Creating a national GHG compliance regime will be problematic because Canada's Constitution does not address the environment, says Dennis Mahony in Financial Post

July 23, 2008

Climate-change concerns are driving Canada's federal and provincial governments to adopt competing regulatory regimes dealing with greenhouse gas emissions (GHG).

The different approaches could create a fragmented regulatory framework. "If the federal framework and the various provincial frameworks are consistent, everything will be fine, but what are the chances of that?" asks Dennis Mahony. "Industry dislikes a patchwork approach."

The federal government's climate-change framework features a "soft" cap-and-trade program, where emission targets are based on intensity rather than absolute reductions under a hard-cap scheme. Soft caps allow companies to increase production without incurring additional penalties, as long as they stay within their ratios. A hard cap system sets a limit on emissions that is unrelated to production increases; a company is subject to penalties when it exceeds that limit.

"The federal government says that intensity targets promote efficiency without putting brakes on the economy," says Dennis. Under the federal scheme, regulated businesses that operated in 2003 or earlier have until 2010 to reduce emission intensity on average by 18% of 2006 levels. After 2010, they will have to reduce emissions intensity by an additional 2% each year until 2020. Businesses that don't meet their targets become subject to a $15-per-tonne carbon tax from 2010 to 2012, rising to $20 per tonne in 2013.

Alberta was the first to set GHG limits, in 2007 under the Specified Gas Emitters Regulation. Facilities that emit more than 100,000 tonnes of GHG must reduce emission intensity by up to 12% of their average emissions between 2003 and 2005. New facilities must reduce their intensity by 2% annually after their third operating year. Alberta also allows facilities to pay a $15-per-tonne carbon tax for excess emissions, while those under the specified limits can earn tradable emissions credits. Contrast that to Ontario and Québec, which announced in June the establishment of a hard cap-and-trade regime. B. C.'s broad carbon tax on fossil fuels took effect on July 1 this year, and is expected to yield $1.85-billion in revenue over three years. Québec also has a carbon tax that affects energy producers and importers, rather than fossil fuel end users. It yields about $200 million annually and applies to only about 50 companies operating in the electricity, gasoline, heating oil and natural gas sectors. And the new federal Liberal policy known as The Green Shift postulates a revenue-neutral hard-cap carbon tax, expected to generate $15.4-billion in its fourth year.

"The biggest topic of discussion with all these developments is what a national compliance regime would look like," Dennis says. "But what's not often discussed is the constitutional authority to regulate, which is a problem because the Constitution doesn't address the environment. If the directions of these cap-and-trade systems keep diverging, a legal battle could very well be in the offing."

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