A Transferable

Discharge Permit
Market for Canada
A Guide For Implementation

A paper prepared for the Manning Centre for

Building Democracy.

Sean McConnachie
12/17/2007
Table of Contents:

1. Current Situation
a. Current Issues and Sentiments
b. Regulatory Framework on Air Emissions

2. Memorandum
a. Policy Recommendations
b. Rationale
c. Considerations / Consultations
d. Results & Accountability
e. Financial Considerations / HR Implications

3. Conclusion

4. References

5. Appendixes
a. CETR Structure
b. MC Preparation Planning Schedule
 Current Situation

Current Issues & Sentiments:

Environmentalism and economic prosperity are two of the most pressing issues currently
facing Canadians. This puts policy makers at a disposition; how does one reduce our contribution
to global warming without sacrificing substantial economic growth in the short- to medium-term.
In order to achieve the aforementioned goal one would have to regulate effluent emissions in the
most efficient and cost effective manner to ensure minimal market distortions. Based on this
criterion, only one mechanism can be offered as a solution, an emissions trading market. A
market induced problem requires a market focused solution.

Although Emissions Trading Markets (ETMs), also known as Transferable Discharge

Permit Markets (TDPMs), have been theorized by the academics since the 1980s, they have not
been implemented on a grandiose scale until recently. In Canada ETMs have not been given due
thought until the 21st century, but it has become increasingly apparent that this is a preeminent
option for achieving our environmental ambitions.

The efforts of the current Conservative Government in this area have been notable, but
there is still much to be done. Because the present government is in the development stages for a
coherent and workable policy solution, it is important to try to provide a picture of how some
specifics of this policy may look. This paper will attempt to fill in these gaps by first providing a
coherent policy and then by providing a broad plan for implementation of this policy for Cabinet
consideration.

The implementation of a policy of this magnitude will be strenuously intricate. This

spectrum of complexities varies from inter-governmental to intra-governmental and will be
magnified by the problems that only the establishing of a new market from scratch can provide.
Consequently, within the confines of this paper it will be best to only concentrate on one specific,
but critical, aspect of establishing an ETM, a centralized agent of the Federal government.

Regulatory Framework on Air Emissions:

The Regulatory Framework was published on April 26th, 2007 as a guideline for the
establishment of air emission targets, outlining mechanisms that would be used to achieve these
targets. This is the first document of its kind in Canada that proposes, albeit arbitrarily, an action
plan that will reduce emissions within a given timeframe. The main goal of the Federal
Government, as outlined in the abovementioned document, is to reduce the emissions-intensity
of the Canadian economy by 18 percent from 2006 emission levels by 2010. Every year
thereafter, a 2 percent reduction per year will be required, resulting in a total emissions intensity
reduction of 26 percent by 2015.

These reductions are to be achieved by directly regulating specific sectors of the

Canadian economy in which heavy emitters reside – electricity production by consumption, oil
and gas, forest products, smelting and refining, iron and steel, some mining, and cement, lime,
and chemicals production. The emissions intensity reduction within these sectors should be
enough to reduce Canada’s total emission of Greenhouse Gases (GHGs) by 20 percent by 2020.

Achieving the targets outlined in the Regulatory Framework will not cause the economy
significant harm. It is estimated by Environment Canada, that Gross Domestic Product (GDP)
should not fall by more than 0.5 percent for any given year up to 2020. To ensure that the actions
taken to reduce GHGs do not drastically impede economic growth, the Federal Government will
use compliance mechanisms designed to provide flexibility for firms to meet their individual
legal obligations as set out within future GHG regulations. The two main instruments under this
framework are an ETM and a “Climate Change Technology Fund”.

Unlike certain GHG reduction initiatives in other countries, the main mechanism in the
Canadian model is not the ETM, but the Technology Fund. Although the Technology Fund is
only a temporary mechanism, however its effects on the ETM could be long-term. Like other
jurisdictions internationally which are implementing policies to reduce GHG emissions, Canada
should focus its efforts on designing and executing an effective, efficient, and resilient ETM. For
the most part however, the Regulatory Framework is as ambiguous as it is arbitrary, providing
little information about the structure of the ETM.

Under the Federal Government, the ETM would be a baseline-and-credit trading system
whereby the emission targets for each firm would be based on their 2006 emission levels.
Credits, or allowances, would be allocated to firms based on a comparison of their current
emissions intensity versus their baseline intensity. Credits can also be accumulated through
financial contributions to the Technology Fund and through off-sets.

