Canada Eyes Emissions' Trade

By HYUN YOUNG LEE

Canada has made early overtures toward matching tougher climate-change rules likely to come in the U.S., but there are still big bumps on the road to creating a North American emissions-credit market.
In its list of priorities for the new session of Parliament, Canada's federal government last week said it would tackle rising emissions of greenhouse gases using methods comparable to those used in Europe, the U.S. and other industrialized countries, methods previously rejected by the current Conservative administration.
"We will work with the provincial governments and our partners to develop and implement a North America-wide cap-and-trade system for greenhouse gases," Governor General Michaëlle Jean said in the speech.
Events south of the border have sparked Canada's embrace of the cap-and-trade mechanism, which would set a fixed emissions limit allowing participating facilities to buy and sell emissions credits as needed. With President-elect Obama coming into power, the U.S. is looking to shake off its reputation as a climate-change laggard.
Mr. Obama last week re-emphasized his commitment to stringent emissions targets. "That will start with a federal cap-and-trade system," he said in a video prepared for a climate-change summit in Los Angeles.
Canada wants to forge as close a bond with the U.S. on emissions as it has in energy, with Prime Minister Stephen Harper calling for a joint climate-change policy days after Mr. Obama's election victory. But this would involve a complete overhaul of Canada's current standards, which are looser and purposefully at odds with cap and trade.
"I don't see any possibility for the Canadian system now to link into what's likely to come out of the U.S.," said Milo Sjardin, who heads North American operations for research firm New Carbon Finance. "The world is moving towards a cap-and-trade system and it just doesn't make sense for Canada to go its own way."
Last year, the Canadian government outlined much-criticized plans to cut emissions intensity, or the ratio of greenhouse gases to industrial output, in the hope that this would slice a fifth off its 2006 emission levels by 2020 without the need for fixed caps.
But if industrial production expands quickly enough, overall greenhouse gases can still rise despite deep cuts in intensity. Over the past two decades, this is precisely what has happened in Alberta's vast oil sands, one of the beneficiaries of Canada's system.
Canada already has some limited carbon emissions trading through the Montréal Climate Exchange, though the federal program isn't slated to start until 2010.
"If and when Canada and the U.S. reach an agreement to recognize each other's [climate-change] efforts, there will eventually have to be some kind of reciprocity or fungibility between the two programs," said Léon Bitton, the exchange's vice president of research and development.
But Mr. Obama wants to cut U.S. emissions to 1990 levels by 2020, creating one of the stiffest cap-and-trade programs in the world, and chop an additional 80% by 2050. The U.S. may prove unwilling to assign equivalent value to credits from Canada's softer plan, weakened further by an array of compliance options that allow companies to meet targets without cutting emissions, such as paying a fixed penalty into a technology fund.
"Canada's a bit like the Lone Ranger -- the Canadians have designed their system differently to anyone else in the world," Mr. Sjardin said. "The Canadian government will need to fall into line if it wants to take part in an international program."
Climate-change policy has already been moving forward at the provincial level. British Columbia has imposed a carbon tax on fossil fuels, which came into force in the summer. In June, Ontario and Quebec, where nearly two-thirds of Canada's population resides, inked a deal to establish a bilateral cap-and-trade system, potentially serving as a foundation for a national plan.
The three provinces, and Manitoba, have committed to a cap-and-trade system with seven U.S. states, including Arizona, California, New Mexico, and Washington, under the Western Climate Initiative, or WCI.
This program is due to start in 2012, the expected launch date for a U.S. federal system, leading some to think the WCI will simply be subsumed into the latter.
Write to Hyun Young Lee at hyunyoung.lee@dowjones.com