business insights on carbon pricing mechanisms - IETA

June 2016 Delivered to: Environment and Climate Change Canada, Climate Policy Office Email: [email protected] Online Submittal: http://letstalkclimateaction.ca/canada-s-approach-to-climate-change?id=12

BUSINESS INSIGHTS ON CARBON PRICING MECHANISMS IETA COMMENTS TO THE WORKING GROUP ON CARBON PRICING MECHANISMS UNDER THE PAN-CANADIAN FRAMEWORK ON CLEAN GROWTH & CLIMATE CHANGE On behalf of the International Emissions Trading Association (IETA)1, we welcome the opportunity to provide comments on carbon pricing mechanisms to inform the Pan-Canadian Framework (PCF) for Clean Growth and Climate Change. We trust that IETA’s input will help to inform efforts of the PCF Working Group on Carbon Pricing Mechanisms, jointly overseen by the Canadian Council of Ministers of the Environment (CCME) and Canadian Ministers of Finance.

OVERVIEW & KEY MESSAGES IETA’s input is guided by several goals in the March 2016 Vancouver Declaration, including the collective pursuit of increased levels of ambition, promotion of clean economic growth, delivery of (real and measurable) mitigation actions, and enhanced cooperation both within and beyond Canada’s borders. Specifically, IETA’s input is targeted at the Vancouver Declaration’s Working Group on Carbon Pricing Mechanisms, established under “Taking Action: 2(d)” of the agreement. Special attention is paid to sharing IETA’s latest insights from across carbon pricing programs, while highlighting the clear environmental, economic and co-benefit merits associated with tradable carbon systems. IETA’s detailed comments are structured around the following core elements of the Working Group on Carbon Pricing Mechanism’s mandate, as defined under the Vancouver Declaration: 1. 2. 3. 4.

Achieving Certainty in Emission Reductions (Environmental Outcomes); Efficiency of Achieving Emission Reductions at Lowest Possible Cost; Ensuring Competitiveness; and Sustainable Carbon Finance and Empowering Communities.

IETA, and many of our partners across the business and international climate community, believe that flexible market instruments, including trading, offsets and linking, must underpin Canada’s future approach to pricing carbon. Such market-based policy tools, which enable cross-border partnerships and higher levels of climate ambition, will not only achieve measurable climate outcomes but also help Canada reach its 2020, 2030, and longer-term climate goals. Find key IETA take-away messages in the box below. 1

IETA is the leading global business voice on the design and expansion of flexible market mechanisms to tackle climate change and drive clean private finance and investment. Our team and multi-sector membership work closely with governments (sub-national, national, and UN levels), multi-laterals, academics, and environmental groups to inform the design and functionality of carbon pricing systems. IETA’s 140+ member companies include some of Canada’s - and the world’s – largest power, industrial, manufacturing and financial corporations. Members also include leading firms and experts in: greenhouse gas data assurance and certification; brokering, trading and finance; engineering and clean technology; offset project development, aggregation, registries; and legal and advisory services. To learn more about IETA, visit www.ieta.org

IETA KEY MESSAGES: BUILDING EFFECTIVE CARBON PRICING PROGRAMS WORLDWIDE 1. 2. 3. 4. 5. 6. 7. 8.

Emissions trading, specifically cap-and-trade, ensures emissions reduction certainty. Emissions trading achieves measurable emission reductions at least-cost. Emissions trading enables cross-border program linkages, cooperation and partnerships. Emissions trading can most effectively respond to macro-economic fluctuations. Emissions trading drives economically-rational, low-carbon innovation solutions. Emissions trading can best support low-carbon transitioning for business and households. Emissions trading can address industry competitiveness and leakage concerns. Emissions trading provides a global response to a global challenge.

CARBON PRICING INTERNATIONAL TRENDS & MARKETS As illustrated in IETA’s carbon pricing map, below, over 40 national and 20 subnational jurisdictions – representing 25% of global greenhouse gas emissions – currently use some method of carbon pricing. Since 2009, cap-and-trade programs have predominantly driven the exponential growth of carbon pricing worldwide.

