Josephine V. Yam

Josephine Yam Selected as Energy Futures Lab Fellow

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Josephine Victoria Yam, the Executive Director of the Environmental Law Centre (Alberta), has been selected as one of 40 Energy Futures Lab Fellows.

These Fellows are leaders from across Alberta’s energy system who are charting the course towards shaping a new energy future for Alberta. Each of the Fellows brings a particular viewpoint representing a diverse set of interests including government, ENGOs, energy industry, academia, First Nations and community groups. What unites these leaders is an understanding of the need to move towards a new energy system for Alberta characterized by sustainability, resilience and innovation.

As Josephine notes…

"For many decades, Alberta has been a major engine of economic growth for Canada. Central to this growth is Alberta's carbon-intensive oil and gas and oil sands resources. Alberta should recognize these carbon-rich resources as opportunities - not barriers - that can help its successful transition to a carbon-constrained world".

"Alberta has a vast abundance of clean energy resources - - - solar, wind, geothermal and biomass. It can use its world-class research and innovation and its entrepreneurial spirit to develop these low carbon resources in cutting-edge, innovative ways as it did with oil and gas and oil sands many decades ago".

Want to learn more about Josephine's work with the Energy Futures Lab? Connect with Josephine via LinkedIn

Do Courts Take Judicial Notice of Climate Change?

At the recent 2015 Canadian Bar Association Symposium on “Environment in the Courtroom” in Calgary, I delivered a presentation on the topic “Judicial Notice of Climate Change”.  The presentation focused on the question of whether or not courts have accepted climate change as a scientific fact so that no further proof of its existence or cause would be required in courtrooms.

This question is quite interesting on many fronts. In the arena of public opinion, as reported in a 
2014 Forum Poll survey, while 81% of Canadians believe in climate change, there are still many who deny its existence.  According to the survey, climate denial generally emanated from the following groups: Generation X (18%), males (17%), mid‐income groups (18%), Atlantic Canada (19%), Alberta (20%), Conservative voters (29%), least educated (17%), and Evangelical Christians (32%).

In the arena of politics, there are some very high-profile politicians who also deny the existence of climate change. A couple of months ago, 
The Washington Post reported that U.S. Senate James Inhofe, who is Chair of the Environmental & Public Works Committee, went on the Senate floor to bring his “proof” that climate change is the “greatest hoax ever perpetrated on the American people”. On the palm of his hand was his piece of evidence: a perfectly round snowball which he later tossed out to an unsuspecting Senate colleague.

Meanwhile, in the academic arena, there are also some very prominent scientists who still deny that climate change is caused by human activities.  The 
New York Times recently reported that Willie Soon, a scientist at the Harvard-Smithsonian Centre for Astrophysics in Boston, claimed that the variations in the sun’s energy are the cause of climate change and that greenhouse gases cause little risk to humanity. Through the Freedom of Information Act, documents revealed that he received $1.2M from fossil fuel companies for his scientific papers. The article noted that some environmental groups deemed this revelation as clear evidence of “the continuation of a long-term campaign by specific fossil-fuel companies and interests to undermine the scientific consensus on climate change”.

While many public debates continue to rage on whether or not climate change really exists, those debates are interestingly not taking place in the courtroom. As climate change science has developed, courts have increasingly taken judicial notice of it. What is judicial notice? 
Chief Justice McLachlin in R. v Find,  (2001 SCC 32)  explained that “judicial notice dispenses with the need for proof of facts that are clearly uncontroversial or beyond reasonable dispute”. Thus, whenever a fact is judicially noticed, it is not subject to the ordinary procedural processes for testing evidence such as oaths and cross-examination.

So you may ask, where can the scientific consensus on climate change be found? It is found within the confines of the reports created by the 
United Nations-endorsed Intergovernmental Panel on Climate Change (IPCC). These reports provide rigorous and balanced scientific information to decision-makers. They are written by hundreds of leading scientists and reviewed by thousands of experts. They provide full scientific, technical and socio-economic assessments on climate change. And what have these reports concluded? That warming of the climate is undeniably happening, that human-caused greenhouse gas emissions are likely causing the climate to warm, and that adverse climate-related impacts are presently occurring and are expected to increase in the future unless significant reductions of greenhouse gas emissions are achieved.

In the landmark case for judicial notice of climate science,  the 
U.S. Supreme Court in Massachusetts vs EPA (2007) stated that: “[a] well-documented rise in global temperatures has coincided with a significant increase in the concentration of carbon dioxide in the atmosphere.  Respected scientists believe the two trends are related.” It also stated that “[t]he harms associated with climate change are serious and well recognized”.

Indeed, U.S. courts have heavily relied on IPCC reports because they have various indicia of reliability favoured by the U.S. laws of evidence. They are also backed by highly credentialed organizations and scientists. An American Bar Association article noted that in fact, no judge, except in one dissent, has expressed skepticism about the science underlying climate change. In a survey of the more than 400 climate change litigation cases that have been launched in the U.S., it was noted that the debate on climate change in courts is 
neither based on its existence nor its cause. Rather the debate is based on its detrimental impacts and to whom those impacts can be attributed.

In Canada, the court in 
Syncrude vs Canada (2014 FC 776) likewise took judicial notice of climate change. As Justice Zinn declared:  “The evil of global climate change and the apprehension of harm resulting from the enabling of climate change through the combustion of fossil fuels has been widely discussed and debated by leaders on the international stage.” Thus, he noted that “[c]ontrary to Syncrude’s submission, this is a real, measured evil, and the harm has been well documented”.

Nevertheless, the success of any climate change litigation will turn on the factual basis that is established by the plaintiffs. Indeed, despite the scientific consensus that greenhouse gas emissions cause climate change, it is difficult to prove the contribution of specific defendants to the problem in a specific location. It cannot be denied however that climate change litigation performs several functions: to keep the pressure on fossil fuel companies and other large emitters, to keep the issue live in the public mind, and to send a strong message to the legislature that comprehensive climate legislation is needed because current statutes are inadequate to address it.

At the end of the day, while courts have taken judicial notice of climate change, the future of climate change litigation is less certain. This is because it hinges on the strong political will and ambition of governments to establish, implement and strongly enforce climate change legislation.

Is Canada Ready for the 2015 Paris Climate Change Conference?

At the 2015 Canadian Association of Environmental Law Societies Conference held at the University of Calgary last week, I presented a brief overview of global, Canadian and provincial developments in carbon pricing and greenhouse gas reduction policies.  One of the questions I sought to address was whether Canada can be expected to have a strong, ambitious national carbon pricing policy in time for the Paris climate change conference in December 2015.

Indeed, the Paris climate conference has been touted as the "world’s last best chance to reach an agreement on cutting carbon emissions."  As successor to the Kyoto Protocol, the international climate change treaty that emerges from Paris will consolidate all the Intended Nationally Determined Contributions (INDCs) of more than 190 developed and developing countries.  The INDCs are countries’ plans that articulate their greenhouse gas (GHGs) reduction targets and how these will be achieved, including the possible use of market-based mechanisms such as emissions trading and carbon taxes.

“Ambitious but achievable” are adjectives that the 
Guardian used to describe the upcoming Paris international climate treaty. Why? Last November 2014 in China, U.S. President. Barack Obama & China President Xi Jinping forged a historic deal that their countries, the two largest emitters in the world, would commit to significantly reduce their GHGs. For the U.S., Obama committed to cutting its GHGs between 26% and 28% by 2025 over the 2005 baseline period. For China, Xi Jinping committed to peaking its GHG emissions by 2030. China is also poised to officially launch a national emissions trading market in 2016. Not to be outdone, the European Union, which has the largest emissions trading scheme in the world with 30 countries participating, also committed to cutting its GHGs by 40% by the year 2030 using a 1990 baseline. Interestingly, even Pope Francis is scheduled to issue an encyclical this year to encourage his 1.2 billion Catholic followers to take action on climate change because it is a moral responsibility.

