Introduction

In April of 2007 the federal government released a framework for managing greenhouse gas (GHG) emissions in Canada. The framework included as a key element regulated emissions intensity targets for industry as well as a number of flexibility mechanisms that can be used to meet those targets. On March 10th, 2008, the federal government elaborated its plan by providing additional detail on the targets for new units and on the application of the flexibility mechanisms.¹

The federal framework includes targets that are out of step with climate change science as well as many potential loopholes that threaten to erode the environmental integrity of the system. The following backgrounder describes the federal system as well as the primary concerns with it. 

Description of the Framework

The April 2007 framework included an overall national target to reduce GHG emissions to 20% below 2006 levels by 2020 and 60-70% below 2006 levels by 2050. A key element of the framework are emissions targets for industrial emitters and their associated flexibility mechanisms.

Targets

The targets will be emissions intensity targets, meaning targets are written on the basis of emissions per unit of production (i.e. tonnes per barrels of oil, tonnes per mega watt hours (MWh) of electricity, etc.). The targets will also vary between existing and new facilities, where new facilities are defined as those that begin operation after 2004.

• Existing facilities will have reduction targets of 18% starting in 2010, with an additional 2% “continuous improvement"² target added in every subsequent year.

• New facilities will have no target for the first three years of operation. In the fourth year of operation, they will receive a 2% reduction target with an additional 2%“continuous improvement" target for every subsequent year. 

The targets will be measured against a baseline emissions intensity that is set according to sector and varies between existing and new facilities. For existing facilities:

• In most sectors (oil sands, refineries etc.) the baseline will be the facility’s own intensity in 2006,

• In the electricity sector, the baseline will be “corporate-specific”, meaning the 2006 emissions intensity of all electricity generation units belonging to the company that owns the facility,

• In the pulp and paper, aluminium, chemicals and lime sectors, the baseline will be the emissions intensity in 2006 of the sector as a whole.

For new facilities, some baselines will be set using a “cleaner fuel” standard that varies by sector:

• In the electricity sector, the standard will be fuel-specific, meaning that it varies for different kinds of plants. The standard for coal will be based on the emissions of an up-to-date coal plant, the standard for natural gas generation will be based on an up-to-date natural gas plant, and so on.³

• For other sectors, including the oil sands, the standard will be set at what the facility would emit if it used natural gas as a fuel. There is an exception for facilities that have higher emissions than this standard but that are built ready to be retrofitted with carbon capture and storage technology, these facilities will receive baselines equal to their actual emissions intensity.

In other sectors, including aluminium, pulp and paper, and cement, the baseline for new facilities will be set at 18% below their sector’s 2006 intensity times the relevant continuous improvement charge⁴.

Finally, for base metal smelters, the baseline for new facilities will be based on the facility’s own intensity in its third year of operation.

Cogeneration units, which produce heat and electricity at the same time, will be given a baseline that is higher than the actual emissions of the facility. The facility will receive two baselines, one for the electricity produced from the facility and one for heat. Both baselines will be set well above the actual emissions that could reasonably be attributed to those activities.⁵ In addition, the electricity portion of all cogeneration facilities (both existing and new) will receive no emission reduction target.

Coal-fired power plants and oil sands plants that start up in 2012 or later will face an additional standard. This target will be based on carbon capture and storage (CCS), meaning that it will require these facilities to meet a target that reflects what their emissions would be if they had captured and stored much of the CO2 from their facility. This standard comes into force in 2018.

In some sectors, the government has also set minimum size thresholds. This means that facilities smaller than the threshold will not face a regulated target. In the oil and gas sector, this threshold is set at 3 kilotonnes (kt) of emissions per year per facility and 10,000 barrels of oil a day of production per company. In the chemicals and fertilizer industry, the threshold will be 50kt per facility. In the electricity sector, the regulations will apply to units greater than 10 megawatts (MW) in size.

Compliance Mechanisms

Emitters will be able to use a number of compliance mechanisms to meet their emissions intensity targets. In order to comply with targets, in general, facilities can pursue:

1. On-site emissions reductions. A large emitter can make emissions reductions on its own industrial site, thus bringing the facility’s emissions closer to its target.

2. Emissions credits from other large emitters. Those emitters that do better than their intensity target will generate credits that they can sell to other companies.

3. Emissions Offsets. Ideally, offset credits represent real, incremental reductions in emissions from sectors that will not be subject to regulated targets. Example of potential offset projects include renewable energy projects or “demand side management” to reduce electricity consumption. The offset system will certify these projects when they meet the government’s criteria; once certified, regulated emitters can purchase them to be used for compliance with their obligations.

4. The Technology Fund. Emitters can pay a fee into a technology fund at a rate that starts at $15 per tonne in 2010 and rises to almost $25 per tonne in 2017. Emitters can use the fund to meet 70% of their target obligation in 2010, and this limit falls every year until the fund is phased out in 2018.

5. Credits for early action. The government has set aside 15Mt for actions to reduce emissions taken by large industry between 1992 and 2006. These credits will be divided among the emitters who qualify.

