Energy Probe

I am not sure where Janet Peace, Vice President of Markets and Business Strategy at the Pew Center on Global Climate Change, gets her estimate that only 10% to 20% of Canadian exports are vulnerable to US trans-border charges under US climate change legislation.

Here is a spreadsheet that shows you Canadian exports to the US and whole world—in current US$ value terms—for 2006 through 2008. In the first spreadsheet I have identified 16 general product categories that are vulnerable to US GHG tariffs. My reference is the Waxman-Markey bill except where the Kerry-Boxer bill is less threatening to Canadian exports—meaning the vulnerable export estimates reflected in the attached are likely conservative. The spreadsheets that follow the first show you the product group breakdown, and which specific commodities are vulnerable to which form of proposed US direct or indirect GHG tariff.

So far, I have only gone through the breakdowns for 3 of the 16 product categories that are generally vulnerable, and I find that if the least aggressive of the current US Congressional climate change cap and trade proposals had been law in 2008, the tariff-vulnerable commodities in those 3 product categories alone accounted for 23% of total Canadian world-wide exports (on an export value basis). 

I am guessing that when I complete the analysis of all 15 generally vulnerable product categories, I will find that somewhere between 30% and 40% of Canadian exports (worldwide) are vulnerable under US cap and trade rules alone.

Then there are the emerging Japanese, South Korean and European cap and trade /tariff proposals. If we posit that Japan and South Korea will adopt US-style cap and trade/tariff rules—as those nations have previously committed to do, after/once the final US rule becomes law—then my guess is that we are going to find that over 60% of Canada’s global exports will be vulnerable to US-style direct and cap and trade, system-based indirect GHG tariffs

In this analysis, I characterize:

•     a government-set,trans-border charge as a "direct" tariff, and

•     a binding obligation for US importers to surrender US GHG allowances covering GHGs arising from the production, transport and/or US end use of the imported products—when the US importers do not receive any free US allowance allocation—as an "indirect" tariff.

Precedents suggest that the US-prescribed GHG allowance liability will be deemed a tax or tariff under world trade and NAFTA rules. Precedents also suggest that the WTO and NAFTA will up hold the US’s right to impose that liability on US importers as long as the tariff on imports is equivalent to the GHG charge on US producers of the same products. 

In 3 very separate ways, the US GHG cap and trade proposals fail to treat imports fairly.  However, if Canada signs on to a general agreement that stipulates there will be (1) international trade in GHG allowances and (2) parties can allocate their domestic allowances as they see fit, as long as the overall domestic allowance supply complies with general limits outlined in the agreement. 

The US is proposing/will propose that every nation will submit a baseline inventory and then cap each nation’s overall right to generate domestic GHG allowances at xx% of total baseline emissions, where xx% will decline over time. Any final US cap and trade law will cover at least 80% of US GHG sources with allowance/quota liabilities, before we take into account exemptions.

The US cap and trade rule achieves this coverage by making producers and importers of carbon-based products liable for US consumer end-use GHGs—meaning the cap and trade rule covers all transportation, buildings and other consumption GHGs. The US will unilaterally stipulate—whether or not this is internationally agreed—that  any trading partner can elect to cover less of their GHG inventory with their own GHG allowance allocation/auctions. But the US will also stipulate—as outlined in Waxman-Markey—that the US compliance regime will not recognize/accept or will discount  foreign GHG allowances that originate in a developed nation that:

•     does not adopt a series of firm, absolute national GHG targets, starting in 2012, that are "comparable" to the final targets that the US adopts—where "comparable" is deemed to be the same in percent-reduction -from-the-same-base-year terms, and where GHGs or emission attributes associated with the production of electricity is assigned to the national inventory of the nation in which the electricity is consumed, not the nation in which the electricity is produced, or

•     cannot verify baseline year (2005 or 2006, likely) GHGs with data collected pursuant to a facility-level emission (all emissions, not just GHGs) reporting regulation that is deemed "comparable" to US facility level reporting rules (Canada fails to meet this test), or

•     has not adopted a "US comparable" GHG reporting standard by 2011 (Canada fails to meet this standard so far), or

•     has failed to adopt a "US comparable" GHG permitting system, or

•     covers any sector/industry/sources that are covered by the US cap and trade system under a domestic Offset System. In other words, if Canadian regulations issue Offset Credits to zero-emission power generators, or to reward entities for investments in building efficiency, the US will not accept any Canadian GHG allowances as compliance units in the US market. These are only two examples of a large number of projects that Environment Canada currently proposes to cover with Canada’s Offset System that fall afoul of the proposed US law.

It is also important to note that all of the US, EU, Japan and South Korea advocate for a national GHG budget-setting process that also defines sector-level GHG quota allocation limits in percent-reduction-from base year terms. Even if the US agrees that Canada’s national GHG limits (sovereign GHG quota allocations) are comparable to US limits, and that Canada could achieve our national reduction targets without matching US sectoral allowance supply limits (as a % of sectoral base year GHGs), the final US law will authorize the administrator of the program to assign tariffs to Canadian commodity imports that originate in any sector that has a more generous GHG quota allocation in Canada than it has in the US. In the attached analysis, I do not account for this potential source of new US tariffs because, obviously, I cannot yet compare Canadian and US sectoral GHG allowances/quota allocations.

