ENVI Committee Report

RECOMMENDATION 1

That the government establish an agency to oversee the implementation of climate change policies on a government-wide basis. The agency should establish standard protocols for departmental reporting requirements and should table a consolidated progress report annually.

The Government is well organized to deliver on its climate change commitments. The Prime Minister established the Ad Hoc Committee of Cabinet in October 2004 with a clear mandate to consider, in an integrated manner, sustainability and environment priorities, including climate change. As demonstrated by the release of the 2005 Climate Change Plan, titled Moving Forward on Climate Change: A Plan for Honouring our Kyoto Commitment, and the subsequent actions to support its implementation, the Committee has made significant progress in this area.

Another example of the horizontal management approach to climate change is the review of programs called for in Budget 2005. This review, led by the Treasury Board Secretariat, is well under way to determine which programs should be maintained and expanded, which ones should be modified, and which programs have been performing below expectations or have outlived their usefulness and so should be terminated.

Departments are required under the Auditor General Act to prepare Sustainable Development Strategies and the Government is complying with this obligation. The current approach ensures that Ministers are accountable for tailoring strategies to the specific challenges of their departments.

As climate change is already a ministerial responsibility, the creation of an agency would detract from and/or duplicate the work already being conducted by departments.

RECOMMENDATION 2

The Committee recommends that the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals be given a legislative basis and that the Privy Council Office be directed in the legislation to report annually to Parliament on the application of SEA across government.

The Government shares the Standing Committee's view that the application of Strategic Environmental Assessment (SEA) across the federal government requires improvement. In her 2004 audit report, the Commissioner of the Environment and Sustainable Development found that one main factor adversely affecting the performance of departments with respect to SEA was that many departments lacked the necessary management systems to implement the Directive. In response to the Commissioner's report, the federal government committed to establishing SEA management and accountability systems by December 2005. The Government believes that implementing this commitment will significantly increase compliance with the Directive.

Another key commitment stemming from the Commissioner's report was to examine options for making public statements of environmental effects easily and centrally accessible. The public statement requirement was re introduced in the January 2004 version of the Directive to provide for improved transparency, particularly for those initiatives likely to be of greatest concern to the public. Making public statements centrally accessible will also help to improve compliance with the Directive as monitoring of SEAs will be greatly facilitated, and an additional level of scrutiny will be added to the process.

The Government believes that the measures being taken as a result of the Commissioner's report are one important means to help ensure that departments have all the necessary systems in place to make certain that their policy, plan and program proposals are being systematically evaluated for their environmental implications. In addition, the Canadian Environmental Assessment Agency continues to play an important role in terms of promoting SEA and providing guidance to departments on SEA.

In regard to the second part of this recommendation, it would be outside the purview of the Privy Council Office (PCO) to coordinate the drafting of an annual government wide report on SEA across government. PCO exercises a challenge function and supports the Cabinet process, but this does not supplant the fundamental responsibilities (individual and collective) of ministers under our system of government.

RECOMMENDATION 3

That the Canadian Environmental Assessment Agency be given the task of producing regulations under the SEA legislation outlining how federal climate change goals are to be accounted for in assessments of policy, plan and program proposals.

The Government agrees that SEA is an important means of guiding policy, plan and program development consistent with Canada's climate change goals. In this regard, the Agency, in collaboration with departments, will develop climate change guidance for SEAs by December 2006.

RECOMMENDATION 4

That the Privy Council Office create a secretariat for sustainable development and that this secretariat be given the tasks of:

• producing a federal sustainable development strategy with key priorities identified, and;
• reporting annually on progress toward the goals of departmental sustainable development strategies.

The current structure of PCO fully supports the development of a federal sustainable development strategy. To accelerate the formation of a national strategy, the Prime Minister established the Ad Hoc Committee of Cabinet on Sustainability and the Environment in October 2004 with a clear mandate to develop an overarching framework on sustainability and the environment that will guide the Government's overall actions. Work on this key initiative is progressing and, as indicated in the Government's response to the 2005 Report of the Commissioner of the Environment and Sustainable Development, will be completed by mid 2006. Support for this initiative is provided by the Economic and Regional Development Secretariat of PCO.

To further support these efforts, the Committee of Deputy Ministers on the Environment and Sustainability was established in April 2005 with a clear mandate to lead in further elaborating and implementing an integrated environment and sustainability framework, including climate change. Also facilitating collaborative efforts is the mandate recently provided by the Prime Minister to the Minister of the Environment to take on the role of providing leadership, guidance and coordination in the development of departmental Sustainable Development Strategies across federal departments and agencies.

