Comments on Canada’s Large Final Emitters (LFE) and Domestic Offsets Climate Change Plans GRAY E. TAYLOR 1 First Canadian Place, 44 th Floor Toronto, ON M5X 1B1 Ph: Fax: CBA National Environmental, Energy and Resources Law Section/Department of Justice Annual Meeting October 22, 2004 Ottawa, Ontario

2 PRESENTATION OUTLINE 1.Issues with LFE System 2.CEPA Notice on Reporting of GHGs 3.IETA Canada Working Group on the Carbon Market Agreement with Natural Resources Canada October 23, Domestic Offsets Issues 5.International Trading Issues

3 ISSUES WITH LFE SYSTEM 1.50 % of Canada’s total GHG emissions but less than 25% of reductions 2.“business as usual” expectation of GHG emissions may be too low, based on historic projections 3.a) $15 per tonne price cap may lead to a need to prevent international trades in AAUs or in the special $15 units b) $15 per tonne subject to “prudent management of emissions”? 4.complexity  recent consultation on cogeneration

4 ISSUES WITH LFE SYSTEM (Cont’d) 5.International participation  ERUPT and CERUPT approach not likely government participation in private funds? who is running this show? 6.US/Canada economies converging while Kyoto diverges - efforts to maintain competitiveness 7.Long term emission targets for projects long term emission targets for projects how to cover emission reduction deficit in period? 8.R&D incentives interacting with compliance mechanisms covenants appropriate? how to cover emission reduction deficit in period?

5 CEPA Notice re Reporting GHGs Effective March 13, 2004 to March 13, 2007 covers GHGs in Kyoto Protocol CO 2 methane (CH 4 ) nitrous oxide (N 2 O) sulphur hexafluoride HFCs CFCs requires operators of facilities to file GHG data

6 CEPA Notice re Reporting GHGs (Cont’d) facility threshold is greater than 100 thousand tonnes of CO 2 equivalent in 2004 (CO 2 e uses Global Warming Potentials from IPCC) threshold does not include CO 2 from biomass combustion but must report if facility exceeds threshold reporting facilities encouraged (authorized?) to used UNFCCC national inventory methodologies

7 CEPA Notice re Reporting GHGs (Cont’d) reports to include company name (individuals?) “parent” companies (not defined), their ownership percentage (why?) and Dun and Bradstreet number (why?) direct emissions of CO 2, methane and N 2 O by source category (Stationary Fuel Combustion, Industrial Process, Fugitive, Other Direct emissions of SFs, HFCs and FCs

8 CEPA Notice re Reporting GHGs (Cont’d) how quantities of emissions determined (monitoring, mass balance, emission factors or engineering estimates) facility definition means all on one site or on contiguous or adjacent sites owned or operated by a single person and functioning as a single integrated site operator to file is as of December 31 for whole year or, if operations are terminated, the last operator for the portion of the year in which operations took place opportunities for gamesmanship!!

9 INTERNATIONAL EMISSIONS TRADING ASSOCIATION (IETA) CANADIAN WORKING GROUP ON THE CARBON MARKET AGREEMENT WITH NATURAL RESOURCES CANADA (NRCAN) OCTOBER 23, Sustainability  sustainable development through emission reductions with environmental integrity, economic efficiency and social equity  efficient and transparent market 2.Linking  to minimize costs, link on equivalency basis to foreign emission trading systems 3.International Consistency  consistent with Kyoto Protocol, including all 6 GHGs

10 CANADIAN IETA WORKING GROUP AGREEMENT WITH NRCAN (Cont’d) 4.Certainty  predictable and certain to facilitate planning but flexible to accommodate international change 5.Instruments  all units tradable, including offset units tradable for Kyoto units, and no limit on use of Kyoto units 6.Transparency  prices and volumes transparent, subject to normal commercial confidentiality

11 CANADIAN IETA WORKING GROUP AGREEMENT WITH NRCAN (Cont’d) 7.Liquidity  need adequate supply of tradable units 8.Low Transaction Costs  to facilitate trading 9.Single Market  throughout Canada 10.Banking  throughout first Kyoto commitment period and accommodate Kyoto changes if made

12 CANADIAN IETA WORKING GROUP AGREEMENT WITH NRCAN (Cont’d) 11.Private Sector/Government  private sector 1) develop trading infrastructure (exchange, derivatives, dealers, brokers, etc.) 2) services (verification, trading, financing, etc.)  federal government 1) assures overall performance 2) provides framework (legislation to create instruments and registry)

13 DOMESTIC OFFSETS ISSUES AND INTERNATIONAL TRADING 1.Discuss if there is time.

Gray E. Taylor 1 First Canadian Place, 44 th Floor Toronto ON M5X 1B1 Ph: Fax: