If the premiers of Ontario and Quebec come out swinging against a federal plant to hit the oil sands facilities with "intensity" targets while they hit manufacturing industries with absolute targets they will look very, very foolish in the not-to-distant future.  It is time to distinguish between what you need to rebuild your economies as provinces and anti-Conservative politicking (says she, a Lbieral).

The bottom line is that environmental non-governmental organizations (ENGO) have sold the media on the invalidity of intensity targets, so if your Premiers come out swinging you can probably score a hit on the federal Conservatives in the short term.  But the fact is that when emission limits are assigned to facilities, intensity limits are much harder to comply with than absolute limits, especially if the absolute limits are relative to operating emissions for the base year of, say, 2006 or 2007.  

The ENGO argument against intensity targets is valid only if those targets define national, province-wide or sectoral objectives. An intensity limit is always, by definition, an absolute limit when it is applied at the facility level, especially when it is coordinated with a stringent emission standard for new sources.  At the facility level, an operator cannot achieve compliance with an intensity limit simply by cutting back output. An intensity limit compels the operator to invest in equipment to cut back emissions per unit of output.  

In every existing Canadian federal and provincial pollution regulation, as well as every US cap and trade market, an existing facility is deemed a "new facility" if it applies for a permit amendment to increase emissions.  In other words, as long as the feds introduce a credible and stringent New Source Performance Standard (the most stringent limit which new facility developers have to comply) along with the emission limits for Existing Facilities, intensity-based facility limits are potentially much more difficult and costly to comply with than absolute facility limits.  I have not seen the federal regulatory proposal, but all public indications to date are that it will include a set of very stringent New Source Performance Standards.

As the output declines from facilities that have intensity-based emission limits, so do their overall effective entitlements/rights to emit.  On the other hand, if a facility operator is assigned an absolute emission limit, they can simply cut back output to comply.  If that absolute limit is defined as a % reduction relative to, say, 2006 actual emissions levels, virtually every manufacturer in Ontario is already at least part way to compliance given the reduction in product output they have experienced due to the recession.

As you know, I continue to remind anyone who asks that every existing long-standing cap and trade regime has assigned BOTH intensity and absolute limits to all of the facilities covered by the cap—including the US Acid Rain program SO2 market rule. In 39 out of the 40 existing precedents, the intensity limits drive the emission reduction agenda, not the absolute limits.  

If your objective is to cut emissions, you define the intensity limits first.  If your objective is to allocate quota on the basis of historical market share, you assign absolute limits first.  Remember, cap and trade is simply quota-based supply management and works just like Canada’s dairy quota regime.

If Ontario and Quebec are assigned absolute limits based on historical manufacturing sector emissions, that means the feds have decided (wrongly in my view) to ensure that Ontario and Quebec remain the manufacturing centres of Canada and will not have to compete with the rest of Canada for that status.  

Look at the dairy quota regime. Quebec is legally assigned 37% of Canada’s dairy quota, while BC gets only 4%, even though BC now houses 13% of the dairy-eating population.  Canada’s dairy market would be much more efficient if BC farmers were allowed to increase their output, but the national dairy quota regime put in place in the early 1970s—which based absolute production shares on historical market shares—sets the Quebec and maritime provinces’ shares of the national dairy market at historical levels.  Historically, those regions had larger shares of the national population and dairy demand.  So now BC consumers have to import dairy products from the eastern provinces due to the quota regime that set market shares in stone.

There are many, many reasons why assigning absolute emission limits to sectors and facilities that are defined as % reductions relative to historical CO2 levels to drive CO2 reductions—which usually means allocating CO2 discharge rights to provinces based on historical levels—is a very, very bad idea for Canada. Not the least of these is that any CO2 regulatory regime that evolves, structurally, into a mirror of Canada’s dairy quota regime will likely hasten the break up of the nation.  

In am likely to prove very concerned about the federal regulatory proposal if it, in fact, takes the shape that the media has suggested over the past days (and it may well do so…I don’t know). But it is well past time that your Premiers shifted from their rhetoric in these matters to understanding-based dialogue.

Assigning intensity limits to petroleum producers and absolute limits to manufacturers most likely gives the manufacturers the cost break in this deal, not the other way around as is suggested in the media.  If your Premiers come out shooting against intensity targets they could win a short term media war against the federal government, because the media clearly does not get this.  

But that short-term win will be entirely at the expense of your manufacturing economies in the medium and long terms.