Continental Cap-and-Trade: Canada, the United States, and Climate Change Partnership in North America

Beginning of article

I.   INTRODUCTION

II.  BACKGROUND OF FEDERAL CAP-AND-TRADE POLICIES
     WITHIN UNITED STATES AND CANADA

     A. United States Federal Policy and Cap-and-Trade
     B. Canadian Federal Policy and Cap-and-Trade

III. CANADIAN OIL SANDS ARE CRITICAL COMPONENT TO
     CONTINENTAL CAP-AND-TRADE DEBATE

     A. Oil Sands Production is Expensive and Creates
        High Emissions
     B. Alberta Developed Unique Climate Change
        Strategy

IV.  REGIONAL FRAMEWORKS AND FACILITATING
     INSTITUTIONS PROMOTE NORTH AMERICAN CLIMATE
     CHANGE COOPERATION
     A. Regional Alliances Between Canadian and
        American Jurisdictions Serve as Focal Points for
        Trans-Boundary Cooperation
     B. Important Facilitating Institutions for Continental
        Cap-and Trade Already in Place

V.   ENERGY AND ENVIRONMENTAL DISCUSSIONS BETWEEN
     THE UNITED STATES AND CANADA PROMOTE
     COOPERATION BUT BARRIERS TO AGREEMENT PERSIST
     A. Canada and the United States Agreed to Clean
        Energy Dialogue
     B. The United States has a Strong Interest in Carbon
        Capture and Sequestration Technology Because of
        High Emissions From Coal Consumption
     C. Canada's Intensity-Based Emissions Proposal may
        be Incompatible with United States' Hard Cap
        System
     D. Regional Agreements Will Impact Federal Cap-and-Trade
        Policies within the United States and
        Canada, but These Initiatives May Languish

VI.  ALBERTA INCREASINGLY ISOLATED WITHIN
     CONTINENTAL CAP-AND-TRADE DEBATE
     A. Alberta's Favorable Response to Clean Energy
        Dialogue
     B. Oil Sands Heavily Impacted by American Low
        Carbon Fuel Standards
     C. Proposal for Securing Alberta's Cooperation

VII. ADDITIONAL CONSIDERATIONS
     A. Mexico Could be Important North American Cap-and-Trade
        Partner
     B. Continental Cap-and-Trade Considered in Light of
        North American Free Trade Agreement
     C. North American Cap-and-Trade System Must
        Consider Problems of E. U. Emissions Reduction
        Scheme

VIII. CONCLUSION

I. INTRODUCTION

Canada and the United States share an energy relationship that is unsurpassed by any other two countries in the world. More oil, natural gas, and electricity are imported into the United States from Canada than from any other country. (1) As the largest energy consumer in the world, (2) the United States is an invaluable customer of Canadian energy production. Because of the size and importance of this relationship, Canada's energy and environmental policies can have a tremendous economic impact on the United States and vice versa. Specifically, these two countries face similar challenges in reducing greenhouse gas emissions while maintaining their critical energy relationship. As the U.S. and Canadian federal governments consider implementing domestic cap-and-trade programs for carbon dioxide emissions, each country's proposals reveal the high degree of interdependence characterizing this North American relationship. While some linkage between these two countries' eventual cap-and-trade systems is inevitable, the United States and Canada should actively negotiate a continental cap-and-trade system for carbon emissions.

If carefully crafted, this system would preserve North American energy security while promoting the development of carbon-reducing technologies. Such a comprehensive framework would also maintain the vital economic relationship between Canada and the United States by sustaining energy production and innovation. Additionally, continental cooperation would avoid potential international trade disputes that could threaten the strong ties between these two countries. Though not the primary focus of this paper, Mexico may also be a willing partner to such an agreement, likely strengthening the continental cap-and-trade framework even further. While there are many advantages to such a comprehensive emissions trading scheme, the initiation of this endeavor presents numerous legal challenges to Canada and the United States. The oil sands within the province of Alberta represent a sensitive issue for many environmentalists, and the United States' dependence on coal creates similar political concerns. Current federal proposals within Canada and the United States differ in some significant ways, and the timeline for final passage of domestic cap-and-trade programs is unclear. Finally, regional cap-and-trade partnerships--already in place in North America--offer both an opportunity and a challenge to the development of a comprehensive continental partnership.

In this paper, Part I provides background on U.S. and Canadian domestic federal policies pertaining to cap-and-trade and reduction of greenhouse gas emissions. Part II summarizes the important role the oil sands of Alberta play in the North America energy framework and discusses Albertan provincial climate change policy. Part III characterizes the numerous regional cap-and-trade alliances and continental facilitating institutions in North America. Part IV addresses specific challenges and opportunities pertaining to Canadian and American partnership on cap-and-trade, and Part V analyzes Alberta's increasingly isolated role within North America. Part VI discusses additional considerations to continental cap-and-trade, including the possibility of Mexico entering such an agreement.

