Identifying Carbon Risk and Value

Many people are still laboring under the misconception that carbon risk and carbon value are future propositions which, although it might be nice to know something about now, can be put off thinking about until a future date. Not true. Carbon risk and value exist today and those who continue to think of them as something they need not worry about now may be overlooking hidden value within their own businesses or those of others, or, may be buying or financing a risk they have not factored into their business model. In our experience, it is the lack of existing federal or provincial green house gas ("GHG") emission regulations that is driving this perception. This perception is incorrect since carbon value does not require federal or provincial regulation to exist, nor does the non-existence of such regulation mean that carbon risk does not exist.

What is carbon value?

Carbon value is the economic value that can be extracted from a reduction in GHG emissions.

What is carbon risk?

Carbon risk is the risk associated with a current or future regulatory obligation that a business may have to reduce its GHG emissions. It can also result from the failure to account for carbon value.

Where does carbon value reside?

Carbon value resides in the changes (whether to equipment, materials or processes) that are made by a company and which have the effect of reducing its GHG emissions. Not all of such changes can be monetized as there are elements at play other than mere reduction but the initial reflex of businesses that reduce their emissions, even as a by-product of some other activity should be to check for carbon value.

How is carbon value created now?

Carbon value can be created now by the conversion of a GHG emission reduction into a tradable commodity, which can have various names but which we will generically refer to as a carbon credit.

In Alberta, a regulated market for trading GHG emission reductions exists today and carbon value can therefore be created by regulated entities, by exceeding their emission reduction targets or by non-regulated entities, by the voluntary reduction of their emissions on a project basis.

In the rest of Canada, reductions are voluntary and because there are no regulated markets, project based. A project is simply: 1) the definition of a scope of GHG emissions that emanate from a defined source; 2) the application to the defined source of a change in technology or process that has been described in a scientific protocol; 3) the measurement of the defined scope of emissions after the application of the scientific protocol to the defined source; and 4) the verification of the application of the scientific protocol and the measurements by an independent third party.

If a project proponent wants to have the credits from a project registered on a project registry, then the project will need to be validated according to the rules of the registry and the verification will have to be done by an entity accredited for such purpose by the registry. If the project meets the registry's standards, the reductions that are created by the project will then be serialized (assigned a number) and will appear on the registry. Often, projects are validated and run for several years and the emission reductions are verified on an annual basis. Once the emission reductions have been verified for a specific year, they can then be registered on the registry. Once the credits are registered, they can be transferred between account holders on that registry and or retired (i.e. taken out of circulation).

Two things are important to note in relation to the process described above. First, it is not necessary for emission reductions to be registered or even verified for them to have a market value. Second, the verification standard that is used for the project is a key element to determining what the value of the credits generated will be. Different standards have different market values and it is important for a company that feels that it has potential carbon value to determine what standard it will use to monetize that value.

Who can help me find carbon value?

The members of the Climate Change Group at Gowlings are familiar with many of the situations in which carbon value can arise and will be happy to discuss with you where you should be looking for this value. However, the process of creating carbon value is in part a scientific one and Gowlings has developed a network of professional contacts in this area and can guide its clients to reliable resources for the performance of the analysis of the emissions baseline, the development or choice of reduction protocol and the verification of any reductions. This ability is important as the level of service and expertise in this industry is not uniform.

Who are the buyers of carbon value?

Carbon credits are generally being purchased by three groups of entities: companies that believe they will have a compliance obligation in a future regulatory framework, investors and companies that are currently offering "greening" and carbon neutrality services or are looking to go carbon friendly or neutral on their own.

This market is currently conducted mostly over the counter in Canada and as a result, precise numbers with respect to trading volumes and prices are difficult to come by but as public awareness of impending regulatory obligations and a desire to reduce emissions increase, we expect that this market will become more transparent. In terms of its value, it is expected that, if the United States adopts emissions trading the total value of this market worldwide will rise to over 600 billion U.S. dollars by 2013¹.

Who has carbon risk? Where is it coming from?