With bold, significant steps by the U.S., China and the European Union, the question arises: Will Canada follow suit and forge ahead with a strong, ambitious national climate policy in time for the Paris climate conference?  To address this question, it may be helpful to recall Canada’s historical record on the climate file.

In 1997, Canada made a binding commitment under the Kyoto Protocol to reduce its GHGs by 6% below 1990 levels by 2012. In 2011, Canada withdrew from the Kyoto Protocol because it had already emitted 30% more above its Kyoto obligation.  If Canada fulfilled its Kyoto obligation, the government claimed that it would cost Canada $14 billion or about $1,600 for every Canadian family.

Because the federal government knew that Canada would fail in its 2012 Kyoto obligation, as early as 2009, it committed the country to a non-binding commitment to reduce its GHGs by 17% below 2005 levels under the Copenhagen Accord.  As of 2014, however, Canada has already missed its Copenhagen target by 122 megatonnes of CO2e.

Given Canada’s dismal record of keeping its climate reduction obligations, it appears that Canada is not poised to emerge with a strong, ambitious national carbon pricing policy at the Paris climate conference. This conclusion is buttressed by Prime Minister Stephen Harper who 
avowed: “It’s not that we don’t seek to deal with climate change, but we seek to deal with it in a way that will protect and enhance our ability to create jobs and growth, not destroy jobs and growth.”

To fill in this void on federal climate policy, several provinces have gone ahead and established their own carbon pricing schemes. Alberta has its emissions intensity trading scheme, being the first jurisdiction to legislate on reducing GHGs in North America. British Columbia has a revenue-neutral carbon tax scheme, which has won praise from the OECD and the World Bank. Quebec has a cap-and-trade scheme which is linked with California’s scheme through the Western Climate Initiative. Ontario has cut its emissions by 6% below 1990 levels and will soon be implementing either a cap-and-trade scheme or a carbon tax this year.

But there is still time for Canada to act. It should seize this rare opportunity to repair its poor climate change reputation by joining the 
74 national governments that the World Bank has reported as supporting a strong carbon price. In doing so, Canada can manifest its climate leadership in time for the Paris climate conference. However, this can only happen if the Canadian government can muster within itself the strong political will and courage to do so.

By 2023, a Changed World in Energy

“When it comes to energy, the rule of the game is to expect the unexpected,” observed energy historian Daniel Yergin in the New York Times article, “By 2023, a Changed World in Energy”.

Yergin noted: “So much effort is going into research, development and innovation all across the energy spectrum, 10 years from now we may well see the next game changer.”

Writer Clifford Krauss recalls that, in 2003, American natural gas fields were thought to be depleting rapidly such that expensive terminals for natural gas importation, not exportation, were being built. U.S. oil production was likewise declining at rapid rates.

Now, ten years later, the U.S. is well on its way to become energy independent, thanks in no small part to new drilling technology that has made its oil and natural gas fields much more productive. In fact, in its latest World Energy Outlook, the International Energy Agency (IEA) reported that the U.S. will overtake Saudi Arabia and Russia as the world's top oil producer by 2017. This will have massive geopolitical consequences, as the U.S. will no longer depend on undemocratic regimes like Venezuela or Nigeria for obtaining its oil supply.

So what will the energy world look like in 2023? It will be a different energy world where there will be widespread adoption of electric cars, solar panels by business and households and trains and trucks guzzling on natural gas. It will be a world where renewable energy sources will become dominant, accounting "for 32 percent of the overall growth in electricity generation through 2040.”

According to the IEA, the emerging market economies, like China, will still be reliant on fossil fuels through 2035. Yet, it reports that China’s new government has committed to investing more than $70 billion a year in clean energy projects, in recognition of the imperative sustainability path that it must undertake to quench its still growing energy appetite.

“Much of the future of energy will depend on government policy, of course,” noted Krauss. And indeed, a clean energy world will only be possible if governments around the globe arm themselves with the solid political will and foresight to bravely implement policies that support sustainable growth that is so crucial in this carbon-constrained decade.

Sustainable Development: Intersection of Economy & Environment

It is crucial that you get the attention of the "people who hold the purse strings", namely Finance Ministers, if you want countries to strategically move towards sustainable development, said Rachel Kyte, World Bank VP for Sustainable Development, In her blog "Why Finance Ministers Care About Climate Change & Sustainable Development",

She said that climate change was front and centre of discussions among the world's Finance Ministers at their annual World Bank/IMF Spring Meeting in Washington this weekend. Climate change "isn’t just an environmental challenge, it’s a fundamental threat to economic development and the fight against poverty... If the world does not take bold action now, a disastrously warming planet threatens to put prosperity out of reach for millions and roll back decades of development."

Fortunately, there has been great progress around the world in the fight against climate change. For example, an increasing number of countries have or are in the process of establishing their carbon markets to link with each other and put a price on carbon. This market-based approach will effectively help drive greenhouse gas emissions (GHGs) down and spur clean energy investments. Through the Partnership for Market Readiness (PMR) established by the World Bank, countries around the world explore innovative and cost-efficient ways to drive down GHGs while building financial flows.

Indeed, it is crucial to have had that discussion among the Finance Ministers, to discuss with them that the fight against climate change is a win-win proposition for both their countries' valuable environments and value-based economies.

U.S., China Forge Historic Deal on Climate Change

"Groundbreaking" is the appropriate word to describe the United States - China deal recently forged to jointly combat climate change. Being the world’s two biggest economies and greenhouse gas (GHG) emitters, their monumental “call to action” to reduce GHGs will be undertaken "by advancing cooperation on technology, research, conservation, and alternative and renewable energy."

The National Post article reported that this deal was reached during U.S. Secretary of State John Kerry's visit to China this weekend. Kerry is known to be a staunch advocate for advancing U.S. policies on GHG reduction and climate change.

The U.S.-China joint statement forcefully enunciated that both countries “consider that the overwhelming scientific consensus regarding climate change constitutes a compelling call to action crucial to having a global impact on climate change.” Moreover, they recognize that an “urgent need to intensify global efforts to reduce greenhouse gas emissions… is more critical than ever” and believe that “such action is crucial both to contain climate change and to set the kind of powerful example that can inspire the world.”

Noted Alden Meyer, representative for the Union of Concerned Scientist in the United States: By “pledging to set the kind of powerful example that can inspire the world," both countries "raise expectations" that they "will move more forcefully to confront the threat of climate change."

Yet, as we all know, the devil will surely be in the details. So we wait in anticipation as the U.S. and China discuss the details of this historic deal in an upcoming Strategic and Economic Dialogue meeting later this July.

The Accelerated Growth of Carbon Markets

"Right now, the carbon markets of the future are under construction in all corners of the world", enthused Rachel Kyte, Vice President of Sustainable Development at the World Bank, in a recent Huffington Post article.

According to Kyte, at least 35 countries, 18 sub-national jurisdictions in the U.S. and Canada, and 7 Chinese cities and provinces will eventually be launching their own carbon markets to reduce their greenhouse gas emissions (GHG).

For example, China has vocally expressed its resolute determination to use the "magic of the market" of emissions trading as a way of greening its robust economy. The Chinese government believes that the creation of its own national carbon emissions market will serve as a very efficient strategy to achieving a sustainable green economy.

The linking of carbon markets with one another is crucial to achieving cost efficiencies in reaching a global carbon price for carbon credits. To this end, the World Bank established the Partnership for Market Readiness (PMR) in 2011, which has brought together over 30 developed and developing countries to consolidate their efforts in creating market-based instruments for GHG emissions reduction, including the creation of emissions trading schemes. Indeed, this bottom-up approach may prove to be a more effective way to successfully combat climate change.