Canada’s best defence against the US trade protectionist GHG allowance allocation and trading rules is to NOT implement US-style cap and trade (with tradable allowances/quota) in Canada.

Canada should implement a series of product standards, including federal renewable energy and emission performance standards, that oblige distributors of regulated carbon-based products to report and reduce supply chain GHGs over time. The Canadian standards should permit any combination of regulated product distributors to comply jointly, and also allow them to bank credits in any year that they fail to use the full carbon entitlement implied by the product standards.

It is essential that when Canada develops our product standards, we define performance in GHG/unit of regulated product sales terms, not in %-reduction from base year GHG terms. That is because in most regulated product classes, Canadian producers are already low-GHG intensity suppliers. 

So, for example, assume we bind to a national and sectoral limits defined as a "20% reduction from 2005 levels by 2020". That means that the US aluminum industry has to cut sector average GHGs from roughly 12 TCO2e per Tonne of aluminum output to 10 TCO2e/T Al—including GHGs associated with the smelters’ consumption of electricity. 

But it also means that the US can hold Canadian aluminum producers to a standard of 5 TCO2e/T Al (and apply tariffs to our aluminum exports if we fail to cut our sectoral average GHG discharge rate from the current rate of roughly 6 TCO2e/ T Al). Canada currently exports over 80% of our domestic aluminum output to the US, and we export well over 90% of our output worldwide. Obviously it will be less costly for US producers to up grade their older smelters to cut GHGs to 10 TCO2e/T Al than for Canadian smelters to cut GHGs from 6 to 5 TCO2e/T Al.

So the US (and other nations to whom we export aluminum and which are high GHG/T Al producers in their own right) should attract significant new investment in US smelters—at the expense of Canadian exporters’ US market share—even though Canadian aluminum output is already much less GHG intensive than US output will be AFTER the US achieves full compliance with the stated performance target.

Canada can break down the US protectionist play, but only with a preemptive regulatory agenda. Canadian GHG performance standard should stipulate, for example, that any entity that distributes aluminum in Canada shall report global supply chain GHGs (this is doable if we adopt most—but not necessarily all—of the GHG reporting standard that is already law in the US) and demonstrate, that the GHG intensity of their Canadian sales (on a sales porftolio average basis) is, say,  9 TCO2e/T Al in 2012, declining to, say, 7 TCO2e/T Al by 2020. The US will argue that this standard is not "US comparable", because it imposes no GHG reduction obligation on most Canadian smelters.

However, Canada could win WTO and NAFTA challenges if/when the US introduces tariffs on Canadian aluminum exports, because we will be able to demonstrate that the GHG intensity of US output is much higher than the GHG intensity of Canada output, before, during and after the 2012 – 2020 budget period.

The Canadian product standard should incorporate credit trading and banking under the emission performance standard, but Canada should not issue credits to domestic aluminum producers on the basis of the difference between the regulated 7 TCO2e/T Al GHG standard and actual emissions of 6 TCO2e/T Al for plants whose emission levels are 6 TCO2e/T Al before the product standard is implemented. US law will impose on Canada the obligation to erect a domestic GHG permit system (and WTO precedents—see the reformulated gasoline case—suggest we can’t get out of this). 

Canadian GHG permits should cap facility-level GHGs in two ways: (1) absolutely, at, say, 2000-2008 average levels multiplied by, say, 1.1, and (2) GHGs/T Al output at 2005-2008 average actual rates. No Canadian smelter should be permitted to exceed the absolute facility level GHG limit outlined in its permit, no matter how many GHG credits the operator might have in the bank. But any time an operator reports actual GHGs/T Al lower than the permitted intensity level, that operator would earn bankable, tradable GHG credits equal to the difference between the actual and permitted intensity rate multiplied by its annual output.

Note, that this procedure puts two distinctly different market signals in play. Aluminum distributors are still free to source their supply from anywhere in the world, including very GHG-intensive smelters. But the more they source from very GHG-intensive smelters, the more they also have to source from extra-low GHG intensity suppliers. 

Distributors will immediately start to introduce a wholesale price differential, paying more for less GHG intensive feedstock and less for more GHG-intensive feedstock and intermediate products. In reaction to the product standard the market (as opposed to government) puts a price on carbon. This emission performance standard ("EPS") covers domestic production and imports equally, without any need for any tariff, because it covers the GHG or carbon intensity of "sales", not output.

But while the aluminum distributors are the obligated parties under the emission performance standard ("EPS") regulation, the permitting and crediting system covers only domestic producers of aluminum. Bankable Canadian GHG credits (marketable to Canadian distributors of regulated carbon products) are issued only to Canadian operators of GHG permitted facilities who cut their operating GHG intensities. The GHG permits contain both absolute GHG limits (as the environmental community requires) AND intensity-based GHG limits (the mechanism we need to use to drive emission reductions).

The GHG permit/crediting regime rewards entities that invest in GHG reductions in continuing Canadian operations, but there is no gain in the crediting process for operators who elect to shut down or cut back Canadian production to reduce GHGs.