Many people view carbon risk as something that will exist only in the future. Not true. Carbon taxes exist in various jurisdictions and emissions are already restricted in Alberta. In addition, to the extent that it is likely that a company will eventually have a reduction obligation under Canada's federal GHG regulations or a provincial equivalent, carbon risk exists now. Indeed, under the proposed federal framework, the industries that will be subject to emissions limits have already been identified, as have the thresholds for compliance. The same is true of the Western Climate Initiative, the standards of which will be implemented in Québec, Ontario, Manitoba and British Columbia through provincial legislation. With respect to the expected commencement dates of these obligations, Québec and Ontario have already indicated their desire to bring legislation in as early as January 1, 2010 (Quebec filed draft legislation on May 12, 2009) which, at the time of the writing of this article, also remains the target date for the federal GHG emissions legislation. Observers agree however that this target cannot be met by the federal government and will be pushed back.

As a result of the foregoing, Canadian businesses could see legislated emission reductions in force outside of Alberta as early as 2010 and very likely on or before January 1, 2012. Our message to our clients is that these deadlines are important and imminent but the risk they create is already here.

The obvious risk is the risk to companies that will be subject to an emissions cap themselves. Determining emissions and getting a handle on ways in which they can be reduced is not a process that can be accomplished overnight and companies that continue to put off the exercise of measuring their GHG emissions are potentially decreasing their ability to mitigate the risk that they may have under a future regulatory regime. In acting this way, companies are failing to engage what will be a permanent shift in the North American economy and may be creating a risk of litigation for having failed to manage this evolution appropriately.

The less obvious risk is that being incurred by buyers, sellers and investors. Indeed, any buyer acquiring a company that will be a regulated entity under an eventual GHG emissions regulation, is incurring a risk if it is not conducting proper carbon diligence and factoring the cost of compliance with such future obligations into the purchase price.

Similarly, a seller that has hidden carbon value in its business, creates carbon risk, where it sells the business without forcing the buyer to price in the carbon value or exclude it from the transaction.

Banks and other lenders or investors, if they are lending money or investing without conducting proper carbon diligence are not taking into account carbon risk and are not therefore using all of the tools at their disposal to correctly analyze the business to which they are lending or in which they are investing.

Similarly, where they fail to take into account carbon value, they are not properly determining the value of the business and may therefore create carbon risk by refusing needed capital to their client based on an underestimation of the company's value.

Finally, carbon risk is also incurred where sellers of technology with the potential to create carbon value fail to protect their rights in that value. Failure to take into account the potential carbon value, is in and of itself a carbon risk.

As a result, although the regulation of GHGs may not take place for another 12 to 36 months, outside of Alberta, companies that are acting now to purchase or sell assets or shares, lend money, invest or sell products are perhaps buying or creating carbon risk without realizing it.

What do businesses need to do?

Businesses need to begin to develop internal processes and tools for recognizing carbon value and risk both internally and externally.

Gowlings is familiar with the existing carbon markets and draft regulatory frameworks proposed across Canada and elsewhere and is able to advise its clients with respect to best practices for the recognition of carbon value and its monetization and for the identification of carbon risk and protection against it.

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1. "Global Carbon Market to Achieve 669 Billion in 2013" http://www.marketwire.com/press-release/Sbi-974348.html

Tax Considerations in the Trading of Carbon Credits
(Article 1 of 2)

This article is the first in a series of two articles in which we will address certain tax considerations related to the trading of carbon credits which we have split into two defined categories set out below. In this installment, we will comment on the tax consequences of the initial allocation of emission allowances for free and will address certain tax considerations for the buyer and seller of emission allowances and offset credits. In the second installment, we will discuss the treatment of allowances purchased at auction from the government and the taxation of financial transactions involving carbon credits and related commodities.

In both Canada and the United States, markets for project based greenhouse gas ("GHG") emission reductions or offsets ("Offsets") and emission allowances issued under, or created through compliance in, regulated systems ("Allowances") have already been established and more and broader markets will emerge with the creation of federal and/or multi state markets created through federal, state and provincial legislation. Although relatively unknown to the general public at the present time, these markets will take on an increased level of importance in the months and years to come.