As sustainable development clearly touches on many areas of federal involvement (environment, industry, health, finance, natural resources, etc.), as well as provincial jurisdiction and the work of private industry, the current collaborative approach is important to achieve consensus on the formation of a federal sustainable development strategy and its longer term implementation and viability. Horizontal management of sustainable development with one department as lead is the approach used by several other jurisdictions.

It would be neither practical nor appropriate for PCO to oversee and direct the activities of the government as a whole. PCO exercises a challenge function and supports the Cabinet process, but this does not supplant the fundamental responsibilities (individual and collective) of ministers under our system of government.

RECOMMENDATION 5

That a significant portion of their performance bonus be used as an accountability mechanism for holding deputy and assistant deputy ministers responsible for sustainable development targets.

The Performance Management Program is designed to evaluate the performance of individual deputy ministers in achieving performance commitments and in ensuring that government objectives are met during an annual performance cycle.

Performance commitments are currently divided into three categories: Policy and Program Results, Management Results, and Personal Results. These commitments form the basis of performance agreements.

Individuals are evaluated based on a combination of:

• results achieved over the performance cycle in relation to the commitments;
• personal display of leadership competencies;
• contribution of the individual to the public service as a whole; and
• extent of the challenges overcome (shifting priorities; urgent demands; changing government agenda, etc.)

Eligibility for performance pay is based on a global assessment of all of these considerations. The main components of performance pay are at risk pay and a bonus. At risk pay is awarded for the successful achievement of performance expectations. Bonuses are earned for surpassing performance expectations.

Environment and Sustainable Development are considered to be part of the delegated ongoing responsibilities of all deputy ministers in managing their organizations.

Sustainable development is specifically mentioned in the performance agreements of individual deputy ministers when it represents a significant priority for the department.

The performance of deputy ministers in achieving progress on sustainable development is assessed along with many other considerations, such as support to the ministers; achievement of departmental business plans and government priorities; and management of the department.

Performance pay is used as a mechanism for holding deputy ministers accountable for numerous important performance results, including progress on the environment and sustainable development.

Identifying a portion of performance pay for a single, specific objective would not be reflective of the full scope of deputy minister accountabilities.

RECOMMENDATION 6

That Natural Resources Canada produce a comprehensive and fully accessible summary of energy use in Canada on an annual basis and that it update and make accessible its energy outlook at least every two years.

Natural Resources Canada (NRCan) produces comprehensive summary information on energy use in Canada that is fully accessible to the public. NRCan reiterates its commitment to deliver this information on an annual basis. Since 1996, the Department has published an annual report Energy Efficiency Trends in Canada. This report delivers on NRCan's commitment to track trends in energy efficiency, energy use and related greenhouse gas (GHG) emissions in Canada. This report provides a comprehensive summary of energy use in Canada by end use sectors. The report is available in both paper and electronic formats.

Starting in 2002, the Department has increased accessibility to energy use data by publishing a companion report called the Energy Use Data Handbook. The main objective of this report is to provide a statistical overview of Canada's sectoral energy use markets. This handbook also provides information on major activities and relevant indicators influencing energy use. The data in these tables were taken from the comprehensive energy use database (described below). The report is available in both paper and electronic formats.

This year, NRCan has added a new product – a CD containing electronic versions of the above two reports as well as detailed data tables for Canada.

From 2003, a comprehensive database, including most of the historical data energy use and GHG emissions data used by the Department for its analysis has been made available on its Web site.

NRCan has been producing and publishing a long-term energy Outlook for almost 25 years. Over the years, the emphasis has varied among topics; however, the core purposes of the Outlook have remained to:

• provide a focal point for assembling the views of the department on energy matters within a consistent framework;
• identify pressure points and emerging issues in Canadian energy markets;
• offer a base against which to assess the need for, and the form of, policies to be addressed; and
• contribute to an informed public discussion on energy and its related economic and environmental issues.

The previous long term projection, Canada's Emissions Outlook – An Update, was issued in 1999 and modified in early 2002 through the National Climate Change Process. Currently, using a new modelling framework, the Department is preparing a new Energy Demand, Supply and associated Greenhouse Gas Emissions Outlook.