In addition to these compliance mechanisms, which are open to all emitters, there are also two sector specific mechanisms which emitters can use to comply with their obligations. These are:

1. Pre-certified Project Investments. The government will develop a list of eligible projects, and emitters will be able to invest in these projects in a manner similar to investments in the technology fund. Emitters can pursue these projects on their own or as part of a joint venture. The projects are meant to be large-scale and transformative, and could include nuclear energy. For most projects, the rules governing the technology fund will apply: the price will be set starting at $15 per tonne and increasing thereafter, and use of the mechanism will be limited to 70% of an emitter’s compliance in 2010. Like the Technology Fund, this mechanism will be phased out in 2018. However, firms in the oil sands, coal plants, and several other sectors will be allowed to use the scheme to meet 100% of their emissions reduction obligation until 2018 if they invest in CCS.

2. Power plant start-ups and shut-downs. There is a separate mechanism for electricity companies to meet their obligations which occurs through the application of targets on a corporate basis. In this sector, firms can meet their targets by constructing nuclear power facilities, large hydro projects or renewable energy generation units, or by shutting down emitting facilities.

Concerns with the framework:

The government's original framework includes targets that are out of step with the climate change science as well as a number of potential loopholes that threaten to erode the environmental integrity of the system. The update to the framework preserved these problematic features. Specifically, some of the key concerns with the government’s original framework include:

• Targets that are out of step with climate science. The framework’s overall targets, which would allow Canada's total emissions to remain above 1990 levels in 2020, are widely out of step with what science says will be needed for the world to fend off the global climate crisis. For industrialized countries, the science shows that targets on the order of at least 25% below the 1990 level by 2020 are needed to make an adequate contribution to preventing dangerous climate change.

• An intensity based system that will allow emissions to continue to grow .The framework employs intensity-based targets rather than a true cap-and-trade emissions trading system that would place an absolute limit on emissions. All large-scale emissions trading systems in the world, including the European Union's GHG emissions trading system and the main air pollution trading systems in the United States, are true cap-and-trade systems.

• A series of potential loopholes that threaten to erode the environmental integrity of the system. The framework allows emitters to comply with emissions reduction targets by paying into a technology fund. However, the price of this mechanism is set much lower than what is needed to drive real action on climate change and there is no guarantee that the fund will yield equivalent real reductions in the future. 

The federal government's updated framework, released on March 10, 2008, introduces stronger targets for some oil sands and coal-fired power plants starting in 2018. However, the updated framework also introduces a series of measures that threaten the environmental integrity of the system. The updated framework:

• Delays carbon capture and storage targets until 2018. While the framework proposes to set targets that could require significant reductions in emissions from some oil sands and coal plants, the time line of the targets should have been much more ambitious. Because the current federal CCS targets allow considerable flexibility in how they are met, i.e. emitters can use offsets or other emission reduction credits to meet their targets if they can't install CCS technology in the required time-frame, an ambitious time-line for the targets would ensure an accelerated deployment of CCS technology while allowing sufficient flexibility to ensure companies are able to comply with targets.

• Caps the cost of compliance for oil sands and coal plants until 2018 at extremely low levels. The framework removes the cap on access to pre-certified project investments for carbon capture and storage (CCS) projects by oil sands and electricity companies, thereby effectively shielding qualifying oil sands projects from any price on their emissions until 2018. In contrast, the estimated emissions price in the government's economic modelling for the framework is $25 per tonne in 2010, rising to around $65 per tonne in 2017. This policy change brings the system even more into alignment with the current Alberta GHG regulations, which require large emitters to meet intensity targets but allows industry to use a technology fund at a the price of $15 per tonne to meet 100% of their regulatory obligation.

• Gives the newest coal and oil sands an easy ride. Most oil sands and coal plants that come on line between 2005 and 2012 will get a target that starts at 2% in their fourth year of operation and compounds by 2% each year after that. This means that a new oil sand or coal plant that starts up in 2010 will have a target of 2% below their baseline in 2013, growing to just 15% by 2020.

• Lets nuclear into the emissions trading system. Under the revised framework, electricity companies will be given corporate targets that allow them to aggregate their coal plants with large hydro dams and nuclear plants to determine if they meet their emissions intensity targets. The result is that bringing a new nuclear plant on stream would move a corporation closer to compliance with its target.

• Gives credits to existing forestry, oil sands and other industrial plants. The cogeneration baseline is higher than the actual emissions of cogeneration plants, and gives no emissions target to the electricity portion of the plant. This will result in credits being given to existing cogeneration facilities from oil sands, forestry and other sectors. However, many of those plants were put in place for economic and not environmental reasons, which means that they do not go beyond business as usual and do not represent incremental emission reductions.

• Includes even less oil and gas emissions in the system. The threshold that the government set for the regulatory system is higher than that used in the federal government’s 2007 reporting requirements, thus allowing even more oil and gas emissions to be excluded from the system. With the new threshold, 30% of the emissions from the upstream oil and gas industry are expected to be excluded from any obligation.