This series of articles will deal specifically with the tax consequences of receiving, buying and selling Allowances and Offsets. Obviously other tax consequences may attach to the emission reduction efforts that a company must undertake in order to generate an Allowance or Offset and this is an issue that needs to be followed closely. Also, we have not addressed other tax considerations related to certain "green" initiatives, such as investment in plants, equipment and research and development.

The Government Just Gave Me an Allowance: Will I Get Taxed?

Tax Treatment of the Initial Allocation of an Allowance

An Allowance is a right analogous to a permit or a quota that is issued by the regulating authority and which bestows on the holder the right to emit a certain quantity of GHGs. In a capped emissions setting, a GHG emitter having emissions which exceed its regulatory threshold will have to either reduce its emissions to the allocated level or buy additional Allowances to cover the emissions in excess of the threshold.

In our view, the value of Allowances granted may be required to be included in income for tax purposes under paragraph 12(1)(x) of the Income Tax Act ("ITA") as an amount received from a government, municipality, or other public authority.

For income tax purposes, to the extent the allocations are not auctioned, the initial allocation of an Allowance would not have any direct acquisition cost, but may have indirect costs that would be considered to form part of the cost of the Allowance. Certain of these indirect costs may be fully deductible under subsection 20(1)(cc) of the ITA as representing the costs of obtaining a permit, license, and so forth.

For goods and services tax ("GST") and Québec sales tax ("QST") purposes, the allocation of Allowances should be characterized as an exempt supply as the Allowances will be granted by a federal or provincial government for no consideration.

Purchase of Allowances and Offset Credits: Capital or Current Expenditure?

Income Tax Treatment for the Buyer

In order to determine the tax treatment afforded to the buyer, one must determine the nature of the assets being purchased with Allowances and Offsets generating different tax consequences.

The purchase of additional Allowances in the secondary market will have an identifiable purchase price and acquisition cost which will be set out in a contract for the purchase and sale of the Allowances along with the purchase volume and the timing and method of delivery.

With respect to Offsets, they can be acquired in the secondary market from various dealers or in the primary market, directly from offset project developers. Their characterization is usually readily identifiable in a review of the relevant contracts, which will set out the number of Offsets being purchased, the delivery schedule and the price per credit.

From an income tax perspective, the expenditure to acquire an Allowance or Offset is on account of capital where such expenditure is made once and for all and with a view to bringing into existence an asset of enduring benefit to the business.

Conversely, the purchase price of an Offset or Allowance is considered to be a current expense if it is incurred for the purpose of gaining or producing income from the business. The CRA considers that this would usually be the case for companies that are required to reduce the GHG emissions relating to their operations.

The CRA is of the view that expenditure is on account of capital where the benefit from the expenditure will last longer than one year or an operating cycle (which may be the case if the Allowances or Offsets are banked). In practice, if the Allowance or Offset is retired within the year it is purchased the benefit is received within the year after it is purchased and cannot be used more than once. In such a case, the benefits received from these credits do not last longer than one year or an operating cycle.

Companies have been and will be purchasing Allowances or Offsets either as required by regulation or voluntarily in response to pressures to make corporations more responsible towards the environment. In either case, the expense is necessary to continue the day-to-day business operations of the company; namely, to allow the company to compete in the marketplace or operate at its pre-regulation capacity, something which it could not do without acquiring the Offsets or Allowances. In our view, such expenditures can be seen as being in respect of the ongoing operations of a business and not an addition to the basic structure of the business.

This leads to the situation where the same Allowance or Offset, if retired within a year is an expense on account of income and if banked or carried forward to a subsequent year to cover emissions for that year, may become an expense on account of capital.

If the facts of a particular situation support the position that a capital asset has been acquired, the classification of the capital asset must be determined. In brief, Allowances or Offsets could be included in Class 14 as a "license for a limited period". A license is a right that enables the holder to carry its business and should include Allowances and Offsets, provided that the Allowance is in respect of a company and qualifies for Class 14 treatment. If the eventual provincial and federal emissions trading systems provide that Allowances and Offsets will be bankable for long periods of time, the price of the license can be deducted proportionally over the life of the property. Alternatively, expenses for Allowances or Offsets that would not meet the Class 14 conditions would be considered "eligible capital expenditures". These particularities are very technical and could be discussed in a subsequent article.