It is the intention of NRCan to update and publish a new Energy and Emissions Outlook every two years. The Outlook can be updated, from time to time, to respond to changes in market and/or economic circumstances. It should be noted, however, that short term market fluctuations or changes in economic cycles are not expected to change the long term trends.

RECOMMENDATION 7

That the government of Canada's long-term energy strategy acknowledge that a federal role in energy be one of facilitating better coordination of energy policies across Canada in partnership with the provinces and territories. The Committee recommends that the federal government develop a “Green” paper on energy.

The 2005 Climate Change Plan introduces innovative new mechanisms that support coordination with the provinces and territories. For example, the Partnership Fund provides for synergy and collaboration with the provinces and territories through the cost sharing of key initiatives aimed at reducing greenhouse gas emissions.

The Government of Canada is developing an energy strategy that will take into account the views of the provinces and territories, and stakeholders. This strategy will ensure a prosperous, secure, and environmentally and socially sustainable energy future. The framework will continue to be guided by four main principles:

1. respect for jurisdictional authority;
2. market orientation;
3. regulation to guide the market and ensure the public interest; and
4. focussed interventions to achieve policy objectives beyond the market's capacity or will.

The challenge for Canada is to develop an approach to energy which squares our socio economic and environmental imperatives in a more coherent fashion. In the broadest terms, this is sustainable development. Achieving this outcome will require appropriate balance among a number of objectives:

• Prosperity: ensuring that the development of our energy resources continues to be a vibrant source of jobs, investment and profit;
• Security: ensuring that Canadians have access to a secure and reliable supply of energy which will enhance the competitiveness of Canadian industry through competitively priced energy as an input to our economy;
• Environmental sustainability: reconciling production and use of energy with our environmental objectives; and
• Social sustainability: minimizing and/or mitigating the negative social impacts of energy production, while increasing the positive aspects such as employment, skills development, and reduced energy poverty. Taxes and royalties from the energy sector also help to fund the many programs and services that the Government offers.

The key means for achieving a prosperous, secure and environmentally and socially sustainable energy future are:

• reducing energy demand via energy efficiency;
• shifting to cleaner sources of energy;
• increasing energy production, while minimizing environmental impacts, to meet Canadian needs and realize export opportunities; and
• investing in more efficient, cleaner energy technologies.

RECOMMENDATION 8

That the Department of Finance analyze both direct and indirect federal expenditures on the energy sector and report to Parliament on an annual basis.

NRCan has the lead role, on behalf of the Government of Canada, in developing energy policy with a view to promoting the sustainable development and safe and efficient use of Canada's energy resources. As part of this process, it regularly assesses and analyzes the various government expenditures and programs that affect this sector.

Finance Canada assesses policy proposals from both a fiscal and economic viewpoint. It also develops tax policy to support energy policy objectives. The departments of Natural Resources and Finance work closely together on these endeavours to ensure that all policy effects are considered.

The level of direct government spending on programs in the energy sector is available in NRCan's Departmental Expenditure Plans delivered to Parliament annually. Each Departmental Expenditure Plan is divided into two components: the Report on Plans and Priorities (RPP) and the Department Performance Report (DPR). NRCan's 2005-2006 RPP analyzes program activities by strategic outcome, one of which is energy and the environment. Descriptions and estimates of spending on programs related to energy and the environment for the upcoming three year period are included in this document.

In preparing its 2005-2006 RPP, NRCan has put significant effort into producing a Program Activity Architecture that makes it easier to link resources to results and to facilitate the horizontal tracking of government wide initiatives.

Tax expenditures reduce the amount of revenue that the Government receives from the tax system. The Department of Finance identifies and, where possible, estimates the value of these expenditures and reports them on an annual basis through the publication of the Tax Expenditures and Evaluations report. Copies of this report are provided to all Members of Parliament.

Estimates of a number of tax expenditures associated with the energy sector are included in the report. These include earned depletion and the resource allowance (both of which are being phased out) ^[1], the transitional arrangement for the Alberta Royalty Tax Credit, and the reclassification of Canadian Development Expense as Canadian Exploration Expense under flow-through share agreements.