Under such a system the amount of credits is not unilaterally decided on by a regulatory
body, instead allocation of credits is based on either actual reduction achieved through abatement
or through the use of off-sets and/or the Technology Fund. This means the amount of credits in
the market would be decided upon by the regulated firms, analogous to a market that does not
have a central bank influencing money supply and currency value.

This lack of direct control over the infant market is the main fallacy of the system outlined in
the Regulatory Framework. The failure to legislate any centralized oversight of the allocation,
value, and amount of credits in the market, for any period of time, will create insurmountable
problems. Price rates and trading value can be put into question under the current parameters and
can be solved at least in the short-term through a regulatory mechanism.

The Regulatory Framework as it currently stands is overly vague, left open to myriad of
potential problems, most notably those that are associated with allowance control. In order to
remedy the problems that have presented themselves in the European model, the Canadian model
will have to be controlled by a centralized body that will allow the market to work by itself while
maintaining a lofty level of predictability and permanence. The best way to facilitate this is
through the establishment of a centralized ETM regulatoryand oversight body.
 Memorandum

Policy Recommendations:

An arms-length administrative, advisory, and review agency must be created to act as the
cornerstone for the implementation of the ETM and all other related mechanisms in Canada. It
will be an autonomous oversight mechanism for both the provinces and territories, and the
Federal Government, in this matter. In order to achieve the highest level of legitimacy,
effectiveness, and efficiency it is suggested that an oversight body be arms-length be established.

This agency, named the Canadian Emissions Trading Regime (CETR), will be a multi-
faceted organization that will fulfill a multitude of roles. An agent of all major levels of
government, the CETR will act as a democratic forum where representatives from the provinces,
territories, and the Federal Government may discuss the workings of the organization and input
their respective view points.

In fulfilling its role as overseer of the establishment of an ETM in Canada, the CETR will act
as the main allocator of credits in the system at the beginning of each market cycle. Operating in
the same manner as a central bank would; the CETR will control the amount of allowances
within the market to achieve its legislated goals with regards to liquidity and GHG reductions.
Furthermore, the CETR will act as the registry for the entire system; it will record and publish all
allowance-holding information for all regulated firms. Lastly, the CETR will also provide
allowance trading licences to regulated firms and will collect all emissions data from these firms
throughout the duration of the program.
 The structure of this program will be instrumental in achieving the mandate of the CETR.
The CETR will consist of three main bodies; the Chair, the Executive, and the Council of
Representatives (see Appendix 2).

The Chair of CETR will be a non-partisan appointee at the Federal Government’s discursion,
through a multi-staged appointment process in order to uphold the legitimacy of this position. A
list of candidates will first be compiled by the Domestic Climate Change Policy Department and
will be provided to the Minister at Environment Canada. Once the list has been vetted by the
Minister, it will be provided to the Cabinet Committee on the Environment and Energy Security.
After this point, Cabinet will debate the options and select the candidate that they believe is the
most qualified to fill the position.

The Chair of CETR will provide a communications role between the Council and the
Executive body, and will act on all requests of the Council. The Chair will also act as a direct line
of communication between the Federal Government and the CETR. The Chair will provide a
yearly performance report to the Parliamentary Standing Committee on the Environment and
Sustainable Development (SCESD). This will allow the SCESD to ask questions on how
effective and efficient the CETR is in achieving its goals, as outlined by the Climate Change
Action Plan Bill (this is the name of the proposed legislation that would be tabled to the House)
that will set forth emission reduction. The Chair may also be called upon for meetings with the
Minister’s Office, at the request of Environment Canada, to explain and promote the work of his
office.

The Chair of Canadian Emissions Trading Regime will act as CEO of corporation by heading
the Executive of all branches of the agency. The organization will consist of seven main
branches: allowance allocation, emissions recording, allowance registry, off-sets, market
analysis, finance, and international collaboration. Each of these branches will be headed by a
director who will report to the Chair.
 Under the CETR, each province and territory will be provided with two seats on the Council
of Representatives. This Council will have regularly scheduled meetings on a monthly basis and
in the event of unforeseen events or major provincial dispositions the Chair may announce an
emergency session. As part of the process of drafting the Report to the SCESD, the Council will
hold a special session that will address any shortcomings of the CETR and provide a general
framework to remedy these issues within as short a timeframe as possible.