Income Tax Treatment for the Seller

For a seller, the tax treatment will generally depend on two factors: (i) the tax treatment that was given to the initial cost of acquiring the Allowance or Offset; and (ii) whether the seller makes it his business to sell Allowances or Offsets. In addition, the CRA has acknowledged the scenario whereby the tax treatment of the purchase and sale of Allowances or Offsets may not be mirrored (i.e. a current deductible business expense for the purchaser and a gain on capital account for the seller). The factual based analysis will thus be important in every transaction to properly determine the tax consequences for each party.

If the seller's cost of acquisition is considered to be on account of capital, then the disposition may be considered to be in practice taxable at 50% as the disposition of a eligible capital property. If the acquisition cost for an Allowance or Offset is (or would be) considered to be a current expenditure, the income will constitute general business income fully taxable for the seller.

GST and QST Treatment

For GST and QST purposes, the supply of an Allowance or Offset should be characterized as a fully taxable supply of intangible personal property under the Excise Tax Act ("ETA") or incorporeal movable property under An Act respecting the Québec sales tax ("QSTA").

Accordingly, the supplier of the Allowance or Offset should be required to collect GST and, depending on the place of supply, QST on the supply of the Allowance or Offset. A GST and QST registered recipient of an Allowance or Offset should be entitled to claim input tax credits and input tax refunds to recover the cost of the GST and QST incurred on the acquisition to the extent the recipient is acquiring the Allowance or Offset for use or supply in the course of making GST or QST taxable supplies.

Alberta The Lone Canadian Jurisdiction With a Functioning Regulatory Carbon Market

Alberta's Climate Change and Emissions Management Act and its associated Specified Gas Emitters Regulation set province wide emissions reduction goals and provide the framework and regulatory enactment authority for the regulations that set out the details of Alberta's emissions reduction and trading regime.

Alberta has set targets based on emissions intensity (emissions reductions per unit of output). Its legislative regime requires mandatory reporting for all releases of specified gas (the term used to define greenhouse gases ("GHGs") and their global warming potentials) from facilities that emit more than 100,000 tons of GHGs per year (referred to as Large Final Emitters). There are approximately 106 Large Final Emitters in the province. By sector, these Large Final Emitters are Power Plants (45%), Oil Sands (21%); Heavy Oil (7%), Gas Plants (7%) and Chemicals (6%) and "Other" (14%).

Large Final Emitters were required to apply for the establishment of a "baseline emissions intensity" by December 31, 2007. The baseline is calculated based on the ratio of total annual emissions to production. A Large Final Emitter must not exceed 88% of its baseline emissions intensity (i.e. 12% below the facility-specific baseline). Reduction amounts are currently static, but more stringent targets are contemplated in the future. The regime contemplates that all new facilities will be subject to gradual reductions starting the fourth year of operation, reducing emissions by 2% per year until a 10% reduction is achieved. Those found to be out of compliance may be subject to a $200/ton fine. Other penalties for contravention of specified sections of the regulation could result in penalties up to $50,000 in case of an individual and $500,000 in the case of a corporation e.g. failure to submit the required compliance report - s. 11. Emitters can also be subject to administrative penalties.

If they are unable to make the mandated reductions on-site, Alberta's system allows regulated entities to buy credits from other regulated entities, purchase offset credits or make a payment into the technology fund. Payment into the technology fund is currently set at $15/ton of CO2e. Offset project assurance occurs after Offset credits are created. Offset credits do not have to be preapproved before they are used, however they must be verified by a third party and the reduction must:

• Occur in Alberta;
• Not otherwise be required by law;
• Have a project start date not earlier than January 1, 2002;
• Be real and demonstrable; and
• Be quantifiable and measurable.

Alberta offset projects use government approved protocols to establish the scientific basis for the ultimate assertion that GHGs have been reduced or removed. as a result of the project. In Alberta there 24 approved protocols and approximately 14 more are in the review process.

Verified offsets ("Emissions Offsets") can be registered with the Alberta Emission Offset Registry and sold to Large Final Emitters in Alberta. Offset owners may also choose to register and sell their Emissions Offsets inter-provincially and internationally. In such cases, trading occurs through bi-lateral contracts outside the Alberta Emission Offset Registry. The Alberta system does not allow offsets from any source outside of Alberta.