Other tax measures associated with the energy sector are accelerated write-offs for capital and certain intangible expenses. These include portions of Canadian Exploration Expense, Canadian Development Expense, Canadian Renewable and Conservation Expense, as well as accelerated capital cost allowance (CCA) provided for oil sands and energy efficient and renewable energy generation equipment. In these cases, the tax expenditure is associated with the timing of the deduction, rather than the provision of the deduction itself. ^[2]

Tax expenditure amounts are not provided for these accelerated write offs because adequate data are not available to calculate the tax expenditure with any degree of accuracy. In addition, a number of factors make estimating these expenditures very complex. For instance, CCA is a discretionary deduction – a firm can claim any amount up to the maximum permitted, and the undepreciated balance continues to be available for deductions in future years. Further, assets are generally grouped in “pools” for tax purposes, making it difficult to estimate the level of tax support for a given investment. ^[3]

That being said, the Department of Finance has undertaken research to quantify some of these expenditures. For example, it published estimates on oil sands tax expenditures in a 2001 working paper. ^[4]

The Department of Finance will continue to estimate tax expenditures on an annual basis and, where opportunities arise through data and methodological improvements, will expand the list of tax expenditures that it estimates either annually or through special studies.

RECOMMENDATION 9

That ecological fiscal reform be applied to the energy sector in order to give all emerging low impact renewable sources of energy greater support and to decrease GHG emissions.

Ecological fiscal reform is a concept that includes a wide variety of policy tools, including direct program spending, taxation and other economic instruments such as tradeable emission permits. Each of these instruments has a role to play in optimally achieving sustainable development objectives. The Government will continue to take action to support low impact renewables, including through direct program spending, tax measures and production incentives.

For example, NRCan administers programs to encourage investments in renewable energy and energy efficiency. These include the Wind Power Production Incentive (WPPI), which provides financial support to electric utilities, independent power producers and other stakeholders developing wind power production. Budget 2001 provided $260 million to reach the initial target of installing 1,000 megawatts of capacity. This target was recently expanded to 4,000 megawatts with additional funding of $200 million over 5 years, for a total of $920 million over 15 years for the expansion. The terms and conditions of the extended WPPI are being finalized. To ensure that all regions of Canada benefit from the WPPI program, minimum set aside capacity will be established for each province and territory.

In addition, NRCan is currently developing a renewable power production incentive. Similar to the WPPI, this production based incentive will be available to select green energy projects such as small hydro, biomass and landfill gas. Budget 2005 provided this program with $97 million over the next 5 years and a total of $886 million over 15 years. Both the WPPI and Renewable Power Production Incentive programs are key elements of the 2005 Climate Change Plan.

The Government will use its purchasing power to demonstrate leadership in climate change action. A Green Procurement Policy to govern its purchases will be put in place by 2006. The Government will also draw 20 percent of its electricity from renewable sources by 2010.

The Government also provides tax incentives for renewable energy. Incentives for investment in efficient or renewable energy production equipment are provided through accelerated CCA under Class 43.1. Investments eligible for accelerated CCA include wind turbines; small hydroelectric facilities (less than 50MW); active solar and photovoltaic equipment; geothermal systems; equipment powered by specified waste fuels (wood waste, municipal waste, etc.) or that recovers gas from a landfill or sewage disposal facility; equipment used to convert biomass into bio oil; and stationary fuel cells. The 2005 Budget proposed to both increase the rate at which these investments can be written off (from 30 to 50 percent) and extend this incentive to other technologies, notably biogas production equipment where biogas produced from the anaerobic digestion of farm manure is used to produce electricity or heat for use in an industrial process.

For projects where at least 50 percent of the tangible assets are eligible for Class 43.1, certain project start up expenses such as feasibility studies and design work can be written off in full in the year incurred or transferred to investors using flow through shares under the Canadian Renewable and Conservation Expense provisions. These provisions provide the renewable energy and energy conservation sector with improved access to financing in the early stages of their operations when they may have little or no income to utilize the income tax deductions related to these expenses.

In addition, support for the production of alternative fuels is provided through an excise tax exemption for the ethanol or methanol portion of blended gasoline, and for bio-diesel and the ethanol, methanol or bio-diesel portion of blended diesel fuel.

Going forward, the 2005 Budget Plan set out “A Framework for Evaluation of Environmental Tax Proposals”, which indicated the context and criteria that may guide the analytical evaluation of options to use the tax system in order to pursue environmental goals. The purpose of the framework is to contribute to the public policy debate and to facilitate dialogue with other levels of government, organizations and individuals who are concerned with the integration of economic and environmental factors in policy making and the pursuit of sustainable growth.