US is Global Leader in Cutting Greenhouse Gas Emissions

In his New York Times article, "A Model for Reducing Emissions", Eduardo Porter reports that the US has cut its CO2 emissions by almost 13 percent since 2007. The Americans have reduced their total energy use in the past 5 years by 5 percent. Surprisingly, this reduction is likely the most substantial GHG cut among developed countries and even more than what Europe has achieved.

The most compelling driver for the incredible decline in CO2 spewing is neither regulation nor increased citizenry initiatives to combat climate change. It is simply the interplay of market forces: low energy prices and technological innovation. In other words, the reasons are economic, not political.

Undeniably, the depressed economy has caused the lower production of goods and services, which in turn has decreased the Americans' use of energy. But a breakthrough in hydraulic fracturing of shale rocks has also produced massive amounts of cheap natural gas, which is significantly cleaner than coal. This in turn has caused electric utilities to switch from coal to natural gas, increasing the latter's overall proportion from 21 percent to 30 percent of total electricity produced from power plants.

Will these market forces continue to bring into fulfillment President Obama's goal of cutting CO2 emissions by 17 percent by 2020? Maybe. But until there is a carbon price that internalizes the escalating environmental damage and climate threat that carbon imposes on humanity, only then will there be a genuine driver that effectively dampens massive CO2 spewing.

Time to Confront Climate Change

The New York Times editorial “Time to Confront Climate Change” recalls that during his first term, President Obama described climate change as one of humanity’s most pressing challenges. He pledged an all-out effort to pass a cap-and-trade bill that would limit greenhouse gas (GHG) emissions. Unfortunately, during that period, many political obstacles blocked Mr. Obama’s administration from successfully passing a cap-and-trade bill.

Since his re-election in November 2012, President Obama identified climate change as one of his top priorities in his second term. In his interview for TIME’s Person of the Year award, he cited the economy, immigration, climate change and energy at the top of his agenda for the next four years.

The article then raised a very important question: Will President Obama bring the powers of the presidency to bear on the climate change problem?

President Obama has strategic “weapons” within his reach to tackle climate change and reduce emissions while reasserting America’s global leadership, the article notes.

One weapon he has is to ensure that natural gas, which is hugely abundant in the U.S., is extracted without risk to drinking water or the atmosphere. Indeed, the U.S. has natural gas in abundance, a boon considering that it emits only half the GHG emissions as coal does. This can be undertaken by the Obama administration through national legislation to replace the inconsistent, patch-work requirements of various state regulations.

Another weapon President Obama has is to enact and implement policies both in well-known clean energy technologies (i.e. wind power and solar power) as well as in basic research, next-generation nuclear plants and promising technologies that could lead to a low-carbon economy.

Moreover, another weapon within President Obama’s arsenal is to call on the Environmental Protection Agency (EPA)’s authority under the Clean Air Act to limit emissions from stationary sources, mainly coal-fired power plants. The EPA has already proposed strict emission standards for new power plants that can only be built when they have installed carbon capture and sequestration technologies. The problem that the EPA will need to deal with is what to do with existing coal-fired power plants, which still generate about 40% of U.S. electricity power.

At the Copenhagen climate meeting back in 2009, President Obama committed that the U.S. would reduce its GHG emissions by 17% below 2005 levels by 2020. With the abundant supply and strong demand for cheap natural gas as well as the EPA’s newly established fuel standards and mercury rules, among others, the U.S. is now on its way to achieving a 10% GHG reduction by 2020.

Thus, it appears that reaching President Obama’s 17% goal is within the realm of the possible after all. That is, if he courageously uses the powers of his presidency to wield the strategic weapons he has to tackle climate change.

5 Steps for Business-friendly Climate Agenda

Eric Pooley provides five steps that President Obama should take to address climate change in his second term. In his Harvard Business Review article, “A Business-Friendly Climate Agenda for Obama's Second Term”, Pooley outlines how the president can fulfill his promise to ensure that America "isn't threatened by the destructive power of a warming planet". He emphasizes that the following 5 steps can only be successful with the active support and participation of private industry.

1. Feed the conversation. President Obama can start by simply by talking about the issue and helping Americans see the relationship between emissions, climate change and extreme weather. This conversation is crucial as it engages the voices from private industry, including insurance companies, pension funds, banks and small business. To be politically viable, climate solutions must be economically sustainable.

2. Reduce climate accelerants. President Obama can take immediate steps to reduce potent greenhouse gases other than carbon, such as methane and fluorinated gases used in refrigerants and industrial applications. Although carbon is most ubiquitous, these substances are "climate accelerants", which means that they accelerate global warming the same way gasoline fuels a fire.

3. Start a clean energy race. President Obama can reduce subsidies for fossil fuels, continue tax credits for renewable energy while increasing R&D funding. Congress should pass national clean energy standards, which would require states to get more energy from renewables. Obama should also encourage private capital to invest in low-carbon energy by removing barriers to investments in efficiency and renewables.

4. Use the Clean Air Act. President Obama should use the Clean Air Act to reduce greenhouse gas emissions, under authority confirmed by the U.S. Supreme Court in Massachusetts v. EPA. This means vigorously defending the clean-air rules that his administration has already put in place, including the historic higher fuel economy standards for new cars and trucks and restrictions on the emission of mercury and other toxic air pollution for power plants. His administration should also set CO2 emission standards for new and existing power plants through flexible and economically efficient approaches.

5. Put a price on carbon. President Obama should heed the call of economists from across the political spectrum that believe that the most economically efficient way to cut carbon pollution is by imposing a price via a carbon tax or through cap and trade. Either would be a powerful incentive to produce cleaner power and could be accompanied by lower taxes on labor or capital, easing the impact on working families and business. As the U.S. moves toward a fiscal cliff, there is slew of discussions in Washington about raising revenue through a carbon fee. It could be in the form of a carbon tax starting at $20 per metric ton and rising at 6% a year that could raise $154 billion by 2021.

A Case for Clean Subsidies

In his Harvard Business Review article entitled “The Case for Clean Subsidies”, James Bacchus argues that the rules of the World Trade Organization (WTO) should be amended to create an exemption for green energy. These type of exemptions are not new. Many years ago, exemptions that helped achieve ”new environmental requirements” were agreed upon during the Uruguay Round of trade negotiations for subsidies. Unfortunately, these exemptions expired in 2000.

Due to the proliferation of governmental subsidies for clean energy worldwide, Bacchus notes that international trade disputes over green energy have been noticeably accelerating at the WTO. This is because these type of subsidies “distort trade by lowering costs for local manufacturers, thus reducing access to local markets for foreign companies and giving local manufacturers an unfair advantage in exporting to other markets.”

Yet, because fossil fuels are so much cheaper than renewable energy and and because greenhouse gas (GHG) emissions from fossil fuels are accelerating climate change, market forces cannot be relied upon to determine the world’s future energy use. Verily, there is far more at stake than a simple price tag.

While imposing a carbon tax that puts a price on carbon could be effective, such initiative could be politically unworkable. Thus, he proposes that “the only practical political alternative for producing renewable energy competitively seems to be subsidies” because they “ease the necessary shift to low-carbon economies”. However, these subsidies cannot succeed so long as the WTO rules make them illegal under international law. Consequently, amending the WTO rules to make an exemption for green subsidies appears imperative in order to successfully address climate change.

Energy and Climate Change in Obama's To-Do List

In the New York Times article, “A To-Do List for the Next For Years”, Carol Browner proposes the need for President Barack Obama to finally execute on a climate change agenda. Ms. Browner was former director of the White House Office of Energy and Climate Change Policy from 2009 to 2011 and the administrator of the Environmental Protection Agency (EPA) from 1993 to 2001.