STATUS OF CARBON PRICING WORLDWIDE (IETA, 2016)

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IETA - Climate Challenges, Market Solutions Brussels - Geneva - London - Melbourne - San Francisco - Toronto - Washington DC www.ieta.org | @IETA | #MakingTheLinks

The International Carbon Action Partnership (ICAP)’s Status Report 2016 delves further into global carbon pricing figures and coverage. The report, released in February 2016, shows that 40% of global GDP is now covered by a greenhouse gas emissions trading system. This figure is projected to increase to nearly 50% of GDP by 2017, once China implements its national cap-and-trade program by next year2. Spurred by Article 6 of the Paris Agreement, this bottom-up carbon pricing momentum, particularly regarding international trading and market linkages, will continue to build. Detailed considerations about the implementation of Article 6 are shared in IETA’s May 2016 report, “A Vision for Market Provisions of the Paris Agreement”. This new report, along with IETA-EDF’s April 2016 Joint Report, “Carbon Pricing: The Paris Agreement’s Secret Ingredient”, help form the basis of IETA’s June 2016 comments to Canada’s PCF Working Group on Specific Mitigation Opportunities.3

PRIORITY CARBON PRICING CONSIDERATIONS: BUSINESS PERSPECTIVE While exploring the best suite of carbon pricing approaches for Canada, we urge officials to keep the following priority considerations top-of-mind. Results-Based Environmental Outcomes Matter: IETA urges the government to be mindful of the importance and opportunities afforded by environmentally certain carbon pricing options. At the same time, we urge the government to recognize the economic and environmental merits linked to harmonizing and aligning policy designs with key domestic and international jurisdictions. With Canada’s industrial emissions projected to steadily increase through 2030, it becomes increasingly important for the province to pursue measurable, results-oriented policy tools that cap and ratchet-down greenhouse gases while driving cost-effective abatement options and ensuring competitiveness. Enhance Economic Performance & Ensure Competitiveness: The economics and costs of climate action/inaction should guide future policy decisions across all levels of government. Efforts should include thoughtful competitiveness impact considerations and assessments, notably for the treatment of Canada’s energy-intensive and trade-exposed industries that face regional and international competition. Fulsome engagement with affected industries will prove essential as the government evaluates policy impacts, prior to landing on final policy design and implementation decisions. Embrace and Build-Upon Market Linkages: Unlike a carbon tax, tradable market instruments (allowances, offsets, performance credits etc.) allow for cross-border climate cooperation and linkage, while helping to gradually ratchet-up climate “ambition” while minimizing costs. The benefits of linking are clear: the bigger and broader the market, the wider the range of abatement opportunities and improved efficiencies, driving-down program costs while driving-up clean projects, jobs, and investment. Enable Policy Harmonization & Alignment: The Pan-Canadian Framework must enable policy harmonization, and eventually market design alignment, both within and outside of Canadian borders. The design and operationalization of the PCF must drive further sub-national cooperation across Canada and across key US states (e.g., California, Oregon, Washington) and regional carbon programs (e.g. RGGI). 2 3

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See ICAP’s ‘Status Report 2016’ https://icapcarbonaction.com/en/status-report-2016 All referenced reports can be accessed via the IETA homepage: www.ieta.org. IETA - Climate Challenges, Market Solutions Brussels - Geneva - London - Melbourne - San Francisco - Toronto - Washington DC www.ieta.org | @IETA | #MakingTheLinks

The PCF must also enable compatibility with priority international trade partners and competitors that are also putting pricing carbon, mainly through cap-and-trade. Such jurisdictions include, but are not limited to, Europe, China, Republic of Korea, and Mexico. Harmonizing carbon system rules, tools, standards, and quantification methodologies are key steps in building successful cross-border markets, improving system efficiencies, streamlining carbon accounting, and potentially avoiding future trade battles. These actions also allow business to more easily and cost-effectively plan, comply, and invest. Avoid Duplicative & Non-Complementary Measures: Non-market measures – such as government building codes, standards, incentives, R&D support etc. – can play important roles in supporting and scaling certain clean technologies, sectors and behaviors. However, all Canadian jurisdictions must ensure complementarity across these measures, as to avoid impeding a true price on carbon with measurable environmental outcomes. With business input, the nature and sequencing of supplementary low-carbon measures should neither overlap nor potentially double-hit certain industries.