We should anticipate that the US will react to this Canadian scheme as "protectionist", demanding that Canada credit US aluminum producers who supply Canada on the same basis we credit Canadian aluminum producers. WTO rules will allow Canada to respond by issuing Canadian GHG credits only to US aluminum producers who cut GHGs/T Al below the Canadian sector average GHG/T Al rate. We do not have to issue Canadian GHG credits to US suppliers whose GHG/T Al rate is higher than the current Canadian average.  (This is, in fact, how the US treats reformulated gasoline imports from Canada, which treatment the WTO upheld.)

The US has a long history of defining "US comparable" as meaning that the US trading partner has to literally implement US standards. And the WTO has a long history of precedents of ruling against the US when the US does this. The WTO defines "comparable" to mean comparable environmental outcomes, not comparable legislation. 

WTO tribunals will ask: do global GHGs go up or down if/when US output is substituted for Canadian imports under the US scheme? The answer is they go up.  The WTO will, therefore, rule against the US tariffs.

Perhaps more importantly, by implementing a US comparable permitting system, building crediting into permitting and promulgating a federal Renewable Energy Standard and EPSs for the nine critical commodities that dominate our GHG inventory—as soon as possible and before the US passes final law—Canada turns the entire table in the Canada-US "trade protectionism" dialogue.

Finally, China, India and other developing nations should be much more comfortable binding to a  set of common international Renewable Energy and EPS-style product standards as long as the product standards:

•      stipulate numerical GHG/unit of sales performance standards, not a %-reduction-from a base level GHG/unit rate definition of "performance and

•      distributors of regulated products are permitted to comply on a portfolio sales average basis (as opposed to being required to meet the GHG standard for every batch sold.

While it complicates the short-term political landscape somewhat to introduce these alternative market measures at this time, in fact they are much easier and much less expensive to administer and comply with than US-proposed allowance allocations and trading schemes.

It is also important to note that the emission reduction drivers in all US climate change bills that have passed 2nd reading are product standards (the US federal Renewable Electricity Standard, the Electricity Efficiency Standard, the Renewable Fuel Standard, the Low Carbon Fuel Standard, the CAFE standard, new energy efficiency standards for appliances, buildings and industrial combustion units, etc.) In moving first on product standards, Canadian legislators will actually be acting in concert with the material parts of proposed US laws.

After the product standards are in place (with credit trading and banking, as in the existing US laws and proposals), Canadian negotiators can reasonably ask: and why do we need to lay quota-based supply management (allowance allocation and trading rules) on top of these already highly efficient market measures? The answer is: there is no need for quota allocation and trading other than to serve governments desire to use quota allocation to effect barriers to trade and transfer wealth from already more efficient nations to less efficient nations.

The quickest and most collegial way for Canadian negotiators to bring this reality to light would be to gazette two or three Canadian versions of existing and proposed US product standards before December 2009.

The principal reason I started analyzing the Canadian export (and import) data was that I feel that I need to be familiar with this data in order to develop a sense of what reasonable straw-dog GHG/unit of sales standards actually look like, given our current global supply  and export sales mixes.

Tim Flannery, a famous Australian environmentalist was recently interviewed by a number of Canadian media outlets, including the CBC and CPAC. I found his appearance most bizarre. 

His home country of Australia is one of roughly a dozen nations worldwide that have (1) higher per capita GHGs than Canada and (2) have exhibited a higher rate of GHG growth since 1990 than Canada. I found it bizarre to see his disapproval of Canada aired on CBC, yesterday, given the performance of his home nation. 

Including GHGs from deforestation, Aussie’s annual emissions increased 82% between 1990 and 2007, compared to 46.7% for Canada. Per capita GHGs totaled 39.80 tons of CO2 emissions per person in Australia, compared to 24.06 for Canada.

In August, the Australian Senate rejected a cap and trade bill, but an amended, less aggressive version of the bill will be represented to the Senate for a new vote and will likely pass 1st and 2nd reading in November. But even the August version of the Aussie cap and trade bill fails to reduce per capita Aussie emissions down to current Canadian per capita emission levels by 2020.

I think climate change is a real risk and actively advocate for GHG regulations. But I also oppose "cap and trade"—which is just a fancy name for quota-based supply management. As in our other supply-managed markets—dairy, turkey, chicken, municipal taxis, etc.—the only thing that happens when we introduce a quota-type market management tool is that big corporations with deep pockets take all. A quota supply inevitable becomes concentrated in the hands of a small number of cash rich market participants, innovation rates slow down and economic returns to persons and entities that actually make things shrink, as the rents that used to accrue to production are eaten up by quota lease costs.

What Flannery failed to acknowledge is that the problem with Kyoto/Copenhagen and his message is that they have sacrificed the goal for the means. They are not focused on practical measures to cut GHG emissions. They are focused on building an inefficient quota-based global market control mechanism that will not result in GHG reductions. While most of the public do not understand this, they intuitively get that the facile GHG management proposals do not make sense.

"Put a price on carbon", "trade carbon" and "tax carbon" are not functional GHG mitigation plans. They are, at best, slogans.