The Government has also asked the National Round Table on the Environment and the Economy to consult and make recommendations with respect to options for a vehicle “feebate”, with a view to encouraging Canadians to acquire more environmentally friendly vehicles.

In addition, the Government re affirmed in the 2005 Budget that it would continue to review other investments for inclusion under Class 43.1 to ensure that appropriate incentives are provided for investment in efficient and renewable energy generation equipment. Budget 2005 also indicated that new accelerated CCA will be considered only for investments in green technology and that opportunities to use the tax system to advance environmental goals will continue to be actively considered.

RECOMMENDATION 10

That the government make clear that it will reduce unnecessary fiscal support for well established industries associated with large GHG emissions and that it engage these stakeholders in identifying the most appropriate expenditures for elimination.

Most direct federal funding received by the oil and gas industry is used for pre commercial research and development targeted at reducing the environmental impacts of oil sands development and heavy oil upgrading and extraction processes, and to address cross cutting environmental and safety issues in support of the production of Canada's onshore and offshore oil and gas resources. This research contributes to the Government's goals with respect to sustainable development.

Some oil companies are receiving funding under the Government of Canada's CO₂ capture and storage initiative. This program is being run for a finite period and is used to stimulate capture and storage projects that are close to economic, with a view to facilitating the development of a commercially viable Canadian capture and storage market, which will help to reduce GHG emissions. Through the Partnership Fund, a key element of the 2005 Climate Change Plan, capture and storage projects are one possibility for cost sharing with the provinces and territories because of the potential to reduce GHG emissions stemming from the production and industrial use of fossil fuels.

The industrial sector also receives science and technology funding to help it use energy more efficiently, reduce waste and use bio based energy related systems and technologies.

With respect to taxation, the Government uses the tax system for a number of objectives. The basic objective is to raise revenue to fund government expenditures in a manner that is economically efficient, fair, and as simple as possible for taxpayers and the government. The Government also uses the tax system to promote other objectives such as: increasing productivity, investment, jobs, and growth; supporting environmental objectives; and helping provide a strong social foundation (e.g., supporting families with children).

The Committee has pointed to tax preferences for the oil and gas sector as an area that should be reviewed in the context of advancing the Government's environmental goals. The Government provided some considerations underlying these tax preferences in a March 2003 Department of Finance technical paper, Improving the Income Taxation of the Resource Sector in Canada. The resource sector is important to the economies of many communities in Canada and to the country as a whole. As the Committee itself noted, the resource sector faces many commercial risks, including uncertainty related to exploration and large capital requirements for development. At the same time, investments in resource exploration can generate significant benefits beyond those captured by the firm performing the activity. In addition, many resource producing jurisdictions provide special tax treatment for similar reasons. ^[5]

An important consideration to keep in mind when removing a tax measure for an industry because it is associated with high levels of GHG emissions is that it would affect all firms in the industry regardless of their level of emissions. Although some industries may be associated with high GHG emissions, different segments of the industry and even different firms within a segment will have different levels of emissions depending on the nature of their business and the technology they employ. Given that a tax measure would have been put in place to recognize circumstances that are common to the entire industry, or even all businesses, its removal could distort investment decisions for the entire industry, rather than addressing the level of emissions for each firm. This reflects the fact that the tax system is a relatively blunt policy instrument.

There may be other policy tools that would better target firms with the highest emissions and would be less disruptive to the sector as a whole.

For example, the Government of Canada is addressing emissions from GHG-intensive sectors of the economy through the Large Final Emitter (LFE) System, an emissions intensity target based approach that features emission trading, using the Canadian Environmental Protection Act as the regulatory tool. The 2005 Climate Change Plan sets out how the LFE System will be implemented. Further information is provided in the response to recommendation 13.

That being said, the Government has taken steps, where appropriate, to improve the taxation of the resource sector. In particular, the earned depletion deduction is being phased out and the Syncrude Remission Order has expired. The arbitrary resource allowance is also being phased out and is being replaced by a deduction for actual provincial and other Crown royalties and mining taxes paid. This change contributes to the Government's overall policy goal of leveling the playing field between the renewable and non renewable resource sectors.

As noted in the response to recommendation 9, the Government will continue to actively consider opportunities to use the tax system to advance environmental goals.

RECOMMENDATION 11

That the government increase its support for science aimed at understanding Canada's carbon cycle.