Large Final Emitters that emit less than their allocation can trade their Emissions Performance Credits or bank them for future use.

Payment into the technology fund was a popular method of compliance in the first round of the program, ensuring that the price of carbon would not move much higher than $15/ton. In the first compliance period, 1.5 million Emissions Offsets were created and over 2.6 million tons worth of payments into the technology fund were made. In 2007, 1 million Emission Performance Credits were created, but only 250,000 were used for compliance purposes. In 2008, 1.9 million tons of Emission Performance Credits were generated and 1.3 million of those were banked for future use. 2008 also saw 5.47 million tons worth of payments into the technology fund and 3.4 million offset credits generated, 2.7 million of which were used for compliance purposes.

There have been over 5 million offset credits created under the Alberta system. Alberta Emitters have spent more than $155 million on technology fund credits and offsets. The program saw 32% of compliance attained by real intensity reductions in 2007 and 38% in 2008.

Carbon Capture and Storage Update

On March 26, 2009, the federal government announced up to $140 million will be invested in eight carbon capture and storage projects in Canada. Between $3 million to $30 million will be allocated to projects by Spectra Energy Transmission in British Columbia; Enhance Energy, ARC Resources, TransAlta, Epcor and Enbridge in Alberta; and Husky Energy and TransCanada in Saskatchewan. The parties are now negotiating the formal agreements and conditions under which funding will be delivered.

Carbon capture and storage involves capturing carbon dioxide emissions from industrial sources and moving them through a pipeline to locations where they are injected into deep rock formations for permanent storage. It is a key tool in the reduction of Canada's greenhouse gas emissions and has been identified by the Province of Alberta as the main mechanism by which Alberta will reduce its carbon dioxide emissions.

Pursuant to its Climate Change Action Plan, Alberta aims to cut its projected greenhouse gas emissions in half by 2050 through three key ways: carbon capture and storage; energy conservation and efficiency; and greening energy production. In January, 2008, the Stelmach government announced it would allocate $2 billion dollars towards carbon capture and storage projects. It invited 20 applicants for the funding to submit full project proposals by March 31, 2009 and is expected to choose 3 to 5 of these projects by June.

Carbon MarketWatch

CCX versus MCX

In speaking to clients we have noted a lack of understanding in some circles with respect to the role and function of the Montreal Climate Exchange ("MCX") and the differences between it and the Chicago Climate Exchange® ("CCX"). The MCX is a joint venture between the Montreal Exchange (now part of the TMX Group Inc.) and the CCX. One of the common misconceptions about the MCX is that it and the CCX are the same type of exchange. In order to clarify the distinctions between these two exchanges, we will describe briefly below how each of them functions, with respect to carbon credits. It should be noted that other types of financial instruments are trade on the CCX but will not be discussed here.

With respect to emission reductions, the CCX is a self-contained voluntary regulatory scheme and trading system. Credits can be created on the CCX, in much the same way as in a government regulated system. On the one hand, a company may become a member of the exchange and accept to reduce its carbon emissions, thereby becoming a sort of voluntary regulated entity. On the other hand, a company may create a reduction project, the reductions from which, once they have been verified by a verifier that is approved by the CCX, may be registered on the exchange and traded. In short, the CCX acts as its own regulatory framework and determines the reduction requirements for its members as well as the validation criterion for reduction projects that are entitled to register credits on the exchange. The market for which the CCX is a platform is a voluntary market, in that the participants are not bound by law to reduce their emissions.

The MCX for its part is not a platform for a voluntary market but rather a market for forward contracts for delivery of "Canadian compliance units" that will be created in the future regulated market to be put in place by the Canadian federal government and as such is currently reliant on the coming into force of an eventual federal GHG emissions trading scheme in Canada. The MCX does not determine reduction requirements for any of its members, develop criteria for the validation of emission reductions or do anything other than function as a trading platform and clearing house for the contracts described above. The trading unit is a contract for future delivery of 100 "Canada Carbon Dioxide Equivalent Units". Each such unit will be an entitlement to emit one ton of CO2 equivalent in the system to be defined by the government of Canada. The contracts will expire quarterly and the first expiration date is June 2011. Currently the rules of the MCX provide for the physical settlement of the contracts with an alternative delivery procedure being available to the parties on an ad hoc basis.