All goals and timelines expressed in the Regulatory Framework will be set at the federal
level in the same piece of legislation that creates the CETR, and will be upheld nationwide
through the signing of Equivalency Agreements between the Minister of the Environment and
each individual provincial government. Though the CETR is an arms-length entity of the
government, it must comply with the will of Parliament through the guidelines and targets
located within the Climate Change Action Plan Bill, and must adapt all policies to align with
amendments to the Climate Change Action Plan.

The CETR will be a sun-setting organization; it is to be established for a specific period of

time as outlined within the Climate Change Action Plan. Any extension of its tenure will be
contingent on its performance and the will of Parliament as defined in its long-term climate
change goals and will be delivered through amendments to the Climate Change Action Plan.

Rationale:

The logic behind the creation of the aforementioned entity is based on the examining of
other ETMs that are currently in existence or being given serious consideration. The problems
that have plagued the European Union’s Emissions Trading Scheme are in part a large result
from a lack of control and consistency throughout all jurisdictions within the market. The
shortcomings of European system should be fully considered in the design of a Canadian version
as exemplified by the development of the northern eastern United States of America’s Regional
Greenhouse Gas Initiative. Based on the lessons learned in Europe, Canada would establish an
entity that is focused on maintaining the effectiveness and legitimacy of an ETM through
ensuring stability and liquidity.

Considerations/Consultations:

The policy that has been proposed in this paper will need to face the Cabinet policy
approval process and will have to provide flexibility for the provinces so that they may pass
complimentary legislation within their own areas of jurisdiction. Agreement by all provinces is
necessary before it is tabled in Cabinet in order for the Memoranda to Cabinet (MC) to be moved
through Cabinet with minimal change. This will also allow the provinces to move more quickly
in drafting and enacting their corresponding legislation. The suggested course of action in this
scenario is to have all provinces heavily involved in the drafting process. The alignment of the
provinces with the Federal Government prior to the MC passing and becoming legislation will
provide political weight for the government to drive the plan through the legislator. It would be
very difficult for the opposition parties to vote against proposed legislation that has the backing
of all provinces.

The proposal as outlined above will be what is tabled during intergovernmental policy
meetings, and will form the foundation underpinning all subsequent discussion. All inter-
governmental meetings need to be held well ahead of the three week substantive
interdepartmental, Privy Council’s Office and cabinet meeting period. However, any changes or
suggestions that are brought forth during these meetings will immediately be provided to the
provinces for their review. If there are no major obstacles at the interdepartmental meetings, then
the process will move forward. If there are areas of contention brought forth, then emergency
meetings will be called by the Minister of the Environment in order to facilitate an appropriate
solution.

From the earliest stages of turning this policy proposal into a MC, the Ministry of the
Environment is advised to include officials from the Operations Secretariat of the Privy Council
Office. Their role will be to work alongside the Instructing Officers in preparing Bill-drafting
instructions and formatting the MC. During the drafting of the MC, the Minister’s Office and
officials at Environment Canada will work with the PCO to ensure the policy is coherent and will
move it through the Cabinet evaluation process hastily.

Throughout the process of drafting this policy, and most notably as the MC is being
prepared, Environment Canada will be in continuous contact with Natural Resources Canada,
Industry Canada, the PCO, and Inter-governmental Affairs, and would also work with the Round
Table on the Environment and the Economy. In order to set nationwide standards among the
sectors as outlined in the Regulatory Framework, the Federal government will enter into
equivalency agreements with each province. The Federal Government, through the Minister of
the Environment, is authorized to enter into an equivalency agreement with any provincial
government as long as each province meets or exceed the environmental regulations mandated
by the Federal Government. This will help to insure that GHG reductions as outlined within the
Bill will be upheld within each province.

A schedule for regular meetings will be developed which will accommodate all those that
need to be in attendance (See Appendix 1). All scheduled consultations with the provinces will
occur through a group setting, thereby allowing for constructive debate on the policy and to
openly gauge each province’s standpoint. There will be an option for provincial representatives
to request individual meetings; these meetings will be organized by Environment Canada. These
individual consultations are more for clarification purposes and general inquiries, than for input
into the evolution of the policy.

After each federal-provincial meeting, the Ministry of the Environment will schedule
meetings with its federal departmental counterparts to discuss possible changes to the policy in
light of the points raised by the provinces. This process will continue until a predetermined date,
upon which the policy will be introduced to Cabinet. Once the schedule is set, those that cannot
attend should be provided the minutes of the meeting and any revision to the document will be
provided by Environment Canada. Any comments or revisions that other actors might have will
be provided to Environment Canada to bring forward at the next meeting. The provinces will be
continuously updated on the progress of the policy and informed of any possible changes that
may occur.