“Energy and climate change, two issues that deeply divide the country, stand out as major pieces of unfinished business for the Obama administration,” she notes. Nevertheless, she points out that President Obama has unequivocally stated that “even for those who don’t believe climate change is real, the benefits of clean energy -- cleaner air, energy independence, American jobs and enhanced global competitiveness -- are just too important to ignore.”

How then can President Obama execute on a climate change agenda? By using his executive authority and by leverage existing energy laws.

The U.S. Supreme Court has affirmed the EPA’s authority to limit greenhouse gases that endanger public health. Browner recalls that during his first term as president, Obama used an energy bill signed by George W. Bush to reach an agreement on cleaner, more fuel-efficient cars. Car manufacturers had business certainty, consumers saved money at the pump and the environment became cleaner. She notes that President Obama can use this existing authority to work with the electric utilities to reduce carbon pollution and secure greater energy efficiency while providing business certainty.

Ms. Browner also recommends that given the abundance of natural gas, the Obama administration must ensure that “fracking” is done in accordance with strong public health standards. Also, instead of 20 to 30 different state regulations that are imposed on fracking businesses, the Obama administration should just develop one set of national requirements based on the best available science and technology while leaving the oversight and enforcement up to the states.

Indeed, by executing on a strong climate change agenda in the next 4 years, President Obama can ensure that the U.S. moves steadily and unconditionally towards a sustainable, clean energy future.

New Sustainability Metric: Total Return on Resources

The Boston Consulting Group (BCG)'s recent report stated that, in order to succeed in this new world of sustainability, companies will need to treat "resource management" as essential to their business. To do this, companies must focus on their “total return on resources” in order to optimize their inputs and outputs to maximize profits.

For inputs, companies will need to monitor the payback from natural resources in order to minimize the consumption of scarce supplies. Thus, power companies, for example, put a lot of money in improving the efficiency of their generating plants to reduce how much coal or natural gas they need in order to produce each megawatt of electricity.

For outputs, companies will also need to manage the "putback", which is the effect of their actions on the future supply of natural resources and on the climate so as to limit damage to the larger ecosystem. In such cases, for example, power companies put a lot of money in scrubbers and other processes to reduce the harmful emissions they release into the air.

The BCG report cites many stellar examples of companies focusing on their “total return on resources”. One of them is the Florida Ice & Farm, a Costa Rica-based beverage company. Its highly visionary CEO, Ramón de Mendiola Sánchez proclaimed that 40 percent of the variable portion of executive pay would be dependent on the company’s performance on environmental and social measures. He established a framework of strict measurements and strong managerial focus on environmental metrics, such as solid waste, water use and carbon dioxide emissions. The company set very lofty goals of achieving zero net solid waste by 2011, becoming water neutral by 2012 and carbon neutral by 2017. Thus, it comes as so no surprise that one of its bottling plants has become the most efficient in the world in terms of water usage. At the same time, the company’s revenues and market share have continued to grow through a tough economy. Mendiola firmly believes that this commitment to sustainability is the only way to achieve continued growth and to sustain Florida’s position as one of the most influential and admired companies in Costa Rica.

Indeed, the BCG report notes that, as resource supplies fail to keep up with burgeoning demand, companies will start treating sustainability as a central part of management rather than thrust it to the amorphous office unit of corporate social responsibility. The world as a whole is on the verge of a new wave of innovation in resource management, the report observes. And, as with all innovation, this will create opportunities for companies to teach others how to thrive in a carbon-constrained, resource-constrained world.

Norway Sets One of World’s Highest Carbon Tax Rates

The International Herald Tribune recently reported that Norway is set to almost double its CO2 tax rate for offshore oil and gas production beginning in January 2013. Indeed, the Norwegian government is setting one of the highest carbon tax rates in the world by increasing the CO2 tax rate from 210 Norwegian Krone (about €28) to 410 Krone (about €55) per ton of CO2. A substantial part of the newly generated tax revenue will go into the government’s investments in clean energy, the environment and public transportation.

Many have lauded Norway’s sharp increase in carbon taxes for energy producers as exemplary. “The higher the tax, the more aggressive a signal the government is going to send about the need to lower carbon emissions,” said Janet Milne, a director of the Vermont Law School’s Environmental Tax Policy Institute. “You have to get fairly high carbon tax rates in order to get a significant long-term change in behavior,” she said.

“The EU prefers a system that taxes more of what we burn and less of what we earn. If we want to consume less energy, we need a smarter way of taxing,” said Isaac Valero-Ladron, the EU Spokesman for Climate Action.

According to the Australian Climate Commission, by 2013, 33 countries and 18 states and provinces (referred to as "sub-national jurisdictions") will have some sort of levy associated with the emission of CO2.

U.S. Imposes Tariffs on Chinese Solar Companies

The New York Times reported that the U.S. Commerce Department has determined that Chinese solar manufacturing companies were engaged in the unfair trade practice of "dumping". That is, they were benefiting from unfair government subsidies from the Chinese government and thus, were selling their products in the U.S. below the cost of production. In its determination, the Commerce Department imposed tariffs ranging from 24 - 36 percent on most solar panels imported by the U.S. from China. The tariffs will become effective if and when the International Trade Commission (ITC) decides that the Chinese solar companies have engaged in practices that have actually harmed or threatened to harm the American industry. The ITC decision is expected in November.

A group of U.S. solar manufacturers commenced this trade dispute in 2011, alleging that that Chinese companies were "competing unfairly in the American market". Chinese solar companies have cornered about 66% of the global sales for solar panels. Many solar panel manufacturers in the U.S. and in Europe have closed shop since then. In a similar trade dispute, the European Union recently commenced the world's largest anti-dumping case, involving the importation of Chinese solar panel amounting to $26.5 billion in 2011.

Designing Carbon Pricing: Questions that Policymakers Should Address

In its 2012 publication entitled "Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers", the International Monetary Fund (IMF) stated that revenue-raising carbon pricing is the instrument that effectively addresses climate change. It noted that carbon pricing can either be in the form of carbon taxes or cap-and-trade systems with allowance auctions. What is crucial is that it is well-designed in terms of comprehensively covering emissions.

Thus, in designing carbon pricing legislation, the IMF suggested that policymakers give due consideration to the following questions:
  • How strong is the case for carbon pricing instruments over regulatory approaches (e.g., standards for energy efficiency or mandates for renewables)? How do carbon taxes and cap-and-trade systems compare? What might be some promising alternatives if “ideal” pricing instruments are not viable initially?
  • How is a carbon pricing system best designed in terms of covering emissions sources, using revenues, overcoming implementation obstacles (e.g., by dealing with competitiveness and distributional concerns), and possibly combining them with other instruments (e.g., technology policies)? How might pricing policies be coordinated across different countries?
  • How should policymakers think about the appropriate level of emissions pricing?
  • How important is inclusion of the forest sector in carbon pricing schemes? How feasible is this in practice?
  • What should be the priorities for developing economies in terms of fiscal reforms to reduce emissions?
  • From the perspective of raising funds from developed economies to fund climate projects in developing economies, what are the most promising fiscal instruments? How should they be designed?
  • What lessons can be drawn from experience with emissions pricing programs, like the European Emissions Trading System (ETS) or the various carbon tax programs to date?

The IMF argued that the choice between carbon taxes and emissions trading systems is generally less crucial than implementing one of them and getting the design details right. What is important is that carbon pricing must comprehensively cover emissions and avoid wasting its revenue potential by granting free allowance allocations in cap-and-trade systems or allocating revenues for unimportant policy outcomes.

EU Inclusion of Airline Emissions triggers International Law Dispute

The brewing international controversy of airline emissions being included in the EU ETS highlights one of the risks of the EU unilaterally imposing a carbon market on its member countries while China, US and other major economies do not have their own carbon markets, as reported in the New York Times.

