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					                                                                                  CLIMATE CHANGE
MAY 2010

    >>      SENATORS KERRY AND LIEBERMAN                      Emission Reductions
                                                              The bill calls for reductions in greenhouse gas emissions
    >>      NDP’S CLIMATE CHANGE                              from covered entities from 2005 levels as follows:
            ACCOUNTABILITY ACT BILL PASSES IN                 •       4.75% by 2013
                                                              •       17% by 2020
SENATORS   KERRY    AND    LIEBERMAN                          •       58% by 2030
RELEASE AMERICAN POWER ACT BILL                               •       83% by 2050
                                                              The covered entities are large stationary sources in
On May 12, 2010, Senators Kerry and Lieberman                 certain sectors, emitting more than 25,000 tonnes of
released their long awaited climate and energy security       CO2e annually. (Note that this is significantly lower than
bill, the American Power Act Bill. Senator Lindsay            the current Alberta threshold of 100,000 tonnes and the
Graham was a co-sponsor of this bill prior to withdrawing     previously proposed federal threshold of 50,000 tonnes.)
his participation a few weeks ago, primarily for political    It is estimated this threshold will mean the program will
reasons not related to the content of the bill. Last week,    apply to 7,500 factories and power plants. The
Graham cited the Gulf oil spill as another reason not to      emissions reduction requirements will begin with utilities
move ahead with the bill at this time. Notwithstanding        in 2013 and manufacturing will commence in 2016.
this, the bill has now been released for review by the        Producers and importers of fuels will be subject to an
Senate. The bill will need 60 votes in order to pass in the   emissions cap, but will not be part of the cap and trade
Senate, which will be difficult to muster without the         carbon market. Instead, they will be required to purchase
support of all 59 Democrat senators and at least one          allowances at a fixed price on a quarterly basis that have
Republican senator. Support by some Democrat                  been set aside for them. It is not clear what the “fixed
senators for a climate and energy bill has been in            price” will be, but it is expected to be based on the price
question due to the potential impact of the bill on certain   established by the auctions. The EPA will be required to
coal state economies and states opposing offshore             continue regulating the reduction of emissions from
drilling. However, the draft bill attempts to address some    transportation.
of these issues.
                                                              Cap and Trade System
Highlights of the Bill
                                                              The bill provides for capping of emissions from the
Since Canada’s federal government has stated that it will     utilities and manufacturing sectors with the distribution of
follow the path of the U.S. in crafting its climate           allowances for these sectors equivalent to the number of
legislation, including the inclusion and design of a cap      tonnes of GHG emissions allowed for each year. It is not
and trade system or similar market mechanism for              certain what portion of allowances will be auctioned and
reducing greenhouse gas (“GHG”) emissions, the                what portion will be given away for free to emitters.
American Power Act Bill will have a major impact on           However, allowances will be given away free to certain
Canada if it passes. The provisions highlighted here          energy-intensive and trade exposed industries to offset
pertain largely to those that will most directly impact       their cost of compliance and allow them to remain
Canadian business and Canada’s future climate change          competitive while rewarding efficiency investments. The
legislation.                                                  upstream oil and gas sector will not be part of the carbon
                                                              market, but as mentioned above, producers and
                                                                                                              Page 2

importers of refined fuel products will be required to         greenhouse gas market participants will be allowed to
purchase allowances.                                           trade and real time publication of trading information will
                                                               be required.
The bill also provides that states will no longer have the
jurisdiction to legislate their own cap and trade programs     Carbon Capture and Sequestration
and that any such programs will be replaced by the
provisions of this bill. Notwithstanding this restriction,     The bill calls for the creation of special funding programs
states can still enforce stricter targets for emission         to provide incentives to encourage research and
reductions than are contained in the bill.                     development of CCS technologies and will provide
                                                               allowances for commercial CCS deployment projects
Offsets                                                        based on the volume of CO2e permanently sequestered.

