A Climate Change Plan for the Purposes of the Kyoto Protocol Implementation Act – 2007

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The Economics of the Kyoto Protocol Implementation Act

In the face of rising greenhouse gas emissions directly tied to our resource-based economy, growing population, and vast, northern geography, the economics of the Kyoto Protocol Implementation Act for Canada are significant.

The Kyoto Protocol requires parties to focus principally on domestic measures to reduce their greenhouse gas emissions. This is the preferred approach of most countries with targets as described in Annex B of the Kyoto Protocol, and for good reason. Addressing domestic sources of greenhouse gas emissions not only results in certain and measurable greenhouse gas reductions, but also leads to numerous co-benefits, including reductions in local and regional air pollutants that pose human health and other risks. Over the longer term, reducing emissions at home may also strengthen the energy efficiency and technological competitiveness of domestic businesses and entrepreneurs, thereby better positioning them to compete, and potentially lead, in an increasingly carbon-constrained global economy.

In seeking to mitigate the economic risk associated with reducing greenhouse gas emissions, the Government has carefully examined all of its compliance options under the Kyoto Protocol. This includes the potential to rely on the purchase of international credits under the Protocol's "flexibility mechanisms" to meet a major share of Canada's reduction target. These mechanisms are:

At this time, project-based credits generated from the CDM (known as Certified Emission Reductions or CERs) and JI represent the main option for environmentally credible international purchases. There is, however, considerable uncertainty about the volume of project-based credits available for purchase. Based on preliminary information from the United Nations Environment Programme (UNEP) Risoe Centre on Energy, Climate and Sustainable Development, about 85 million CERs and other project-based credits (from Joint Implementation) will be available per year for purchase between 2008 and 20126. Under the unlikely assumption that Canada could acquire all of these credits, this equates to less than one-third of Canada's annual reduction target.

An alternative compliance option to purchasing project-based credits would be to purchase Assigned Amount Units (AAUs), which are emission allowance units granted to each country according to their respective target level of greenhouse gas emissions in the Kyoto Protocol. Those countries that no longer need their AAUs to be in compliance with their Kyoto Protocol targets may offer them for sale to other countries.

Canada and several other countries have serious concerns about the environmental quality of AAU credits at this time, since the vast majority have been generated due to economic collapse or falling production, and not for reasons directly related to efforts to curb emissions. These concerns apply to "greened" AAUs as well, which derive from efforts to ensure that funds generated by the sale of excess AAUs be dedicated to projects that will result in real, incremental greenhouse gas reductions in the near future. At this point, methods to track and ensure the "greening" of AAUs are still at the development stage.

Relying on such international credits would do little to encourage investment and innovation at home, giving a long term economic and environmental advantage to others. Over time, as carbon markets become more mature and more global in nature, with robust emission reduction verification systems, Canadian firms may have increased access to international markets for the purposes of compliance with Canadian regulations. The Government of Canada will not, however, purchase credits or otherwise participate in the carbon market.

Unfortunately, when cast against a timeframe that requires Canada to begin reducing its greenhouse gas emissions by one-third beginning in January 2008, it is evident that domestic action would have to be buttressed by some international purchase of emission credits. Even allowing for such purchases, the government would need to take further drastic action that would overwhelm the environmental and other benefits of action on climate change that Canadians are seeking. These measures would require placing the equivalent of a tax on energy, impacting both large industrial emitters of greenhouse gases and individual consumers. The Government has examined this scenario and rejected it as a viable policy option. Key conclusions under this scenario are presented below, while a more detailed account can be found in the Government's Report entitled The Cost of Bill C-288 to Canadian Families and Business.

The Government's analysis, broadly endorsed by some of Canada's leading economists, indicates that Canadian Gross Domestic Product (GDP) would decline by more than 6.5% relative to current projections in 2008 as a result of strict adherence to the Kyoto Protocol's emission reduction target for Canada. This would imply a deep recession in 2008, with a one-year net loss of national economic activity in the range of $51 billion relative to 2007 levels. By way of comparison, the most severe recession in the post-World War II period for Canada, as measured by the fall in real GDP, was in 1981-1982. Real GDP fell 4.9% between the second quarter of 1981 and the fourth quarter of 1982.

All provinces and sectors would experience significant declines in economic activity under this scenario, while employment levels would fall by about 1.7% (or 276,000 jobs) between 2007 and 2009. In addition, there would be a reduction of real per capita personal disposable income levels from forecast levels of around 2.5% in 2009 (or about $1,000 per Canadian in today's dollars).

Meeting Canada's Kyoto Protocol target on the timeline proposed in the Kyoto Protocol Implementation Act would also have implications for energy prices faced by Canadian consumers. Natural gas prices could potentially more than double in the early years of the 2008-2012 period, while electricity prices could rise by about 50% on average after 2010. Prices for transportation fuels would also inevitably rise by a large margin -- roughly 60%.

These statistics demonstrate the immense challenges associated with trying to meet our Kyoto Protocol target following a decade in which our emissions have grown steadily.

6 Certified Emission Reductions (CERs) are issued for emission reductions from CDM project activities and are equal to 1 metric tonne of CO2 equivalent. Based on information from the UNEP Risoe Centre on Energy, Climate and Sustainable Development, the number of CERs represents roughly 93% of the total project-based credits forecast to 2012 (credits from Joint Implementation -- Emissions Reduction Units -- account for only 7%).

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