VZCZCXRO0537
RR RUEHGA RUEHHA RUEHQU RUEHVC
DE RUEHOT #0446/01 0922111
ZNR UUUUU ZZH
R 012111Z APR 08
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC 7605
INFO RUCNCAN/ALL CANADIAN POSTS COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC
RUEAEPA/EPA WASHDC
RHEHAAA/WHITE HOUSE WASHINGTON DC

UNCLAS SECTION 01 OF 04 OTTAWA 000446 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA, EEB AND OES 
DOE FOR POLICY & INTERNATIONAL AFFAIRS 
EPA FOR INTERNATIONAL AFFAIRS 
WHITE HOUSE FOR CEQ 
 
E.O. 12958: N/A 
TAGS: SENV ENRG CA
SUBJECT: CANADA ANNOUNCES GREATER DETAIL ON CLIMATE POLICY 
 
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 
comment). 
 
¶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 
autumn. 
 
¶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. 
 
Comment 
------- 
¶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. 
 
Visit Canada,s Economy and Environment Forum at 
http://www.intelink.gov/communities/state/can ada 
 
WILKINS