MCX Activity

While the exchange opened on May 2, 2008, the level of activity has been negligible. Exchange representatives attribute this to the federal government's failure to deliver on its obligation to provide key elements to its offset system since the summer of 2008. This failure, along with the federal government's non-committal attitude toward the execution of its proposed GHG regulatory scheme has depressed activity on this market due to the uncertainty that the underlying element of the forward contracts will be available for delivery on the contract expiration dates.

The table above shows the trading volume for the First Quarter of 2009 for the four (4) contracts that are currently traded. Until such time as the federal government begins to create more certainty with respect to the timing of the coming into force of GHG regulation in Canada, there is little reason to expect any significant pick-up in the transaction volumes handled by the MCX.

The MCX itself is now thinking about what it will do in the event that nobody comes to the party in June 2011. In February 2009, the MCX sent out a survey to market participants asking them to give their view on different courses of action that could be adopted by the MCX in the event that the federal framework for GHG emissions trading is not in place by June 2011.

OTC Market

Currently, the over the counter voluntary market offers pre-compliance purchasers the ability to hedge a future compliance obligation by using protocols and verification standards that have been tapped by the federal government in its draft framework as being those that will likely apply. The over the counter market allows the parties to paper the purchase or sale of voluntary credits with tailored provisions, in the knowledge that such contracts may, at some later date, be converted to an exchange position on the MSX if the parties so wish.

Activity in the voluntary markets across North America has generally been depressed in early 2009, with VCS credits down 40% in January/February as compared to November/December 2008 and CCAR credits down 17% during the same period.² Volume in the Canadian OTC market has softened from our perspective but it is interesting to note that CCX reports increased volumes during the same period.³

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2. New Carbon Finance, Voluntary Market - Research Note (11 March 2009), posted at www.newcarbonfinance.com.
3. Ibid.

Regulatory Roundup

Canada's GHG Emissions Keep on Rising

Canada's National Inventory Report for 2007 emissions was filed with the UN on April 17, 2009 in compliance with its reporting obligations under the Kyoto Protocol. The report shows that there has been a 4% increase in GHG emissions in Canada since 2006 and more than a 26% increase since 1990. This increase makes Canada the G8 nation with the most significant rise in GHG emissions. Under the Kyoto Protocol, Canada pledged to reduce emissions to 6% below 1990 levels. This latest report confirms that as of 2007 Canada was 33.8% above its international commitment. The report indicates that transportation and energy production are primarily responsible for the rise in emissions as these sources account for about 143 million tons of the 155 million tons increase since 1990.

Federal Fuel Standards to Align with US

Environment Minister Jim Prentice has announced the federal government's intention to regulate carbon dioxide emissions from new cars and light-duty trucks under the Canadian Environmental Protection Act, 1999, starting with the 2011 model year. A notice of intent to regulate was posted in the April 4, 2009 edition of the Canada Gazette. The new standards will be equivalent to the US national fuel economy standards that were announced on March 27, 2009 for the 2011 model year. It is estimated that these new standards will raise the average fuel economy of new cars and light trucks to 27.3 miles per gallon (202 grams of CO2 per kilometer). The government has indicated this approach allows for the flexibility to align with the US fuel economy regulations as they emerge. Consultations with representatives of other levels of government and stakeholders will begin in the coming weeks.

Ontario Consults on Cap and Trade System

In December 2008, the government of Ontario began consultations leading to the implementation of a GHG cap and trade system, which may be in place as early as 2010. The cap and trade system would be a main part of Ontario's overall strategy to reduce greenhouse gas emissions to 6% below 1990 levels by 2014 and 80% below 1990 levels by 2050. For more information, please see this Gowlings Climate Change Newsflash.

Ontario Tables Ambitious Green Energy Legislation

In February 2009, the government of Ontario tabled a new Green Energy Act and proposed amendments to another 21 statutes to facilitate the development of renewable energy projects and encourage energy conservation. For a detailed analysis by Gowlings, please see this Executive Briefing.