Upon the satisfaction of all actors involved in the process, a Memorandum of Understanding
will be signed to show the provinces’ commitment to the policy that will make its way to the
Commons. The provinces, through the MOU, will agree to pass legislation that will provide the
CETR with the powers necessary for it to perform its tasks in an effective manner, consistent
with its mandate as guided by the Bill. Equivalency Agreements will be signed once the federal
legislation is passed into law.

As MOUs are to be signed upon the completion of the MC stage, it is of significant

importance that the transition from MC to Bill occurs with virtually no changes. While the policy
can change from one stage to the next, what was agreed on by the provinces must be the end
product when provided to the House. Based on this reality, it is imperative that the formulation of
drafting instructions in the MC leaves no room for change. Because of this, legislative drafters
should be involved to in the final stages of MC creation to insure its fluidity.

Open consultations will be conducted by Environment Canada with industry leaders,

environmentalists, academics, various interest groups. Any valuable input that is gathered during
this process will be considered in the policy analysis process.

Results & Accountability:

As this is a program that will constantly be under the microscope of public and partisan
opinion, it is of the utmost importance that all its dealing be conduction in a manner based on
accountability and measurable results. The program will be assessed based on four main
criterions:

1. Effectiveness: How closely does the program meet its defined targets based on a
predetermined timeline;
 2. Efficiency: Is the CETR achieving its outlined goals in the most cost effective manner,
and if improvements are identified, are they quickly acted upon;
3. Legitimacy: is the CETR allowing for democratic involvement of stakeholders in its
decision making and providing open access to its results and market data;
4. Equity: Does the CETR treat all actors involved at various levels in a similar fashion?

The main goal of the program will be to achieve reductions in GHGs with minute detriment
to the Canadian economy, as outlined in the Regulatory Framework and as defined in the
Climate Change Action Plan. In evaluation of the program, criterions one and two are based on
empirical data and will be straight forward to measure. However, criterions three and four will be
more difficult to measure as they are subjective and are open to interpretation. For this reason
more stringent definitions for these criteria should be outlined in the Bill.

The ultimate longevity of the CETR will be based on assessments of its performance and its
achievement of the goals outlined in the Bill. The CETR will survive unchallenged until the end
of the short-term target timeline. The extend life of the CETR at this point will be based on the
establishing of new goals and timelines, as well as an external audit to be performed by the
Auditor General.

Financial Implications and HR implications:

A source of funds will need to be identified after the policy has been constructed and during
the MC drafting stage. The amount of funds cannot be identified at this time, as the information
and calculations required to derive such a number cannot be assembled within the time
constraints associated with this paper. Nevertheless, it is important that the finances be identified
so that a foundation for further discussion can be laid.

As this is a pan-national policy that will assist all participants in achieving their
environmental aspirations, cost pooling should occur. This pooling will be establishment through
the creation of an Access Fund for the CETR. The provinces’ contributions to this fund will be
calculated based on the per industry emissions intensity in each province on the baseline year
and the fiscal needs of the CETR. The Federal Government will take the lead in this initiative
and will thus be the largest single contributor to this fund.

While Ontario and Alberta, the largest provincial atmospheric carbon emitters, will likely see
their contributions as another form of fiscal transferring; the counter argument can be made that
individual administrative costs would be much larger if each province acting alone. As a result of
economies of scale, the cost of implementing a similar program in each province would be far
greater than their respective contributions to the access fund; thus it is financially advantageous
for provinces to participate. Furthermore, the funds that will be created for technological
development and diffusion as well as for consumer off-sets will be of greater benefit to the
citizens and the economies of the provinces.

As GHG reduction is a priority of the Government, the federal contribution will originate at
the government center and will be outlined in the Federal Budget. The funds are to be granted
from the budgetary surplus in addition to funds gained from the diminishment and eventual
removal of other programs that currently occupy some of the roles of the proposed policy. The
new funding that will be allocated for the CETR will be outlined in Supplementary Estimates (A)
as tabled by the President of the Treasury Board.