DETAILED INPUT ON CARBON PRICING WORKING GROUP ISSUES Reflecting on Canada’s Vancouver Declaration goals, along with the defined-mandate of the Working Group on Carbon Pricing Mechanisms, IETA’s following detailed input is structured around: 1. 2. 3. 4.

Achieving Certainty in Emission Reductions (Environmental Outcomes); Efficiency of Achieving Emission Reductions at Lowest Possible Cost; Ensuring Competitiveness; and Sustainable Carbon Finance and Empowering Communities.

1. ACHIEVING CERTAINTY IN EMISSION REDUCTIONS (ENVIRONMENTAL OUTCOMES) The hallmark feature of cap-and-trade is certainty related to environmental outcomes (i.e., greenhouse gas target and reductions). The “cap” effectively represents the program’s overall “emissions budget”, or the total number of allowances that are available to covered entities. This fixed sum of emissions will not exceed a given limit and will ratchet-down overtime. In contrast, a carbon tax simply cannot guarantee, nor is capable of measuring, greenhouse gas reduction outcomes. Implementation of an “absolute cap” that specifies a fixed, declining amount of emissions allowable per year is critical to achieving environmental success and Federal/Provincial greenhouse gas reduction goals. Program integrity of emissions trading is underpinned by accurate and transparent data. Along with environmental outcome certainty, a core component to any emissions trading program is the credible and accurate monitoring, reporting and verification (MRV) of greenhouse gas emissions data. The sound management, transparency and consistency of this data – along with clear enforcement rules and provisions – underpins the overall integrity of the program. This directly impacts program confidence, market participation levels, and linkage opportunities.

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2. EFFICIENCY OF ACHIEVING EMISSION REDUCTIONS AT LOWEST POSSIBLE COST Flexible carbon pricing mechanisms enable strategic planning, investment and preferred routes to compliance. Under a trading program, business can make the most efficient strategic planning, clean investment and productivity choices. With clear and stable rules, business can select preferred routes to compliance based on costs and efficiencies provided by the market (tradable permits or offsets), or by internal emissions reductions costs and time horizons within their own operation. Trading allows for market linkages, enabling business to capture a wider range of clean project and investment opportunities. A key advantage of emissions trading is its ability to connect cross-border systems, creating markets at scale with access to broader pools of cost-efficient emission reduction options. Along with ameliorating competitiveness concerns, linking leads to price convergence across systems and efficiency gains across jurisdictional partners. Ability to respond to macro-economic shifts and trends. Historical price data shows that flexible pricing systems respond to economic downturns with lower prices on carbon – this ability to respond to economic shocks is unique to emissions trading. Unlike the politicized nature of a tax, enabling the open market to set the price of carbon allows for better flexibility and avoids price shocks or undue burdens. As seen in the EU and the nine-state US cap-and-trade collaborative, Regional Greenhouse Gas Initiative (RGGI), prices will fall during a recession as power demand and industrial output (and therefore emissions) fall. Broad access to offsets spur private sector engagement and innovation. Offsets are vital costcontainment instruments and where properly designed, play an important role in program linkage and collaboration. Generated by projects in uncapped sectors such as forestry, agriculture, and waste management, offsets enable a broader pool of emissions reductions while delivering social and environmental co-benefits. The provinces of B.C., Alberta and Quebec already hold significant – some best-in-class leadership in the compliance offsets arena. These leadership efforts and tools form a competitive edge for the provinces, and Canada overall, that must be leveraged and scaled. For instance, B.C.’s Carbon Neutral Government (CNG) program, launched in 2009, sparked private investment and expertise in delivering quality offsets across the province. See the ANNEX for more information about “Why Offsets Matter to a Pan-Canadian Framework”.