Offsets will be included in the cap and trade system and       Agricultural Soil Sequestration
will be generated from eligible projects primarily in
agricultural, grassland and rangeland management and           Farmers will be exempt from the obligation to reduce
sequestration practices, forestry activities and land use      GHG emissions but will be allowed to participate in the
changes, and capture of fugitive methane emissions             offset program by reducing emissions in their farming
from coal mines, landfills and oil and gas distribution        operations. This is expected to be a multi-billion dollar
facilities.                                                    revenue source to farmers and a key source of offsets
                                                               for the offset system.
Price Collar
                                                               Clean Energy and Nuclear
The bill establishes a floor and ceiling price for
allowances of $12.00 and $25.00, respectively,                 There are a number of financial incentives and funding
beginning in 2013 with a provision for an annual               sources for research, development and deployment of
increase of 3% on the floor and 5% on the ceiling, plus        clean energy and nuclear projects, including tax
inflation.                                                     incentives,   accelerated      depreciation    and    loan
                                                               guarantees. Pilot projects for the use of electric-powered
Border Adjustments                                             heavy and light-duty vehicles and incentives for the use
                                                               of cleaner natural gas in heavy-duty vehicle fleets are
The bill provides for a border adjustment mechanism            also contemplated in the bill.
that will require imports from countries that have not
taken action to limit emissions to be subject to an            Offshore Drilling
adjustment amount at the border to prevent carbon
leakage. Presumably, this will also apply where an             Offshore drilling was initially added to this bill as a
exporting country’s emission reduction standards are not       political compromise to gain support from certain
as stringent as those in the U.S. This is one of the           senators for the bill. The bill recognizes that offshore
reasons that the Government of Canada has been                 drilling is required to achieve greater energy
waiting to introduce its climate change legislation, which     independence during the transition period to clean
will have to be at least as stringent as that of the U.S. to   energy. After the recent Gulf oil spill, the bill was
avoid this tariff.                                             changed to address the related environmental issues
                                                               that became front and centre. The bill still contemplates
Market Participation                                           an expansion in offshore drilling, but not until
                                                               investigations have been completed and safeguards put
To mitigate market manipulation and volatility, only           in place to ensure that a spill like the Deep Horizon
entities with compliance obligations and a limited             accident does not happen again. The bill provides for the
number of market makers will be allowed to participate in      right of coastal states to opt-out of drilling up to 75 miles
the auctions and the primary cash market. Jurisdiction         from their shores. Nearby states can veto drilling if they
over trading of greenhouse gas instruments will be under       stand to suffer significant adverse impacts in the event of
the Commodity Futures Trading Commission and off-              an accident. It will be interesting to see how nearby a
exchange trades of futures instruments will be                 state has to be to veto drilling based on the fear of a
prohibited. Trading of greenhouse gas instruments on           major oil spill (which is now and likely always has been,
the secondary market will be restricted to trading             reasonably foreseeable). At the same time, coastal
conducted on an exchange and cleared through a                 states that do allow drilling will receive 37.5% of lease
greenhouse gas clearing agency. Only regulated                 and royalty revenues. 12.5% of federal royalties will also
                                                               be directed to a land and water conservation fund.
                                                                                                           Page 3