The Law

The European initiative, which was effective on January 1, 2012, involves folding aviation into the six-year-old emissions trading system, in which polluters can buy and sell a limited quantity of permits, each representing a ton of carbon dioxide. The law requires airlines to account for their emissions for the entirety of any flight that takes off from — or lands at — any airport in the EU bloc. While airlines landing or taking off in Europe are included in the EU ETS beginning January 1, 2012, they do not have to start paying anything until April 2013.

The goal of this European initiative is to speed up the adoption of greener technologies at a time when air traffic, which represents about 3 percent of global carbon dioxide emissions, is growing much faster than gains in efficiency.

Consequences of the Law

Airlines will have to buy 15 percent of their emissions certificates at auction. Carbon emissions from planes will initially be capped at 97 percent of the 2004-2006 levels. The emissions rules apply from the moment an aircraft begins to taxi from the gate, either en route to or from a European airport, and they cover emissions for the flight from start to finish — not just the portion that occurs in European airspace.

Why the EU went ahead with the Law

Governments and airlines have been in negotiations for more than a decade over the creation of a global cap-and-trade system under the auspices of the International Civil Aviation Organization (ICAO), a U.N. agency that handles global aviation matters. The organization’s 190 member countries passed a resolution in 2010 committing the group to devising a market-based solution, though without a fixed timetable. Impatient with the pace of those talks, the European Commission moved ahead with its own plan, which was passed two years ago with the support of national governments and the European Parliament.

Airline Industry Raise Vehement Objections

Some 26 countries, including China, Russia and the United Countries, formally showed their dissatisfaction with the European system — a move that heralds a possible commencement of a formal dispute procedure at the ICAO. They have questioned whether this EU directive is invalid. Their arguments include the following:

1) Why the requirements apply to emissions from the entire flight, not just the portion that occurs within EU airspace?

2) In applying its environmental legislation to aviation activities in third countries' airspace and over the high seas, the E.U. has violated fundamental and well-established principles of customary international law.

3) The EU's actions infringe on the notion that each nation has sovereignty over its territory, a universally recognized principle of international law

4) By acting unilaterally, the European Union also breached international obligations that require such matters to be resolved by consensus under the auspices of the International Civil Aviation Organization (ICAO), a U.N. agency that handles global aviation matters.

China's Reaction

China announced that its carriers would be forbidden to pay any charges under the European emissions system without Beijing’s permission. It also threatened retaliation, such as impounding European aircraft, if the EU punishes Chinese airlines for not complying with its emissions trading scheme. In fact, this dispute halted China's purchase of Airbus planes worth up to $14 billion. However, during Chancellor Angela Merkel’s visit to Beijing last August, China signed an agreement with Germany for 50 Airbus planes worth over $4 billion.

U.S. Reaction

The U.S. Senate recently passed a bill that would protect U.S. airlines from paying for their carbon emissions on European flights. Democratic Senator Claire McCaskill said that “Americans shouldn’t be forced to pay a European tax when flying in U.S. airspace.” The U.S. bill increases pressure on the ICAO to formulate a global alternative to the EU law.

EU Response to China and the other countries

The EU posits that the ETS is not a charge or a tax but a cap-and-trade system. Its defense includes the following claims:

1) The purpose of our legislation is to reduce emissions, not make money.

2) Including aviation in the ETS is "fully consistent with international law" because the EU is not seeking to extend its authority outside of its airspace.

3) However, given the complaints of China and other countries, the EU could suspend parts of a new law requiring airlines to account for their greenhouse gas emissions if countries were to make clear progress this year toward establishing a global emissions control system

The EU Commission said that the EU would only repeal or amend the law if there was an international deal to tackle emissions from planes, which account for less than 3 percent of global greenhouse gas emissions.

U.S. Energy Boom: Miracle or Mirage?

In his New York Times op-ed article, “Is the Energy Boom a Mirage?”, Steve Yetiv remarked that while the U.S. is experiencing a boom in oil and natural gas production, the benefits of the boom may have been exaggerated. For instance, it will neither automatically produce lower oil prices nor bring greater energy security as expected.

Mr. Yetiv set out several reasons why optimism for boom must be tempered. One reason is the growing backlash against hydraulic fracturing, or fracking, which can pollute water systems. While emerging technologies are making fracking safer and less environmentally damaging, the costs involved are currently not financially justifiable.

“To be sure”, he observed, “the American boom has its positives…Use of America’s abundant natural gas can also offset reliance on dirtier coal.” But he cautioned that “a boom in fossil fuels is hardly something to celebrate, given the urgency of climate change.”

The Race for Water

There is a “new race for water” that has farmers from the arid heartlands of Colorado, USA, competing against energy companies for the purchase of this increasingly scarce resource, reports the New York Times. What has aggravated this rivalry even more is this summer’s record-breaking drought that has scorched the already parched land and has ruined farmers’ crops.

The article notes that farmers in Colorado pay about $30 - $100 per acre foot of water. This is juxtaposed to the oil and gas companies that pay about $1,000 - $2,000 for the same amount of water from city pipes. While this revenue is a boon to local water utilities, farmers complain that they lack the deep pockets to compete with these companies.

Energy companies are buying tons of water that is needed for their hydraulic fracturing techniques to crack the ground and release the oil and gas that is stored beneath it. They estimate that they will use about 6.5 billion gallons of water in Colorado this year, which is about 0.1 percent of overall water use. This is almost nothing compared to the 85.5 percent that is used for irrigation and agriculture in Colorado.

Said Mike Chiropolos, a Colorado lawyer: “Water flows uphill to money… It’s only going to get more precious and more scarce.”

World's Largest Carbon Market: Linking Australian & EU Emissions Trading Systems

Last week, the Australian Minister for Climate Change and Energy Efficiency, Greg Combet, and the European Commissioner for Climate Action, Connie Hedegaard announced that Australia and the European Union (EU) will be linking their emissions trading systems.

Commissioner Hedegaard said: "We now look forward to the first full international linking of emission trading systems. This would be a significant achievement for both Europe and Australia. It is further evidence of strong international cooperation on climate change and will build further momentum towards establishing a robust international carbon market."

Minister Combet said: "Linking the Australian and European Union systems reaffirms that carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions."

A link between emissions trading systems allows companies in one system to use units from another system for compliance purposes. The advantages of linking include:

  • reducing the cost of cutting carbon pollution because enterprises will have access to more and lower cost emissions abatement units;
  • increasing market liquidity, which in turn offers a more stable carbon price signal;
  • increasing business opportunities to trade because companies with excess units will have access to more buyers and companies that need more units can purchase them from a wider range of sellers; and
  • supporting global cooperation on climate change.

A full two-way link between the EU and Australian cap-and-trade systems will start by July 1, 2018. Under this arrangement, private industry will be able to use carbon units from the Australian emissions trading scheme or the EU Emissions Trading System for compliance under either system.

An interim link between the two systems will be established allowing Australian businesses to use EU allowances to help meet liabilities under the Australian emissions trading scheme from July 1, 2015 until the full link is operational in 2018.

According to the EU website, this linking arrangement “represents the first step towards linking the established carbon market in Europe with developing carbon markets in the Asia Pacific. Together, the linked Australian and European emissions trading systems will be the world’s largest carbon market and a major driver of the global transition to a low carbon economy.”

U.S. Adopts Stricter Fuel Efficiency Standards

The Obama administration recently issued final rules that would require automakers to nearly double the average fuel economy of new cars and trucks by 2025, reported The New York Times. This new fuel efficiency mandate requires an average fuel economy of 54.5 miles per gallon (mgp) for the 2025 model year. Existing rules for the Corporate Average Fuel Economy (CAFÉ) program require an average of about 29 mpg, with gradual increases to 35.5 mpg by 2016.