II. BACKGROUND OF FEDERAL CAP-AND-TRADE POLICIES WITHIN UNITED STATES AND CANADA

A. United States Federal Policy and Cap-and-Trade

As of November 2009, the United States does not have a national carbon dioxide emissions reduction scheme. Historically, there has been strong political opposition to mandatory greenhouse gas reductions; moreover, the U.S. Senate has refused to ratify the leading international climate change treaty currently in force, the Kyoto Protocol (Kyoto) of 1997. (3) The Kyoto plan requires industrialized states to reduce their overall carbon dioxide emissions through a cap-and-trade system by an average of 5.2% below 1990 emissions levels by a designated year between 2008 and 2012. (4) In general, a cap-and-trade plan is a system where a jurisdiction sets a cap on the annual emissions of a particular gaseous substance from within its territory. (5) Specific industries are granted a set number of emissions allowances, and these allowances can be sold to third parties if the industry emits less than it was delegated. (6) If a particular industry wants to emit more than its designated amount of the gaseous substance, it can purchase allowances from the aforementioned companies who under-emit. (7) Each year, the jurisdiction reduces the total number of allowances available by a small percentage, leading to an overall reduction in emissions within the country. (8) Kyoto failed in the United States in part because the framework includes exceptions for developing nations such as China and India. (9) Under Kyoto, most developing countries do not have to impose mandatory caps on carbon dioxide emissions through a comprehensive cap-and-trade system. (10) Though the United States did sign Kyoto, the Senate feared such a plan would unfairly detriment the American economy within the global market, and the treaty was not ratified. (11)

More than a decade later, implementation of a mandatory cap-and-trade system is a clear priority within the Obama Administration. (12) During his campaign for the presidency, then-Senator Obama's energy platform included promises that the United States would "[i]mplement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80% by 2050." (13) This represented a "hard" cap on emissions because the plan called for 80% reductions from the total emissions of the previous baseline year of 1990. (14) Since his inauguration as President in January of 2009, Obama has maintained a policy of pursuing cap-and-trade to reduce carbon emissions by 80%. (15) With international climate change talks forthcoming in Copenhagen, Denmark, during December of 2009, President Obama's chief climate negotiator has stated that he expects the United States to be involved in these discussions "in a robust way." (16) Congressman Ed Markey, the Democratic chairman of the House Commerce and Energy Subcommittee on Energy and the Environment, also declared that his party's goal is to pass comprehensive greenhouse gas emissions legislation that allows the United States to become a leader in global climate change negotiations. (17)

While historically less environmentally oriented than its Democratic counterpart, notable members of the Republican Party have indicated potential shifts in climate policy as well. During his time on the campaign trail, Republican presidential nominee John McCain distanced himself from then-President George W. Bush by advocating mandatory caps on greenhouse gas emissions. (18) McCain's cap-and-trade plan was less stringent than Obama's plan and advocated an only 60% reduction in carbon emissions by the year 2050; (19) however, McCain's proposal demonstrates a changing political climate within the United States and indicates that President Obama can potentially formulate bipartisan support for climate legislation. Senator Lindsey Graham (R-S.C.) offered further bipartisan support, co-writing an op-ed piece with Senator John Kerry (D-Mass.), acknowledging the reality of climate change and calling for a "market-based system that will provide both flexibility and time for big polluters to come into compliance." (20) Though some Republicans are receptive to cap-and-trade, most members of the party maintain strong opposition to mandatory emissions reduction. (21) During a hearing before the Senate Environment and Public Works Committee in February 2009, Republican senators referred to cap-and-trade as "a huge unfair tax" and "a trillion-dollar climate bailout." (22)

In proposing a cap-and-trade plan, the President will have to overcome past Congressional struggles in passing a meaningful carbon reduction framework into law. One of the more recent examples is the Lieberman-Warner Climate Security Act of 2008, a bill that sought to impose a cap-and-trade system to reduce greenhouse gas emissions by 70% by the year 2050. (23) The bill failed to reach a full vote in the Senate after the majority of Republicans and some Democrats withheld their support. (24) These events occurred before the presidential election of 2008, and some commentators pointed to a lack of leadership from the executive branch as the key roadblock to a climate bill. (25) Because both presidential candidates indicated their support of cap-and-trade during their campaigns, many believed that climate legislation would be passed once either Senator McCain or Senator Obama was elected into office. (26)

