THE KYOTO PROTOCOL AND CANADA

Gray E. Taylorgtaylor@dwpv.com1 First Canadian Place, 44th Floor

Toronto, ON M5X 1B1

Ph: 416 863 5533 Fax: 416 863 0871

www.dwpv.com

CBA National Environmental , Energy and Resources

Law Section/Department of Justice Annual MeetingOctober 22, 2004

Ottawa Ontario

2

FRAMEWORK CONVENTION ON CLIMATECHANGE - 1992

• FCCC resulted from:• Scientific evidence

• UN initiative

• Experience from Vienna Convention on Protecting the Ozone Layer (1985) and the Montreal Protocol (1987 FCCC signed by 154 countries at Rio de Janiero Earth Summit in 1992

• FCCC in force March, 1994

• Ratified by all major countries including, US, Canada, EU, Japan, Russia, China and India

• Goals included return by 2000 to 1990 GHS emission levels for developed countries (including countries with “economies in transition”))

3

KEY PRINCIPLES OF FCCC

• Stabilization of GHG concentrations at non-dangerous levels• Actions to be

• based on equity• in accordance with common but differentiated responsibilities• in accordance with respective capabilities

• Leadership by developed countries• Consideration of developing countries to avoid disproportionate or abnormal

burden or adverse effects of climate change• Cost effective (but precautionary) policies and measures• “Sustainable Development” goal• No disguised trade restrictions

4

KYOTO PROTOCOL

• objective at the first Conference of the Parties in 1995 (COP1) in Berlin was to move to numerical, binding protocol (“Berlin Mandate”)

• agreed December, 1997 but not in effect

• numerical limits (“caps”) on developed country GHG emissions for 2008-2012 (see Annex B attached)

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

• non-compliance “penalties”

• Kyoto Mechanisms

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CAPSANNEX B

Party Quantified Emission Limitation or Reduction Commitment (% of base year period)

Australia 108 Hungary* 94 Portugal 92

Austria 92 Iceland 110 Romania * 92

Belgium 92 Ireland 92 Russian

Bulgaria* 92 Italy 92 Federation* 100

Canada 94 Japan 94 Slovakia* 92

Croatia* 95 Latvia * 92 Slovenia* 92

Czech Republic* 92 Liechtenstein 92 Spain 92

Denmark 92 Lithuania * 92 Sweden 92

Estonia* 92 Luxembourg 92 Switzerland 92

European Community 92 Monaco 92 Ukraine* 100

Finland 92 Netherlands 92 United Kingdom

France 92 New Zealand 100 92

Germany 92 Norway 101 United States 93

Greece 92 Poland * 94

* Countries that are undergoing the process of transition to a market economy.

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KYOTO PROTOCOL – RATIFICATION

To be effective, requires ratification by 55 developed countries with 55%

of the 1990 CO2 (not GHG) emission

US is 36.1% of 1990 CO2 emissions• US not willing to ratify

• Australia is 2.1%• unlikely to ratify

• Canada is 3.3%• ratified (December, 2002)

• Currently 43.9% of 1990 CO2 emissions have ratified• Russia is 17.4% 43.9%

+17.4%

61.3% > 55%

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KYOTO MECHANISMS

1) Emissions Trading* (*see next slide)

• Countries 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

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Inter-Country Emissions Trading

Country A Country B Country A Country B

Em

issi

on

Lev

els

Before Emissions Trade

Cancelled excess

Cancelled over achievement

Target Overachievement

After Emissions Trade

Excess

AssumeCountry A’s cost to reduce excess is $100

Country B’s cost to overachieve by same amount is $60

Trade results in $40 savings which Country A and Country B can share

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KYOTO MECHANISMS

2) Joint Implementation (“JI”)

• projects in developed country parties that reduce GHG emissions

• generate Emission Reduction Units (“ERUs”)

• host country converts into AAU’s, CERs or RMUs) and assigns to another party or authorized participant*

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KYOTO MECHANISMS

3) 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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WHAT “KYOTO” MEANS

• Allocation to developed country parties of “permits” to emit GHGs

• First Commitment Period is 5 years (2008 – 2012)

• Kyoto Registry

• 5 x “cap”

• allocated in Assigned Amount Units (AAUs)

• Cap is Annex B % x 1990 GHG emissions

• 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

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KYOTO MECHANISMS

• Private entities can participate directly in Kyoto Mechanisms 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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Canada’s Kyoto Challenge

Kyoto Target 571 Mt

2010 Emissions

809 Mt

1990 Emissions 607 Mt

BAU Gap 238 Mt or 30%

Projection

Mt

CO

2 eq

uiv

alen

t

Business as Usual

(1999)

705 Mt

Source: Canadian Climate Change Secretariat, January 2002

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CURRENT FEDERAL PLAN

Total Need 240 million metric tonnes (Mt) of C02 equivalent reductions per yearSources

1) Previous Canadian government initiatives (50 Mt) and sinks (30 Mt)=total 80 Mt

• Both are suspect as to total

2) New Action total 100 Mt• Consumers 20 Mt• Domestic Emissions

Trading System 55 Mt

(sectoral, large final emitters)• Targeted measures

• Renewables 11 Mt• Fugitive emissions

and SME

initiatives 5 Mt• Agriculture, Forestry and Municipal 20 Mt-28 Mt• Government International Purchases of

GHG Reduction Credits 10 Mt

3) Remainder

to be determined (or Clean Energy Exports?) 60 Mt

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LARGE FINAL EMITTERS (LFEs)

• 55 Mt/yr of reductions required under Canadian Climate Change Plan

• Domestic Covenants• Sectoral reductions of approximately 15% from recent intensity

levels• Sectors: thermal electricity, oil and gas, mining and manufacturing

• LFEs to be assisted by:• Domestic emissions trading * (* see next slide)• Access to offsets (agricultural, forestry and perhaps landfills and

others)• Access to international permits

• thus LFEs will purchase CERs and ERUs and perhaps AAUs

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Closed Market Inter-CompanyEmissions Trading

Company A Company B Company A Company B

Em

issi

on

Lev

els

Before Emissions Trade

Cancelledexcess

Cancelledover achievement

After Emissions Trade

AssumeCompany A’s cost to reduce excess is $100

Company B’s cost to overachieve by same amount is $60

Trade results in $40 savings which Company A and Company B can share

Target

Excess

Overachievement

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Open Market Emissions Trading(i.e. “Offsets” Used)

Company A Project X Company A Project X

Em

issi

on

Lev

els

Before Emissions Trade

Reduction No Longer Available

Target

After Emissions Trade

Cancelled excess

Excess

AssumeCompany A’s cost to reduce excess is $100

Company B’s cost to overachieve by same amount is $60

Trade results in $40 savings which Company A and Company B can share

Reduction

Baseline Baseline

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CANADA’S INTERNATIONALPURCHASING OF KYOTO CREDITS

• $15 million investment in Prototype Carbon Fund and more millions into the Biocarbon Fund and Community Development Carbon Fund

• Climate Change Plan• Consider purchase of a minimum of 10 Mt/yr of “international permits”

with priority to permits from CDM/JI projects

• Collaborate with Canadian companies by “pooling” private sector and government expertise and purchasing power

• AAU purchases by Canada (not private sector) to be “greened”

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NATIONAL UNITY

Will Alberta or other Provinces challenge constitutionality of Kyoto?

Gray E. Taylorgtaylor@dwpv.com1 First Canadian Place, 44th FloorToronto, ON M5X 1B1Ph: 416 863 5533 Fax: 416 863 0871www.dwpv.com