                                                              may not be able to block the bill if opposition party
NDP’S CLIMATE CHANGE ACCOUNTABILITY                           senators show support.
COMMONS                                                       The bill itself sets ambitious GHG reduction targets of
                                                              25% below 1990 levels by the year 2020 and 80% below
                                                              1990 levels by the year 2050. This is a significantly
                                                              steeper reduction than is required under Canada’s
On May 5, 2010, the House of Commons passed Bill C-
                                                              Copenhagen commitment of 17% below 2005 levels.
311, the Climate Change Accountability Act (the
                                                              There are no mechanisms or plans set out in the bill to
“Act”), requiring that the Government of Canada set
                                                              achieve these targets, other than the requirement to
science-based Greenhouse Gas (“GHG”) reduction
                                                              make regulations to meet the targets.
targets that are more aggressive than any proposed by
Canada’s ruling Conservative party. The Act passed its
                                                              However, in the interim, the Minister of the Environment
third reading in the House by a slim majority of 149 to
                                                              is required, within six months of royal assent and at five-
                                                              year intervals beginning in 2015, to prepare and present
                                                              to Parliament an interim plan, which establishes an
Bill C-311 is an NDP-sponsored private members bill,
                                                              emission target for each year, specifies scientific,
which saw no support from the Conservative minority in
                                                              economic and technological evidence used in the
the House, who voted unanimously against it. Each of
                                                              establishment of each target, and demonstrates the
the votes in favour came from opposition MPs, who
                                                              consistency of each target with the UNFCCC’s ultimate
joined together for the purpose of passing this
                                                              objective of preventing dangerous anthropogenic
legislation. In reviewing the bill in the Standing
                                                              interference with the climate system and with
Committee on the Environment and Sustainable
                                                              Parliament’s commitment to the Kyoto Protocol.
Development, the Liberals indicated that the bill was
incomplete and should have been amended by the NDP
                                                              The Act also sets out an array of other obligations to
to resolve problems raised in the review.
                                                              ensure targets are met.
Notwithstanding their concern with the bill, they
supported the bill as a call on the government to come
up with a plan to address climate change. The passage         •       The Governor in Council is required by the Act
of the bill demonstrated that although the Conservative               to ensure the Government meets its reduction
Government is not ready to abandon the approach of                    commitments by ensuring that its policy,
“waiting to see” what pending United States’ legislation              internationally and domestically, is fully
will require, the opposition, fuelled in part by public               consistent with its commitments, and making,
pressure, is ready to move forward.                                   repealing, or amending regulations under this
                                                                      Act or any other. Obviously, the Government’s
Even though Bill C-311 passed in the House of                         commitment to reduce emissions by 17% of
Commons, it contains a number of challenging                          2005 levels will not be consistent with the
provisions that were not amended, even in the face of                 commitments set out in the Act.
recommendations of expert witnesses at the Standing
Committee. For instance, the bill requires that               •       The Minister is required to prepare a statement
regulations to meet the targets set out in the bill be made           each year, which sets out the measures taken
on or before December 31, 2009. While no such                         by the Government that year, and the reductions
regulations have been made yet, the bill was passed on                that can reasonably be expected to result from
May 5, 2010, notwithstanding this unachievable                        those measures, expressed for each of the
provision. Experts also noted that there would be serious             following 10 years. Government measures
challenges to meeting the ambitious reduction targets                 include those taken in respect of regulated
within the stipulated time frames required under the bill.            emission limits and performance standards,
                                                                      market-based mechanisms (such as emissions
Whether the Act will become law is now reliant upon the               trading or offsets), spending and fiscal
Senate. The same bill was passed by the House in                      incentives, and cooperation and agreements
2008, but died in the Senate when the last election was               with other levels of government.
called in the fall of 2008. It is questionable whether Bill
C-311 will make it through this time around. Although         •       Following the release of each target plan and
there is pressure on the Conservative senators to block               Ministerial statement, a number of obligations
the bill in the Senate, they do not have a majority and               are placed on the National Round Table on the
                                                                      Environment and Economy (a body created by
                                                                                                           Page 4

        the National Round Table on the Environment           opposition to support amending the Act to adjust the
        and the Economy Act, S.C. 1993, c. 31), to            emission reduction targets to ensure that the
        engage in research and analysis, and to advise        Government can in fact comply with its own legislation.
        the Minister.                                         Otherwise, the coming into force of the Act would very
                                                              likely have undesired consequences, since it would be
•       At least once every two years, the                    difficult, if not impossible, to achieve the legislated
        Commissioner of the Environment and                   targets without such amendments.
        Sustainable Development is required to prepare
        a report that includes an analysis of Canada’s        It remains to be seen whether the passing of this bill in
        progress, as well as observations and                 the House of Commons will result in anything more than
        recommendations.                                      an interesting political occurrence. However, it does put
                                                              some pressure on the Conservative minority
Although much of the detail is left to be determined by       Government to begin planning what they will do if this bill
regulations made by the Governor in Council, the              does indeed pass the Senate.
enforcement mechanism contained within the Act is
strong and should be noted.                                   CONTACT US

The offences and penalties section under the Act allows       For further information, please contact John C. Goetz,
for a fine or imprisonment for any contravention of a         Michael T. Kariya or Alex G. MacWilliam.
regulation made under the Act, and includes a provision
to charge any officer, director or agent of the corporation
that directed, authorized, assented to, or acquiesced or
participated in the contravention.

The larger questions may be how to practically achieve
compliance with the stringent reduction requirements of
the Act and how to compel the Conservative minority
Government to abide by the Act and implement it. The
Conservatives have voiced concerns that the passing of
this bill into law could have disastrous effects on the
Canadian       economy,      including   the  loss   of
competitiveness of Canadian industry, the loss of jobs,
increased energy costs and dramatic increases in the
price of gasoline. Experts have sited the problem of
carbon leakage, where jobs and investment will simply
go to jurisdictions with no or less stringent carbon
emission standards. This concern with carbon leakage
was a key reason that the U.S. would not join Kyoto
without the participation of China and India.

If this bill passes in the Senate, the Conservative
minority Government may be obligated to proceed with
detailed climate change regulations, regardless of
whether the U.S. proceeds with legislation or not. Such
regulations would need to set out emission reductions
and a cap and trade system that will satisfy the
opposition and convince it that Canada is moving in the
right direction. If this could be achieved, the
Conservatives may then be able to convince the