The Finance & Corporate Branch of Environment Canada will be in charge of accessing the
provision of funds needed for the CETR. The positions that would be effected by this financial
shift would not be lost, but would be transferred to the administrative workings of the CETR, as
their expertise would be extremely valuable in this role. Once these funds have been denoted for
the Access Fund, the Finance Department of the CETR will be in charge of the financial
undertakings of the CETR. The finance department will also be the financial auditing system of
the CETR during its annual review process and will maintain continuous contact with the
financial bodies of the federal government – Finance and Treasury Board – on the financial
under takings of the regime.
 Conclusion

The Government has made progress on this file and has laid a strong foundation for the
future reductions of GHG in Canada. However, more is needed; flesh needs to be put to the
bones of the Regulatory Framework in order to provide a workable model for Canada. What is
needed is a centralized ETM organization that allows all stakeholders to interact with each other
in a constructive and productive manner. Furthermore, this organization needs to be created in a
way that allows all stakeholders to be involved in the development and implementation an ETM.
The process and policy outlined above is a foundation for the establishment of an ETM in
Canada, and should act as a foundation to achieve the goals of effectiveness, efficiency,
legitimacy, and equity.

Though climate change is one of the most challenging issues that currently faces Canada,
it is not insurmountable. If Canada implements a market-based solution to this market based
problem, it will allow for the flexibility necessary to permit the economy to achieve real GHG
reductions without sacrificing our economic prosperity.

References

Guide to Making Federal Acts and Regulations: 2nd Edition. Her Majesty the Right of Canada,
2001. (Available www.pco.gc.ca)

The Regulatory Framework on Air Emissions. Her Majesty the Right of Canada, 2007.

2006-2007 Estimates: Report on Plans and Priorities. Office of the Auditor General of Canada,
2006. (Available at www.oag-bvg.gc.ca)

Regional Greenhouse Gas Initiative Model Rule. The Regional Greenhouse Gas Initiative, 2007.
(Available at www.rggi.org)

Directive 2003/87/EC of the European Parliament and of the Council. The Council of the
European Union, 2003.

Building a Global Carbon Market – Report pursuant to Article 30 of Directive 2003/87/EC. The
Commission of European Communities. 2006.
Appendix 1
Week days Monday Tuesday Wednesday Thursday Friday

Weeks before
Cabinet
Committee
Meeting
Eight Weeks: Meetings with Individual consultations with provinces
provincial
representative
s for Final
Policy
Recommendati
ons
Seven Meetings with Final
Weeks: provincial Agreement
representative meeting
s for Final between
Policy Environment
Recommendati Canada and
on the
provinces
Six Weeks: Sponsoring
Notification departments
of Sponsoring alert the PCO
Departments that MC draft
is forthcoming
next week.

Meetings with
key
intergovernme
ntal
departments
Five Weeks: First Draft of Meetings
the MC is with Key
provided to Departments
key for feedback
Departments and input
for analysis
and feed back
Four Weeks: Meetings
with
provincial
representati
ve about
possible
amendment
s
Three Weeks: Second Draft Meetings
MC is provided with
to Provinces
intergovernme representati
ntal meeting ves about
possible
amendments
Two Weeks: Third Draft MC Final
is provided to submissio
all n of
representative amendme
s from the nts
Federal and
provincial
governments
One Week: Meetings with French/Engli
Provincial sh
representative submission
s to agree on of MC to PCO
MOU for CC
Appendix 2
 Organizational Chart of the Canadian Emissions Trading Regime

The Chair:

N.W.T. Yukon Nunavut

CETR CETR Executive

Permanent Seats: Observer Seats: Office of Departmen

Allowance t of Market
Allocation Analysis

Office of Sustainable
Nova Emissions Off-sets
Ontario Alberta British Manitoba
Colombia Scotia Recording Office

Quebec Saskatch P.E.I. New Newfou Department of Financial

ewan Brunswic ndland International Allowance Departmen
k Collaboration Registry t
• The Chair: This position is to be filled with an individual that is selected by Cabinet. The main responsibilities of this position is multifaceted:
(1) to act as a communications mechanism between the CETR and the Federal Government; (2) to preside over all undertakings of the
Council; (3) to delegate all Council decisions to the Executive; (4) to oversee all the undertakings of the Executive.
• CETR Council: The Council will be headed by the Chair, who will conduct all proceedings of the Council. This is to act as the legislative
body of the CETR.
• Permanent Seats: each province is provided to seats, each set represents one vote. The territories within this agreement will have one
seat and one vote.
• Observer Seats: these are to be filled by representative from the federal government and aboriginal groups.
• CETR Executive: the chair of the CETR will act as a CEO to the executive. Each department will have is only executive that will
relay the decisions that have been passed on by the Chair. The Executive is to answer directly to the Chair in all matters and all
documentation for the purpose of reporting is to be provided to the Chair to be presented to the Council or the Federal Government.