Obama announced that the stricter fuel standards represent “the single most important step” his administration has ever taken to reduce U.S. dependence on foreign oil. The benefits are numerous: reduction in oil consumption by 12 billion barrels; savings of $1.7 trillion in fuel costs; average savings of more than $8,000 a vehicle by 2025; reduction in greenhouse gas emissions by half by 2025 through the elimination of six billion tons over the course of the program; and creation of hundreds of thousands of jobs by increasing the demand for new technologies.

Republican presidential candidate Mitt Romney criticized the new fuel efficiency standards as “extreme” as they “would limit the choices when consumers shop for a new car.” Remarked Romney’s camp: “The president tells voters that his regulations will save them thousands of dollars at the pump, but always forgets to mention that the savings will be wiped out by having to pay thousands of dollars more upfront for unproven technology that they may not even want.”

Nevertheless, in a New York Times’ Op-ed article entitled “Cleaner Cars, a Safer Planet”, it was noted that this fuel efficiency mandate is “an important step on America’s path to a lower-carbon and more-secure energy future…. They may also serve as proof that well-tailored government regulation can achieve positive results and that consensus among old enemies — in this case environmentalists and the car companies — is possible even at a time of partisan discord.”

Sources:

2012 Energy and Climate Outlook

The Massachusetts Institute of Technology (MIT) Joint Program on the Science and Policy of Global Change recently published its 2012 Energy and Climate Outlook report (the “2012 Outlook”). The goal of 2012 Outlook is to improve public understanding of the global environment and energy challenges that our world faces, especially in meeting the needs of a projected population of 10 billion people by 2100. It provides solid research that underlies the tight correlation between human endeavours and environmental change.

One of the many significant findings set out in the 2012 Outlook refers to emission targets that G20 nations made at the 2009 Conference of Parties to the UN Framework Convention on Climate Change in Copenhagen. While those Copenhagen targets begin a transition to alternative energy in developed countries and China, they do not provide sufficient incentive to create the full transformation needed within the energy system to stop dangerous levels of climate change. Such necessary transformation envisions wide-scale adoption of renewables, carbon capture and storage, nuclear or alternative propulsion systems in vehicles.

Another significant finding is that while emissions from fossil fuels are huge, other greenhouse gas and land use emissions are also primordial and need to be addressed in order to achieve more stringent stabilization and temperature goals. If policies to reduce them fail, a major opportunity to limit climate change may be missed.

The report concludes: “[T]he Copenhagen pledges do not take us very far in the energy transformation ultimately needed to avoid the risk of dangerous warming. Even if policy efforts in developed countries are successful in holding emissions constant, the emission increases of other nations – growing and industrializing – will contribute to further increases in greenhouse gas concentrations and climate change.”

The full text of 2012 Outlook can be accessed at this link. http://globalchange.mit.edu/files/document/Outlook2012.pdf

Canada Reports Great Progress in Meeting 2020 Emission Target

On August 9, 2012, the Honourable Peter Kent, Canada’s Environment Minister, announced that Canada is half way towards meeting its 2020 greenhouse gas (GHG) emission target. Said Minister Kent: “Using a sector-by-sector approach, our Government has taken action on two of Canada’s largest sources of emissions: electricity and transportation.”

Minister Kent referred to the Canada’s Emissions Trends Report 2012 (the “Report”) that shows a projection of GHG emissions to 2020. When Canada signed the Copenhagen Accord in December 2009, it committed to reduce its GHG emissions to 17% below 2005 levels by 2020, setting a target of 607 Megatonnes (Mt). In 2011, Canada’s GHG emissions were projected to be 785 Mt in 2020. Since then, GHG emissions are now projected to be 65 Mt lower at 720 Mt in 2020.

The Report cites four main factors that have contributed to the decline in projected emissions, when compared to 2011:

The first factor is that GHG emissions are increasingly becoming decoupled from economic growth.

The Report notes that between 2009 and 2010, Canada’s GHG emissions remained steady despite economic growth of 3.2%. The Canadian economy has experienced a substantial decline in energy intensity as industrial processes have become more efficient and lower-emissions and service-based industries have grown. Moreover, GHG emissions from energy generation have declined, primarily due to changes to the electricity generation mix (i.e. from coal to natural gas and renewables) and closure of coal-fired generating units. Thus, economic growth and the level of GHG emissions are becoming increasingly independent of each other. For example, between 2005 and 2010, the Canadian economy grew by 6.3% while its GHG emissions decreased by 6.5%.

The second factor is projected growth for the emissions-intensive sector is now lower, while such growth is now higher for the less emissions-intensive sectors. This reduces projected GHG emissions in 2020, even though total Gross Domestic Product (GDP) is projected to be slightly higher.

According to the Report, emissions intensity continues to improve through 2020 with help from federal, provincial and territorial actions. The projected decline in GHG emissions is associated with a reduction in intensity, implying greater de-coupling between GDP and GHGs. The improvements in emission intensity are partly due to the increased contribution of the services sector, which typically emits less GHG emissions per dollar of GDP and the fact that consumers and businesses are making more progress in reducing emissions while the government helps accelerate the adoption of energy efficient technologies and cleaner fuels.

The third factor is the inclusion in the projections of the contribution of the land use, land-use change and forestry (LULUCF) sector to achieving Canada’s GHG emission target.

The Report notes that, for the first time, there is recognition of the contribution of the LULUCF sector, which has been globally recognized as an important consideration in global accounting frameworks for emissions reductions. Current estimates of this sector’s impact suggest a net contribution of 25 Mt of GHG emissions towards the Canada’s 2020 target.

The fourth factor is that the 2012 projections have a new, lower starting point because the most recent data show that GHG emissions were significantly lower in 2010 than had been previously estimated.

According to the Report, in 2011, GHG emissions were estimated to be at 710 Mt. However, Statistics Canada subsequently reported that Canada’s actual GHG emissions in 2010 were at 692 Mt.

The full text of Canada’s Emissions Trends Report 2012 can be accessed at this link.

U.S. CO2 Emissions Lowest in 2 decades

A recent New York Times article reported that energy-related CO2 emissions in the U.S. from January-March 2012 were the lowest for the first quarter of the year since 1992. The CO2 emissions from energy consumption during this period of 2012 amounted to 1.34 billion metric tons, down by nearly 8% from a year earlier.

According to the federal Energy Information Administration (EIA)’s report, CO2 emissions during the year are generally highest in the first quarter because of the strong demand for heat produced by fossil fuels, such as coal and natural gas. However, the EIA identified the confluence of three factors that contributed to this significant CO2 emissions decline:

The first factor is lower gas heating demand. This is mainly due to a mild winter when temperatures were markedly above the historical average for the season.

The second factor is reduced gasoline demand. This is mainly due to lower economic activity.

The third factor is a decline in coal-fired electricity generation. This is mainly due to utilities using less coal for electricity generation as they burned more low-priced natural gas.

The New York Times article noted that “[t]he extraction of large natural gas deposits in the Marcellus Shale has contributed to the rise of inexpensive natural gas, causing prices to decline in the last four years and making it a far cheaper option than burning coal. In 2005, coal accounted for half of all electricity generated in the country. But the embrace of natural gas, which now accounts for about 30 percent of electricity generation, has caused coal’s share to retreat to 34 percent, a 40-year low.”

However, according to the article, climate scientist Michael Mann warned that when shale gas is extracted from the ground, “fugitive methane”, a far more potent greenhouse gas than CO2, can escape into the atmosphere. He noted: “We may be reducing our CO2 emissions, but it is possible that we’re actually increasing the greenhouse gas problem with methane emissions.”

Federal Court of Canada Holds that Canada can Legally Withdraw from Kyoto Protocol

On January 13, 2012, Daniel Turp filed an application with the Federal Court for judicial review of the Government of Canada’s decision to withdraw from the Kyoto Protocol. Its decision to withdraw was communicated to the Secretary General of the United Nations on December 15, 2011. Turp asserted that withdrawal from the Kyoto Protocol was illegal as it was in violation of the Kyoto Protocol Implementation Act (KPIA), among others.