3. ENSURING COMPETITIVENESS Companies covered by carbon pricing programs whose products face regional or international competition typically do not have the ability to raise product prices or recoup costs linked to higher production or compliance costs at home. These companies, many of which are "energy intensive and trade exposed" (EITE), become vulnerable to revenue loss and carbon leakage. Ideal Mechanism to Address Competitiveness. A major emissions trading advantage is its proven ability to address competitiveness and leakage concerns. Like other regions either implementing or considering carbon pricing, Canada (and the provinces and territories) seek to meet 2020 and longer-term climate targets while maintaining strong economic and industry competitiveness. The future Pan-Canadian plan must provide a carbon pricing framework and guidance that preserves, if not enhances, local industry competitiveness vis-à-vis trade partners without carbon constraints. 5


Allocations to Address Competitiveness & Avoid Leakage. All existing cap-and-trade programs have chosen to freely allocate all, or a portion, of allowances to pre-determined EITE sectors based on agreedupon indicators, criteria and formula.4 Allocations to “level playing fields” typically start high, depending on the industry and susceptibility to leakage, then gradually decline (e.g. X percentage per year) to account for shifts in trade/leakage exposure by facility or sector. This flexible, phased approach lends incremental support to help industries decarbonize while still remaining competitive in the global marketplace. This key feature, realized by Quebec-California (now Ontario), Europe, China, Korea, and other cap-and-trade jurisdictions, can be done through various adaptable and economically-integrated design measures5. Competitiveness Option & Impact Analysis: We strongly encourage Federal and Provincial/Territory Governments to conduct a thorough, transparent review and analysis of competitiveness impacts associated with current (and potential future) carbon pricing options. Analysis should focus on direct/indirect impacts of carbon pricing approaches (e.g. Quebec cap-and-trade vs. B.C. tax treatment and EITE competitiveness impacts). The analysis, likely overseen by CCME, should consider cross-border trade and energy system flows. We also urge officials to transparently and frequently work with affected industry experts to provide assistance, data and due diligence – throughout the comparative analysis. IETA is happy to support these efforts by tapping-in to our broad and engaged membership, many of whom have existing or potential industry assets across Canada and/or Canadian trade partners. 4. SUSTAINABLE CARBON FINANCE & EMPOWERING COMMUNITIES Build on Provincial Offsets Leadership & Experience: IETA applauds the existing provincial leadership on carbon pricing and offsets. The historic support and implementation of market instruments to tackle climate change, particularly across Quebec, Ontario, Alberta, B.C., is commendable and holds various models and tools that are replicable from coast-to-coast. See the ANNEX for more information about “Why Offsets Matter to a Pan-Canadian Framework”. B.C.’s Carbon Neutral Government is a remarkable “leading-by-doing” provincial initiative, underpinned by measurable environmental outcomes (greenhouse gas reductions). This innovative B.C. leadership story (and lessons learned) is now informing the carbon neutral actions of numerous Canadian and international public sector entities. Thanks to this B.C.’s leadership, we have the first-of-its-kind Great Bear Forest Carbon Project, North America’s largest forest carbon project that’s capable of monetizing carbon and conservation benefits while helping to create employment within First Nations Communities. Forest carbon, agriculture and other ecosystem-based offset projects present an important opportunity across a breadth of stakeholders. The ability to reduce and remove emissions in these sectors enables increased engagement, buy-in, and opportunity for sectors across the economy not directly regulated by carbon pricing constraints (e.g. covered under cap-and-trade). In turn, increased volumes of offsets can be used to reach carbon neutral goals or provide cost containment throughout regulated carbon systems. See the ANNEX for more information about “Why Offsets Matter to a Pan-Canadian Framework”.

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See IETA’s library of carbon pricing and competitiveness resources and seminar material at www.ieta.org See IETA’s 2015 Carbon Pricing & Competitiveness White Paper.

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Across North America’s carbon markets, the forest carbon sector is relatively mature in terms of protocols and development history. Canada can benefit from reviewing existing methodologies from Quebec, Alberta, B.C., California and voluntary programs in order to determine what type of protocol parameters establish the best foundation for all offsets across Canada. We also encourage Canada to look closely at concepts and mechanisms relating to different types of project level risks, which are particularly relevant to forest projects, including: leakage; credit discounting; and reversals. Canada has an opportunity to take a leadership role in its approach to reducing uncertainty and risk in forest carbon projects, while reaping the cost-containment and co-benefits these projects could generate. There exists significant offset potential on Crown Lands across Canada. In order for a project to issue an offset, carbon rights to the reductions must be clearly secured and proven. B.C. has recently made progress on this issue, granting their Ministry of Forestry, Lands and Resource Operations the ability to sign “Atmospheric Benefit Sharing Agreements” with project owners; this breakthrough enabled the Cheakamus Community Forest Offset Project to issue carbon offsets, pairing responsible resource extraction with ecological principles of forest management. It is vital for Government, in consultation with First Nations, local communities and subject matter experts, to “do their homework” on Crown Land carbon benefit considerations as early as possible during the policy design stage. Government should clearly – and defensibly – understand and communicate their rights to resources/carbon, and how they can convey those rights to project proponents in line with existing regulation.

