading market is proceeding
piece meal across the country. Coherent solutions to these
challenges will have to be addressed in the next step in the
process, the draft regulations to be published in the autumn
of 2008, for this plan to continue turning the corner on
climate change. End Comment.

17. (U) The regulatory framework for industrial greenhouse
gas emissions will apply to the following sectors: 1) oil
sands, 2) electricity, 3) petroleum refining, 4) chemicals,
5) fertilizers, 6) upstream oil and gas, 7) natural gas
pipelines, 8) potash, 9) iron ore pelletizing, 10) lime, 11)
iron and steel, 12) titanium, 13) pulp and paper, 14)
aluminum and alumina, 15) cement, and 16) base metal smelting.

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