On July 17, 2012, in Turp v. Canada, the Federal Court dismissed the application for judicial review. It found, among other things, that the KPIA, which established certain climate-change-related reporting obligations on the Canadian government, did not limit its royal prerogative to withdraw from the Kyoto Protocol. Thus, the government’s decision to withdraw from the Kyoto Protocol did not violate the KPIA.

The full decision of Turp v. Canada can be accessed at this link:
http://cas-ncr-nter03.cas-satj.gc.ca/rss/T-110-12%20kyoto%20decision%20ENG.pdf

Offsets as Imperative for Canada’s Competitiveness

I believe that Environment Canada should include offsets (Certified Emission Reductions - CERs) as one of the compliance mechanisms for a future Canadian cap and trade scheme. This is because Canada will need a suite of flexible mechanisms, like offsets, that will enable Canadian firms to choose from a buffet of cost-containment options in order to maintain competitiveness.

Sec. 2.4 of the ISSD report notes: “The overall societal cost of carbon policies can be significantly reduced with the use of offsets as a compliance mechanism. Average offset prices of existing systems reviewed were found to be in the range of 42 per cent to 89 per cent less expensive than other compliance options.”

The feature of offsets as a mechanism that reduces compliance cost is very significant for Canada’s overall competitiveness. This is because one key aspect of Canada’s climate policy is its greenhouse gas (GHG) emissions growth.

According to the National Round Table on the Environment and the Economy (NRTEE) report, Canada is projected to have a faster, higher emissions growth relative to the US. This relatively faster emissions growth in Canada implies a greater level of effort and consequent higher carbon prices to reduce emissions and meet the stated targets of Canada. Moreover, Canada’s industrial emissions account for a much higher share of overall GHG emissions. This is because of the higher emissions intensity of Canada’s industrial sectors, particularly the mining and oil and gas extraction sectors, which have shown strong growth in the past decade and are predicted to continue growing substantially. For example, industrial emissions are forecast to account for nearly 50 % of total GHG emissions in Canada in 2030 (as juxtaposed to around 15 % of total GHG emissions in the US

Thus, given the greater effort that Canada needs to reduce its total GHG emissions and the fact that 50% of such total GHG emissions comes from its industrial sectors, then it is imperative for Environment Canada to enable such industries to use offsets so that they can meet their compliance obligations in a cost-effective manner. In failing to do so, Environment Canada will stifle the opportunity of inudstries to find low-cost options, to the detriment of the Canadian economy and Canadian end-users.

Reference:
National Round Table on the Environment and the Economy. (2011). Climate Prosperity, Parallel Paths: Canada – US Climate Policy Choices, Report 03, 1-160.

Thoughts on the Corporate Knights Best 50 Canadian Corporate Citizens List

I read with great interest the Corporate Knights Best 50 Corporate Citizens in Canada. The metrics used in arriving at the Best 50 list were very comprehensive, as they ran the gamut of environmental, social and governance (ESG) indicators.

For Environmental indicators, the following metrics were used:
• energy productivity
• carbon productivity
• water productivity
• waste productivity

For Social indicators, following metrics were used:
• ratio of CEO remuneration to lowest-paid employees
• number of injuries and no lost-time accidents per 1M hours worked
• average % of taxes paid over past 4 years
• funded status of defined- benefit plan benefit obligations

For Governance indicators, following metrics were used:
• existence of sustainable development-themed board committee
• existence of a link between sustainability criteria and senior executive’s compensation
• percent of women, Aboriginal, and visible minorities on Boards of Director

Needless to say, I was very surprised to learn that a lot of companies were coming from the Oil, Gas and Consumable Fuels industry and from the Metals and Mining industry. This is because these industries have the reputation of having as corporate members the heavy polluters and large emitters of GHGs.

I was also very surprised that the list had an economy-wide scope of a plethora of industries – from insurance to independent power producers, to commercial banks, to media, to capital markets, to professional services, to retail and to diversified telecommunications, in addition to the oil, gas and consumable fuels, and the metals and mining industries. This evidences that the ESG indicators have become acceptable benchmarks in the larger mainstream sectors of Corporate Canada.

In view of these revelations --- including the discovery of companies in the “notorious” Oil, Gas and Consumable Fuels and the Metals and Mining industries in this list ---- my traditional perception of such companies in these industries has been radically altered. But then again, it should probably not come as such a surprise to me. This is because if these resource-based companies ignore ESG indicators in their overall operation and management of their companies, they only do so at their peril.

Written: 2011 December
Reference:
The Corporate Knights Best 50 Corporate Citizens in Canada at http://www.corporateknights.com/report/2011-best-50-corporate-citizens-canada/2011-best-50-corporate-citizens-canada

Carbon Finance: To Trade or Tax?

There are a lot of features of a Carbon Tax that make it an effective economic-incentive approach to address climate change:

  1. Carbon taxes lend predictability to energy prices. This allows for strategic decision-making involving energy to be made will full awareness of the carbon–appropriate price signals, whether it is design of new electricity generating plants to the purchase of the family car.
  2. Carbon taxes will provide quicker results. The taxes themselves can be designed and adopted quickly and fairly.
  3. Carbon taxes are transparent and are easier to understand than Cap & Trade. The government simply imposes a tax per ton of carbon emitted, which is easily translated into a tax per kWh of electricity or gallon of gasoline.
  4. Carbon taxes address all sectors and activities producing carbon emissions. They target carbon emissions in all sectors such as energy, industry and transportation.

Indeed, the three-letter word called “tax” can spell political suicide for some governments, especially in the midst of this global financial crisis. Thus, some governments may not be bold enough to espouse it as a strategic policy tool to fight climate change.

Written: 2011 November
References:

The Issue of Double Counting in the Monitoring and Reporting of Greenhouse Gas Emissions (MRG)

There is a complexity inherent in MRGs, especially in respect of consistency of reported information. One related issue relates to international offsets and double counting.

The issue revolves around the following questions:

How will offsets be accounted for in reporting and reviewing countries’ progress toward meeting their emission-reduction targets under the Cancun Agreement? Will both developed (buyer) and developing (seller) countries be able to count emission reductions from offset projects towards their respective pledges? Or will only the buyers get to count them, as is currently the case under the Kyoto Protocol and domestic emissions trading systems?

Currently, there is uncertainty in the existing agreements. Most countries have not taken an official position on what they would be doing.

A Stockholm Environment Institute paper and policy brief entitled “The Implications of International Greenhouse Gas Offsets on Global Climate Mitigation” addressed this issue when the paper was presented at a carbon markets and accountability seminar hosted by the OECD and the International Energy Agency in April 2011.

The paper concluded that the use of international offsets, if counted both by the supplying (developing) and buying (developed) country, could effectively reduce the ambition of current pledges by up to 1.6 billion tons CO2e in 2020. It suggested that the current pledges could significantly fall 10% lower than the total abatement required to stay on a path consistent with limiting warming to 2°C. The paper assumed that each ton of offset credit represents a ton of emissions benefit. To the extent that offsets do not represent real, additional reductions, then the effective dilution of pledges could be even greater.

It would be highly beneficial if this double counting issue of international offsets is settled uniformly across the EU and globally in order to preserve the environmental integrity of the EU ETS and the upcoming emission trading systems around the world.

Written: 2012 March
Reference: Stockholm Environment Institute, “The Implications of International Greenhouse Gas Offsets on Global Climate Mitigation (2011)

What are the advantages and disadvantages of catastrophe bonds?