On February 24, 2009, newly-inaugurated President Obama asked a joint session of Congress to "send [him] legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America." (27) In May 2009, a climate change bill was proposed by U.S. House members Henry Waxman (D-Cal.) and Edward Markey (D-Mass.). (28) After months of discussion in various Congressional committees, the legislation, titled the "American Clean Energy and Security Act of 2009" (Waxman-Markey Bill), passed through the House in June 2009 by a narrow vote of 219 votes in favor and 212 votes against. (29) The plan uses 2005 national emissions as a baseline and advocates a 3% reduction in annual greenhouse gas emissions by 2012, a 20% reduction by 2020, and an 83% reduction by 2050. (30) After the introduction of the Waxman-Markey Bill, the Obama Administration spoke favorably of the measure while stopping short of offering a full endorsement for the plan. (31) After the passage of the Waxman-Markey Bill by the House, U.S. Senators Barbara Boxer (D-Cal.) and John Kerry (D-Mass.) released a similar climate bill in September 2009 titled the "Clean Energy Jobs and American Power Act" (Boxer-Kerry Bill). (32) At the time of this paper, the Boxer-Kerry Bill is awaiting formal consideration by the Senate Committee on Environment and Public Works. (33)

Even without Congressional approval, the Obama Administration can regulate greenhouse gas emissions through the U. S. Environmental Protection Agency (EPA). In 2007, the U. S. Supreme Court ruled in Massachusetts v. E.P.A. that the EPA has the authority under the Clean Air Act (CAA) to regulate greenhouse gas emissions from new motor vehicles. (34) The original claim in the Massachusetts case was filed by a group of states, municipalities, and private organizations seeking to force the EPA to regulate greenhouse gases under the CAA. (35) During the Bush Administration, the EPA refused to issue a ruling determining whether greenhouse gases qualified as "air pollutants" under the CAA. (36) The Supreme Court held that the EPA was required to issue a ruling on the nature of greenhouse gases. (37) Then, if such substances are deemed to be "air pollutants" within the CAA, the EPA was further required to regulate greenhouse gas emissions from motor vehicles through the CAA. (38) On April 17, 2009, the EPA responded to the Massachusetts decision by issuing a proposed ruling that greenhouse gases "endanger the public health and welfare of current and future generations," and these gases fall within the CAA. (39) This decision was followed on September 30, 2009, when EPA Administrator Lisa P. Jackson unveiled a proposed rule requiring large facilities emitting more than 25,000 tons of greenhouse gases a year to obtain permits demonstrating the use of best practices and technologies to minimize these emissions. (40) In addition, officials within the Obama Administration have reportedly assured foreign diplomats that, in the absence of Congressional action, the President will use the EPA's power under the CAA to regulate carbon dioxide emissions. (41)

B. Canadian Federal Policy and Cap-and-Trade

Like the United States, Canada has not yet implemented a federal greenhouse gas cap-and-trade system of its own. Unlike the United States, Canada ratified the Kyoto Protocol in 2002, and the federal government committed itself to a 6% hard cap reduction in greenhouse gas emissions from its 1990 levels by the year 2012. (42) However, Canada, along with more than half of all other Kyoto signatories, is not expected to meet its emissions targets under the treaty. (43) The federal government failed to take any significant action to fulfill Canada's Kyoto commitment until 2005, and domestic efforts to reduce greenhouse gas emissions never extended beyond public education initiatives and encouragement of voluntary action by private industry. (44)

One of the key factors behind Canada's slow implementation of its Kyoto obligations is that much of Canada's economy is dependent on the extraction of natural resources, and such industries create a substantial amount of the country's greenhouse gas emissions. (45) Overall, the Canadian energy sector is responsible for approximately 80% of the country's overall emissions. (46) Though the energy sector accounts for a little more than 6% of Canada's gross domestic product (GDP), (47) the energy sector is responsible for more than 27% of the GDP of the province of Alberta, (48) 30% of the GDP of Newfoundland and Labrador, (49) and 17% of the GDP of Saskatchewan. (50) In addition, 16% of all current investment in Canada is related to energy. (51) For these reasons, the energy industry is a crucial and growing segment of the economy in many regions of Canada. (52) With this growth has come recognition that, if left unregulated, Canada's emissions levels in the year 2020 could be as much as one-third higher than 1990 levels. (53) In order to comply with its Kyoto commitments, Canada will have to find a way to reduce its potential 2020 emissions by 45%. (54) Such reductions are not achievable if the energy sector continues to expand, so Canada has abandoned a hard cap system in favor of an intensity-based emissions reduction system. (55)