Quebec Tables Draft Cap and Trade Legislation

On May 12, 2009, Quebec's government tabled a Bill-42 entitled An Act to amend the Environment Quality Act and other legislative provisions in relation to climate change. Under this draft legislation, the government of Quebec will inter alia, designate by regulation, reporting and reduction obligations for regulated emitters in the province. It will also enact regulations to issue "Emissions Units", "Offset Credits" and "Early Reductions Credits", enact regulations to establish a public registry for the foregoing units, enact regulations to govern the trading of these units and enter into agreements with other governments to harmonize Quebec's regime with that of other jurisdictions.

In Bill-42, the Quebec government proposes to go further than any other proposed regulatory system in North America in defining the scope of application for emission reductions. Indeed, the scope of application of the cap and trade system is described as follows:

"46.1 This subdivision applies to a person or municipality (the "emitter") who carried on or operates a business, facility or establishment that emits greenhouse gases, that distributes a product whose production or use entails the emission of greenhouse gases or that is considered to be such an emitter by regulation of the Government"

The inclusion within the footprint of the distributor of the emissions caused by the production and use of the products they sell, will be a rude awakening for many in the province. In particular if the reporting and reduction thresholds chosen are 10,000 and 25,000 tons CO2 equivalent.

Nova Scotia Proposes Caps on Electricity Sector Emissions

Nova Scotia released its Climate Change Action Plan in January 2009. The plan focuses primarily on reductions of GHGs in the electricity sector. It acknowledges that Nova Scotia Power Incorporated accounts for 46% of the province's GHG emissions and proposes emission caps on the sector. The caps will take effect in 2010 and further reductions will be mandated in 2015 and 2020. The proposed cap for 2010 is 9.7 million tons of carbon dioxide equivalent, down 0.45 million tons of CO₂e from 2007 levels. Nova Scotia's plan focuses on conservation and renewable generation to allow the electricity sector to meet these caps. The Action Plan also recognizes the need for action in the other sectors over time.

US Rejoins Global Climate Change Talks

The US has rejoined the global effort to develop a successor agreement to the Kyoto Protocol, which is set to expire in 2012. US diplomats participated in the first round of negotiations in Bonn in March-April 2009. Four more rounds are scheduled before the United Nations Climate Change Conference in Copenhagen this December, where the new agreement is to be finalized. On April 27, 2009, Secretary of State Hillary Clinton told international delegates to a preparatory meeting in Washington that "the United States is fully engaged and ready to lead and determined to make up for lost time both at home and abroad".

US Cap and Trade Legislation Proposed

The Energy and Commerce Committee of the US House of Representatives continues its work on a draft bill (commonly known as the Waxman-Markey bill) that would impose a cap and trade regime on greenhouse gas emissions from large emitters, with a view to lowering emissions to 20% below 2005 levels by 2020 and 83% below 2005 levels by 2050. One feature of the draft bill that has caused some concern in Canada, particularly in the oil sands industry, is the concept of "border adjustments", whereby imports of energy and goods from countries that do not have an effective greenhouse gas cap in place would be slapped with a carbon tariff. For a more detailed analysis of the proposal, please see this Gowlings Climate Change Newsflash.

What's Happening

Douglas Clarke is a member of a panel on May 26 with representatives of PWC, to a joint group of PWC and Gowlings clients at the Centre Sheraton in Montréal the topic is: How Climate Change Can Bring New Opportunities and Tax Incentives for Business.

Douglas Clarke is member of a panel on May 28, at the Financial Executives International Canada Conference at the Hilton Bonaventure in Montreal. The topic is: The Greening of the Finance Function.

Mark Madras and Douglas Clarke will participate on June 11, 2009, from noon to 2 p.m. (Eastern Time), in a webinar on "Emerging North American Carbon Markets" co-hosted by Gowlings with US law firm Thompson Hine LLP. The webinar will address topics such as regulatory regime design, carbon market opportunities and carbon market transactions. Registration is complimentary. For further information and to register please visit:
http://www.gowlings.com/e-form/Invitations/TOR_20090611.en.html.

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