CONCLUSION Once again, IETA appreciates the opportunity to help inform the Pan-Canadian Framework. Our Canadian and international business members remain deeply committed to supporting the healthy evolution of a strong and successful Framework – one that harnesses the power of markets and business innovation to cost-effectively meet Canada’s climate goals to 2030 and beyond. In addition to submitting online, these comments have been delivered to Environment Canada and Climate Change (ECCC)’s general account, Federal-Provincial Government Co-Chairs of the Working Group on Carbon Pricing Mechanisms, and the Canadian Council of Ministers of the Environment (CCME). If you have questions or requests related to these comments, please contact IETA Director of the Americas and Climate Finance, Katie Sullivan ([email protected]).

Sincerely,

Dirk Forrister IETA President and CEO

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ANNEX: WHY OFFSETS MATTER TO A PAN-CANADIAN FRAMEWORK Offsets Reduce Costs While Preserving Environmental Integrity: Offsets provide an alternative for regulated emitters to substitute real greenhouse gas emission reductions made outside capped sectors, presumably at lower cost, for emission reductions in their own facility. This provides the same benefit to the environment as an emission reduction at the regulated facility but at a lower cost. It is of paramount importance to ensure that each compliance offset issued and entering a system represent a real, discrete, additional and verifiable tonne of greenhouse gas emissions reduced or sequestered. Offsets Provide Economic Benefits & Preserve Competitiveness: Trading and access to offset reductions provide necessary compliance and policy flexibility. These measures can help drive low-carbon innovative solutions and investments, keep program and compliance costs to a minimum, capitalize on new revenue streams, manage competitiveness concerns, and pursue clean investments on a logical timescale. Flexibility also gives regulated industries the ability to gradually transition and meet compliance obligations, while adopting new low-carbon strategies, technologies and processes that work best for their operations, human resource capacity, supply chains, and consumers. Offsets Drive Innovation: By their very definition, offsets act as an innovative and direct financing tool, driving the implementation of new technologies and practices that would not have happened under business as usual. The tool provides a new way for technologies and resource management practices to progress from the lab to the field – providing fertile opportunity for partnerships between the research community and business. Years of industry experience across multiple programs and regions have demonstrated that properly designed offset systems drive clean innovation and entrepreneurialism by providing a clear price signal upon which to invest. A well-designed offset system builds and sustains an ecosystem of “clean” innovators and entrepreneurs who help us reach our de-carbonization goals. Offsets Provide Environmental & Community Benefits Beyond Climate: Underwritten by the carbon market, offsets can provide various non-climate environmental improvements for free. For example, offsets generated through fertilizer management can limit nutrient run-off; offsets generated through wetlands restoration can create waterfowl habitat and flood protection; offsets created through improved forest management, reforestation, and avoided degradation sustain robust ecosystems, potentially far into the future. It can also work to engage local communities in developing sustainable land-use practices that benefit their economic development. In such ways, offsets can help achieve important non-climate environmental objectives without additional expenditure. Offsets Help Drive Levels of Ambition & Linkages: In today’s bottom-up climate policy world, coordination and harmonization of the climate policies of a variety of national and sub-national jurisdictions are important. The use of emissions trading and offsets, which can fully or partially link systems, will become an increasingly critical tool in meeting greenhouse gas reduction targets. Provinces – and Canada as a whole – need more, not fewer, greenhouse gas emission reduction projects. The more offset projects, the greater the supply of lower-cost emission reductions. The linking of jurisdictional efforts through mutual recognition of tradable units, including offsets, helps to provide greater certainty that units will have value into the future, while increasing the probability that underlying reduction projects (in the context of offsets) can be financed. 8