The first meaningful action taken at the national level to regulate emissions occurred on July 16, 2005 when the Canadian Federal Department of the Environment (Environment Canada) announced its intent to regulate carbon emissions by Large Final Emitters (LFEs). (56) LFEs are major companies in the oil and gas, mining, manufacturing, and electricity generation sectors. (57) Collectively, LFEs are responsible for slightly more than half of Canada's greenhouse gas emissions. (58) Within this notice of intent, Environment Canada stated it would focus on reducing the intensity of domestic greenhouse gas emissions rather than imposing a system of hard caps on emissions as envisioned under Kyoto. (59) With this intensity-based system, LFEs would be required to reduce their emissions by 12% from "business as usual" (BAU) levels forecast in 2010. (60)

BAU levels are calculated by determining the amount of expected greenhouse gases an LFE would emit in the absence of climate regulations limiting the LFEs emissions from a baseline year. (61) Because most industries' BAU emissions levels will likely increase over time as their operations expand, a reduction in emissions from projected BAU levels will not necessarily lead to a decrease in overall national emissions from previous levels. For example, if the annual BAU emissions of a Canadian LFE are expected to increase by 30% over the next ten years, but the LFE is only required to reduce its emissions by 20% from BAU levels over that same time period, the LFE would still increase its overall greenhouse gas emissions by 4% in ten years. (62) Though a Canadian intensity-based system would not necessarily compel immediate and absolute reductions in carbon emissions, this program would still require LFEs to find ways to reduce their potential future emissions as their businesses expand.

On October 21, 2006, Environment Canada revealed that it would take a more comprehensive approach to greenhouse gas reductions by announcing a further intent to regulate emissions from the transportation sector as well as LFEs. (63) This announcement was followed by Prime Minister Harper's declaration on February 6, 2007 that "for the first time ever, [Canada] will set out enforceable regulatory targets for the short, medium and long term. The era of voluntary compliance is over." (64) Environment Canada released its initial regulatory proposal on April 26, 2007 with a plan addressing all forms of air emissions. (65) Regarding greenhouse gases, the plan states that Canada is committed to reducing emissions by 20% less than 2006 levels by 2020 and by at least 60% by 2050. (66) Though the plan promised that hard reductions from 2006 levels will ultimately occur, the framework will begin in 2010 as an intensity-based system for industrial emitters. (67) With this proposal, Environment Canada revealed even more stringent requirements than published in 2005, as industrial emitters would be generally required to reduce their emissions intensity from 2006 levels by 18% in 2010. (68) Then, the intensity reduction requirements will increase by 2% every year through 2015 for an ultimate requirement of 26% annual reduction in emissions intensity from 2006 forecasts. (69)

In 2008, the Canadian federal government revealed its desire to form a joint system for the reduction of greenhouse gas emissions with the United States. (70) Michaelle Jean, the Governor General of Canada, announced in a speech before Parliament that "[Canada] will work with the provincial governments and our partners to develop and implement a North America-wide cap-and-trade system for greenhouse gases." (71) This proposal represents one element of Prime Minister Stephen Harper's desire to unify numerous aspects of North American energy policy. (72) Canada also seeks to harmonize policies for alternative and sustainable energy technologies such as ethanol production and carbon-reducing technologies. (73) Furthermore, Harper would like the United States and Canada to collaborate on natural gas pipeline development and joint expansions of the electricity grids running between the two countries. (74) The primary intent of all of these proposals is to tie together the issues of North American energy security and interdependence with regulation of greenhouse gas emissions. (75)

III. CANADIAN OIL SANDS ARE CRITICAL COMPONENT TO CONTINENTAL CAP-AND-TRADE DEBATE

A critical component of the Canadian energy sector and any discussion of continental cap-and-trade is the development of the oil sands in the province of Alberta. The Albertan oil sands are a tremendous resource for North American energy security because they represent a large source of oil from a politically-stable Canadian jurisdiction that borders the United States. (76) There are obstacles to oil sands development; oil sands production is very expensive (77) and leaves a comparatively higher carbon footprint than more conventional forms of oil production. (78) In response to these challenges, Alberta's provincial government adopted its own comprehensive approach to the problem of climate change. (79)

A. Oil Sands Production is Expensive and Creates High Emissions

The Albertan oil sands contain at least 175 billion barrels of economically recoverable oil, ranking the province in second place behind Saudi Arabia, which has approximately 265 billion barrels of recoverable oil reserves remaining, (80) as the jurisdiction with the most oil reserves in the world. (81) Most Albertan oil exports are transported by pipeline to the Midwest region of the United States; however, the market for oil sands production is growing within other regions as well. (82) Oil sands production is expensive compared to other forms of petroleum development, and many estimates put the required market price of oil at around sixty-five dollars per barrel in order for a producer to break even on a new oil sands project. (83) The primary reason for such high oil sands production costs is that the oil is literally processed and separated from the sand in which it sits. (84) Raw oil sands material, known as bitumen, is usually processed in upgrader facilities located relatively close to the …