Advantages

  • Catastrophe bonds have less credit risk because the total amount of funds which can be called by the (re)insurer if a catastrophe occurs are placed in trust. In contrast, reinsurers do not hold funds equal to their maximum exposure, and thus reinsurers have insolvency risk.
  • Catastrophe bonds also reduce agency costs relative to equity capital, because the funds raised from the bond issue are placed in trust and cannot be used by managers unless a specified catastrophe occurs.
  • Catastrophe bonds involve lower tax costs than equity capital, just as debt financing in general has a tax advantage relative to equity financing.
  • The catastrophe bond structure reduces financial distress costs relative to traditional subordinated debt, because the contingent payments are based on readily observable variables (the occurrence of a catastrophe) and the payments are agreed upon ex ante. Additional debt financing generally involves greater financial distress costs.
  • Catastrophe bonds have a moderating effect on reinsurance prices and prevent reinsurance prices from increasing any faster than they did. By presenting an alternative to traditional reinsurance, the development of cat bonds has forced reinsurers to become more competitive with pricing.
  • Investing in catastrophe bonds could be recommended since they have presumably low or zero correlation with other currently traded assets and are therefore a promising instrument for portfolio enhancement. Also, cat bonds have attractive risk/return characteristics, especially for those large, sophisticated investors they are designed for, such as mutual funds/investment advisors, proprietary/hedge funds, and (re)insurers.
  • Returns on catastrophe bonds are proven to be less volatile than either stocks or bonds.

Disadvantages

  • The use of catastrophe bonds is hindered by regulatory constraints that generally require that the bonds be issued by an offshore special purpose vehicle. As a result, catastrophe bonds can involve substantial transactions costs. Transaction costs indeed represent approximately 2 percent of the total coverage provided by a catastrophe bond (for example, $2 million for a security providing $100 million in coverage). These costs include: underwriting fees charged by investment banks, fees charged by modelling firms to develop models to predict the frequency and severity of the event that is covered by the security, fees charged by the rating agencies to assign a rating to the securities, and legal fees associated with preparing the provisions of the security and preparing disclosures for investors. The price of a reinsurance contract would not typically include such additional fees.
  • Others institutions avoid purchasing catastrophe bonds altogether because it would not be cost-effective for them to develop the technical capacity to analyze the risks of securities so different from the securities in which they currently invested.
  • Catastrophe bonds are available only to institutional investors.
  • The market in cat bonds generally suffers from lower levels of liquidity relative to mainstream bonds.
  • The dramatic recent growth in the catastrophe bond market has in turn spurred the launch of some new insurance related businesses which could potentially undermine the long term growth prospects of the cat bond market.

Written: 2011 October
References:

Inclusion of Airline Emissions by European Union Emissions Trading System (EU ETS) triggers International Law Dispute

The brewing international controversy of airline emissions being included in the European Union Emissions Trading System (EU ETS) highlights one of the risks of the EU unilaterally imposing a carbon market on its member countries while China, US and other major economies do not have their own carbon markets.

The Law

The European initiative, effective January 1, 2012, involves folding aviation into the six-year-old emissions trading system, in which polluters can buy and sell a limited quantity of permits, each representing a ton of carbon dioxide. The law requires airlines to account for their emissions for the entirety of any flight that takes off from — or lands at — any airport in the EU bloc. While airlines landing or taking off in Europe are included in the EU ETS beginning January 1, 2012, they do not have to start paying anything until April 2013.

The goal of this European initiative is to speed up the adoption of greener technologies at a time when air traffic, which represents about 3 percent of global carbon dioxide emissions, is growing much faster than gains in efficiency.

Consequences of the Law

Airlines will have to buy 15 percent of their emissions certificates at auction. Carbon emissions from planes will initially be capped at 97 percent of the 2004-2006 levels. The emissions rules apply from the moment an aircraft begins to taxi from the gate, either en route to or from a European airport, and they cover emissions for the flight from start to finish — not just the portion that occurs in European airspace.

Why the EU went ahead with the Law

Governments and airlines have been in negotiations for more than a decade over the creation of a global cap-and-trade system under the auspices of the International Civil Aviation Organization, an arm of the United Nations. The organization’s 190 member states passed a resolution in 2010 committing the group to devising a market-based solution, though without a fixed timetable.
Impatient with the pace of those talks, the European Commission moved ahead with its own plan, which was passed two years ago with the support of national governments and the European Parliament.

Airline arguments

Some 26 countries, including China, Russia and the United States, formally showed their dissatisfaction with the European system — a move that heralds a possible commencement of a formal dispute procedure at the International Civil Aviation Organization (ICAO), a U.N. agency that handles global aviation matters. They have questioned whether this EU directive is invalid. Their arguments include the following:

  1. Why the requirements apply to emissions from the entire flight, not just the portion that occurs within EU airspace?
  2. In applying its environmental legislation to aviation activities in third countries' airspace and over the high seas, the E.U. has violated fundamental and well-established principles of customary international law.
  3. The EU's actions infringe on the notion that each nation has sovereignty over its territory, a universally recognized principle of international law.
  4. By acting unilaterally, the European Union also breached international obligations that require such matters to be resolved by consensus under the auspices of the International Civil Aviation Organization (ICAO), a U.N. agency that handles global aviation matters.

In fact, China recently announced that its carriers would be forbidden to pay any charges under the European emissions system without Beijing’s permission.

EU Response to China and the other countries

The EU posits that the ETS is not a charge or a tax but a cap-and-trade system. Its defense includes the following claims:

  1. The purpose of our legislation is to reduce emissions, not make money.
  2. Including aviation in the ETS is "fully consistent with international law" because the EU is not seeking to extend its authority outside of its airspace.
  3. However, given the complaints of China and other countries, the EU could suspend parts of a new law requiring airlines to account for their greenhouse gas emissions if countries were to make clear progress this year toward establishing a global emissions control system.

Written: 2012 February
References:

Why was there an over-allocation of allowances in the European Union Emissions Trading System (EU ETS)?

One reason why there was an over-allocation of allowances in the European Union Emissions Trading System (EU ETS) was because of national self-preservation. The EU gave its member states the authority to determine their specific allocation of allowances. In the name of protecting national economic self-interest, the member states over-allocated allowances to themselves, especially France, Germany and Italy. With no ability to bank allowances into the second phase because of their expiration dates, the allowance price of a Phase I allowance dropped to zero in 2007.

Written: 2012 February
Source: PriceWaterhouseCoopers (PWC). (2009). Carbon Taxes vs. Carbon Trading: Pros, cons and the case for a hybrid approach

What are the two main conditions that make emissions trading systems feasible in the European Union Emissions Trading System (EU ETS)?

Condition 1 - the participants covered by the program must be sufficiently varied for there to be potential gains from trading allowances. If all firms were the same, then they would all face the same abatement costs and so they would all be either net buyers or net sellers. Hence no trade would occur. In the European Union Emissions Trading System (EU ETS), the coverage includes power plants and five major industrial sectors (including oil, iron and steel, cement, glass, and pulp and paper) that together produce nearly half the EU’s CO2 emissions.

Condition 2 - there should be a sufficient number of polluters included in the scheme in order to ensure a reasonably liquid market. This increases the amount of trades that occur, hence allowing a clear price signal to emerge. In turn, this reduces the uncertainty that participants face when making long-term investment decisions because the expected gains from investing to abate are much clearer. Furthermore, the risk of any one participant holding extensive market power, which would restrict trading, is reduced. In the European Union Emissions Trading System (EU ETS), approximately 12,000 facilities in the 25 EU member states are covered.

In successfully meeting these two conditions, the EU ETS’ massive scale and breadth has enabled it to build a very robust emissions trading market in a short period of time. For example, in 2007, over 100 million allowances per month were traded. Moreover, rates of compliance amongst participants were encouragingly high.

Written: 2012 February
Source: PriceWaterhouseCoopers (PWC). (2009). Carbon Taxes vs. Carbon Trading: Pros, cons and the case for a hybrid approach”