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Market News

 May 18, 2006
Canada-US 'Cap and Trade Plan'

 Vancouver, Canada -- Emissions of particulates and harmful pollutants such as nitrogen oxides (NOx) and sulphur dioxide (SO2) are causing serious environmental damage in Canada: increasing the acidity level of our lakes and rivers through acid rain; damaging soil and forests; corroding buildings and infrastructure; and more. As the sources and effects of these contaminants are located both in Canada and the United States, dealing with these problems requires cross-border solutions. One idea being considered is a shared 'cap-and-trade plan'.

SO2 is produced as by-product of both industrial smelting processes and the burning of fossil fuels, especially by coal-fired power generators. About two-thirds, of SO2 emissions come from industrial sources; the remaining one-third comes from electrical utilities.

NOx occurs as a by-product of both transportation and industrial combustion processes. The transportation sector accounts for 60 per cent of NOx emissions. The industrial sector accounts for 25 per cent and the remaining 15 per cent comes from electrical utilities and residential fuel combustion. Pollution from electrical utilities varies significantly depending on each region's generating mix.

The Canada-U.S. Air Quality Agreement of 1991 has facilitated considerable progress in reducing NOx and SOx emissions. Between 1980 and 2001, Canada and the U.S. reduced sulphur dioxide emissions by 48 per cent and 39 per cent respectively. Nitrogen oxides were similarly slashed.

While many environmental advocates focus on carbon dioxide and climate change as the most important issue, the health and environmental costs associated with other air pollutants is significant. The United States Clear Skies package - which targets particulates and mercury but doesn't specifically regulate CO2 - would cost utilities up to US$6 billion to implement, but would pay off with up to US$143 billion in health benefits by 2020.

Regulating pollutants

Through the Border Air Quality Strategy, Canada and the United States are looking into the feasibility of entering into a joint cap and emissions trading program aimed at reducing both NOx and SO2 emissions. A joint study on the feasibility of a cross-border emissions cap and trade system for nitrogen oxides and sulphur dioxide (NOx and SO2) was released July 29, 2005.

While cross-border trading is only being contemplated at this time, an important consideration is the availability of technologies in Canada to achieve the desired environmental goals.

A cap and trade program first sets an aggressive cap or maximum limit on emissions. The industries covered by the cap then receive (or bid for) allowances to emit a fixed amount of NOx and / or SO2. Those who undershoot their targets may sell excess credits; those who overshoot must purchase more allowances.

The success of an emission allowances trading regime depends on strong monitoring and enforcement mechanisms and accurate measurement of emissions from a generating facility. A reduction in actual emissions from the permitted allocation becomes a tradable commodity with an economic value. As such it is treated as an asset. The degree to which emissions exceed allowances becomes a liability.

The measurement of emissions if not appropriately regulated and enforced, potentially could provide emitters the opportunity to falsely report lower than actual emission levels in order to minimize their liabilities or to create more assets than they deserve.

It is also important to measure emissions accurately and consistently even when different emitters use dissimilar measurement strategies. For example, different industries and facilities have adopted various approaches in measuring NOx and SO2 emissions to meet Environment Canada's reporting regulations.

In the United States, Continuous Emissions Monitoring (CEM) systems complying with established guidelines 40 CFR 75 (Part 75) are required when measuring NOx and SO2 emissions at facilities under cap and trade programs. In Canada, Environment Canada's Report EPS 1/PG/7 (1993) establishes protocol and performance specifications for CEM in thermal power generating plants.

The US and Canadian guidelines differ in some significant aspects. The US guidelines are much more extensive and specific. The net effect is that CEM systems that meet EPS 1/PG/7 in Canada are not consistent with those in the United States. This discrepancy will be an important consideration in any cross border cap and trade negotiations. The alignment of CEM standards and the application or the use of alternate emissions monitoring approaches would be essential for any cap and trade system between Canada and the United States.

One question yet unanswered is whether Canada's entry into cap and trade program with the United States would act as a driver in growing Canada's environmental technology industry, especially in air pollution and monitoring systems?

Currently, Canada is especially strong in environmental consulting and engineering. Canada's capability in the air emissions control and monitoring technology sector is gaining strength, with the exception of CEM, where are still weak and must rely on American expertise.

Presently, air emissions control is being implemented at the provincial level. For example, Ontario is establishing a provincial cap and trade initiative for large industrial emitters for NOx and SO2 pollution. Alberta is developing an emission credit program based on abatement targets.

Any direct involvement by the federal government in emissions controls would likely be done collaboratively with provincial governments. While the development of international trade agreements including future emissions cap and trade programs is a federal government responsibility, in order for a particular cap and trading mechanism to work efficiently and effectively, this authority would undoubtedly be managed in a federal-provincial, territorial and municipality context.

Moving Forward

The federal governments in Canada and the United States have indicated a strong desire to improve air quality and to address the health affects of pollution. As a consequence, some tightening of regulation in this area is very likely for each country. Both governments have also indicated a desire to harness market forces and use schemes such as emissions trading to encourage the private sector to reduce pollution, rather than simple regulatory limits. In this context, further development of a NOx and SO2 seems possible.

Addressing the technical, regulatory, and economic issues associated with such a scheme will require involvement from a diverse cross-section of stakeholders. Governments, industry, health experts and the public will need to have input on the process, which will require significant scientific and operational analysis to be completed.

Whatever the results in this particular area, air pollution remains a cross-border issue, and only by working together can Canada and the United States hope to improve our natural environments while maintaining economic competitiveness. While any agreement may require concessions from each side, moving forward collaboratively will strengthen our relationship and our individual societies.