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Climate Change Essentials: Navigating Carbon Pricing Mechanisms and Guide to Canadian Federal and Provincial Regulatory Framework

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December 7, 2015


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Introduction

Over the years, climate change policy has experienced its ebbs and flows. Climate change arrived on the international stage at the Rio Earth Summit in 1992, where 154 countries signed the United Nations Framework Convention on Climate Change (UNFCCC) to stabilize atmospheric concentrations of greenhouse gas (GHG) emissions at a level to prevent “dangerous anthropogenic interference with the climate system”. The UNFCCC entered into force on March 21, 1994 and 195 countries have ratified the UNFCCC to date. Subsequent international negotiations led to the Kyoto Protocol, an international treaty which extends the UNFCCC and commits its signatories to reduce GHG emissions. The Kyoto Protocol was adopted in December 1997 and came into force on February 16, 2005. There are currently 192 signatories to the Kyoto Protocol. While Canada withdrew from the Kyoto Protocol effective December 2012, a newly elected federal government has indicated its willingness to re-engage in international talks to reach a new global climate change treaty for the post-Kyoto era.

Following the anticlimactic outcome of the 15th session of the Conference of the Parties to the UNFCCC (COP 15) which produced the non-legally binding Copenhagen Accord in 2009, there was cautious expectation of a legally binding successor agreement – or at least certain legally binding components of an agreement – to the Kyoto Protocol as countries convened in Paris for the latest round of international climate change talks held from November 30 to December 11, 2015 (COP 21). After marathon negotiations and compromises on all sides, COP 21 reached a successful conclusion on December 12, 2015 with the adoption of the Paris Agreement by 195 member nations of the UNFCCC.

Coming into the climate talks, there were four key international drivers behind the push for a global climate change agreement:

  1. Pressure from sub-national and local governments around the world, many of which have undertaken their own initiatives to implement policies and programs to reduce GHG emissions and are now calling for more coordinated national strategies to address climate change. From energy efficiency standards and green building codes, to investments in clean energy and infrastructure, Canadian provinces, territories and municipalities have been leading the way on climate change action.
  2. Calls from industry leaders and investors around the world for governments to put a price on carbon, aimed not only at reducing GHG emissions, but also at facilitating business planning, an “even playing field”, and risk management. The 2014 Global Investor Statement on Climate Change, signed by 385 investors with more than $24 trillion in assets, sets out steps institutional investors (both asset owners and asset managers) can take to address climate change, and calls on governments to support a new global agreement on climate change in 2015. In addition, many companies already operate in countries that have carbon pricing systems in place, so they are incorporating a real or internal carbon price into business planning and investment decisions. According to the CDP (formerly the Carbon Disclosure Project), in 2015, 437 companies are using an internal carbon price ranging from US $6 to US $89 per tonne of carbon dioxide equivalent (CO2e); an additional 583 companies have indicated they will start carbon pricing within 2 years.
  3. The world’s two biggest emitters – China and the United States – have recently made significant commitments to reducing their GHG emissions. In November 2014, the two countries issued a Joint Announcement on Climate Change, pursuant to which the US set an economy-wide emissions reduction target of 26%-28% below 2005 levels in 2025 and committed to make best efforts to reduce its emissions by 28%, while China will achieve peak emissions around 2030 and will make best efforts to peak early. China will also increase its share of non-fossil fuels in primary energy consumption to around 20% by 2030. In August 2015, the US finalized its Clean Power Plan, which will reduce emissions from the power sector to 32% below 2005 levels by 2030. In addition, China plans to a introduce national cap-and-trade program between 2018 and 2020 (covering major industrial sectors) and has committed US $3.1 billion to help developing countries adapt to climate change
  4. Prior to the Paris Agreement, limiting the rise in global temperatures to no more than two degrees Celsius (2°C) was the de facto target for global climate change policy. 2°C is the level scientists of the Intergovernmental Panel on Climate Change (IPCC) say is needed to avoid the potentially adverse consequences of climate change. The concept of the two degree threshold first emerged in the 1970s, when Professor William Nordhaus suggested that warming of more than two degrees would push the climate beyond the limits that humans were familiar with. The two degree limit was formally enshrined into international climate policy in the 2010 Cancun Agreements, which commits governments to “hold the increase in global average temperature below 2°C above pre-industrial levels”. As the British Met Office reports that global temperatures for 2015 are on track to be 1.02°C above the 1850-1900 average, there is a sense that the window is quickly closing for collective action on climate change. With the adoption of the Paris Agreement, countries have committed to a more ambitious goal of holding the increase in global average temperature to well below 2°C above pre-industrial levels, while they pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels.

The Paris Agreement, which contains both binding and non-binding commitments, will enter into force 30 days after the date on which at least 55 parties to the UNFCCC, accounting for at least 55% of total global GHG emissions, deposit their instruments of ratification, acceptance, approval or accession. As noted above, the Paris Agreement aims to hold the increase in global average temperature to well below 2°C above pre-industrial levels, while countries pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels. The Paris Agreement also establishes a series of global goals to enhance climate adaptation efforts and capacity-building, as well as strengthen resilience and reduce vulnerability to climate change.

Since national pledges to reduce emissions are voluntary, the success of the pact in achieving meaningful GHG emission reductions will likely turn on the willingness of future governments to take action as well as global peer pressure. Ahead of COP 21, countries were invited to submit their Intended Nationally Determined Contributions (INDCs), which set out what post-2020 climate actions they intend to take under a new international climate agreement. As of December 12, 2015, 187 parties to the UNFCCC had formally submitted INDCs, covering approximately 94% of global emissions in 2010 and 97% of global population. There is wide variation among national plans in terms of scope and ambition. Member nations are required to put forward a plan, but as noted above, the pledges by countries to reduce emissions are voluntary and there are no legal requirements around how – or how much – countries should reduce emissions. That said, negotiators have built certain legally binding commitments into the Paris Agreement, including a requirement that countries present updated plans every five years (starting in 2020) with ever-tightening emission reduction targets. Countries will also be required to undertake a global stocktake in 2023 (and every five years thereafter) to assess their collective progress toward achieving the goals of the Paris Agreement. Further, they will be required to monitor and report on their national GHG inventories based on standardized requirements. Developed countries have been called on to mobilize financial resources to assist developing countries with respect to both mitigation and adaptation, and other parties are encouraged to provide or continue to provide such support voluntarily.

The adoption of the Paris Agreement marks the start of a renaissance period for climate change policy, one that represents a global paradigm shift towards a lower-carbon economy. The process for renewing Canada’s climate action plan is only just starting now, but Canada has already expressed its support for more ambitious climate action by endorsing the global goal of keeping rising average temperatures to within 1.5°C above pre-industrial levels. How this ambition will translate into federal, provincial and municipal climate action remains to be seen. One thing is clear: in 2016, policy makers, businesses, non-governmental organizations and individuals will come together in a collective conversation about the kinds of policies and actions that will be needed to bring Canada closer to meeting its commitments under the Paris Agreement.

Purpose of this Guide

This guide provides an overview of key climate change issues, focusing on the market mechanisms for addressing climate change as well as the context for climate change concepts such as the global carbon budget and the social cost of carbon. In addition, an overview of Canadian federal, provincial and territorial climate policies, and regional climate change initiatives is provided. While a discussion of municipal climate change initiatives, climate change mitigation and adaptation plans, air quality regulations, and provincial renewable energy policies and incentives is outside the scope of this guide, such initiatives and policies play a key role in the fight against climate change.

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