Strong scientific understanding of Canada's biological carbon cycle is vital for ensuring that the contribution of carbon is optimized both for Kyoto and in the longer run, and for ensuring international recognition of the contribution. The Government has long realized this, and is active in four areas (science; carbon measurement and monitoring; understanding risks to forest carbon; and understanding the potential of biofuels and sinks). Government support has been strong and is improving scientific understanding.

Under the United Nations Framework Convention on Climate Change (UNFCCC), Canada has committed to conserve and enhance its biological carbon sinks and reservoirs. As well, under the Kyoto Protocol, Canada is required to account for the carbon impacts of its activities that create new forests (afforestation / reforestation) or permanently remove forests (deforestation). Canada also has the option of including forest management, cropland management and grazing land management activities in meeting its Kyoto commitment (decisions to be made by late 2006).

Scientific Understanding of the Carbon Cycle

The Government has long supported scientific research aimed at understanding the factors that influence the terrestrial carbon cycle. In addition to considerable in house research and assessment, the Government also provides substantial support to other researchers, particularly in universities, through organizations such as the Fluxnet Canada Research Network, BIOCAP Canada, the Canadian Foundation for Climate and Atmospheric Sciences and NSERC.

Carbon Measurement and Monitoring

To fulfill Canada's UNFCCC reporting obligations, the Government is improving its national system for preparation of the annual GHG National Inventory Report, including carbon monitoring, accounting and reporting system for agricultural land, forests and other land, under the overall responsibility of Environment Canada. This system is being further developed to satisfy the future international reporting requirements of the Kyoto Protocol.

Understanding Risks to Forest Carbon

Although it is not possible to predict future fire and insect disturbances with any certainty, the Government is researching what their future carbon impacts in the managed forest could be, using the Carbon Budget Model of the Canadian Forest Sector (CBM-CFS3). The Government has long supported in depth forest carbon budget modelling efforts, including the successful development of the first version of this model in the early 1990s.

Understanding the Potential of Biofuels and Sinks

The Government has supported substantial research and policy efforts to better understand and realize the potential contribution from changes in agriculture and forest management practices, reduced deforestation, increased afforestation and use of biofuels. For example, Agriculture and Agri-Food Canada has supported adoption of best management practices like no till seeding that increase soil carbon, through research and demonstration sites, model farms, extension and information services, and programs such as the Shelter Belt Enhancement Program.

The Government is examining bioenergy opportunities that will have a wide range of positive impacts on the sustainable use of forests, climate change mitigation and the economic health of the forest industry. The Government is also collaborating on bioenergy research projects and policy assessments with industry associations. The utilization of forest biomass for bioenergy is an important part of efforts to achieve Canada's climate change commitments, and the 2005 Budget announced a number of incentives designed to promote and support the production of bioenergy.

RECOMMENDATION 12

That the government, in partnership with provincial and territorial partners and with stakeholders, carry out the research necessary to determine and take advantage of the capacity for carbon sequestration as an effective means to reduce greenhouse gas emissions.

The 2005 Climate Change Plan identifies clean coal, carbon sequestration and a CO₂ pipeline as potential priorities under the Partnership Fund, which will support projects that are federal provincial priorities through cost sharing. Discussions with the provinces and territories are under way to determine potential technology and infrastructure cost sharing investments in these areas.

Canada is also participating in the U.S.-led Carbon Sequestration Leadership Forum. This international climate change initiative is focused on development of improved cost effective technologies for the separation and capture of carbon dioxide for its transport and long term safe storage. Its purpose is to make these technologies broadly available internationally; and to identify and address wider issues relating to carbon capture and storage.

The Government has been very active in the area of carbon dioxide capture and storage through the existing CO₂ Capture and Storage Initiative. The overall objective of the Initiative is to advance the understanding of the optimal use of the capture and subsequent storage of CO₂ in geological formations as a means of reducing Canada's GHG emissions and to promote its commercialization. The goals of the CO₂ Capture and Storage Initiative have been to advance deployment of commercial opportunities and, through a financial incentive program, to facilitate the development of a CO₂ capture and storage market. The first step in the development of this market would be the storage of CO₂ in resource recovery projects which could start to reduce GHG emissions by putting CO₂ into long term storage by the end of fiscal year 2005-2006. The program design anticipated that the storage target would be achieved through a grant and contribution program during fiscal years 2004-2005 and 2005-2006, which would stimulate the initiation of one or more CO₂ capture and storage projects. It has been assumed that these projects, if of a commercial scale, would continue storing CO₂ throughout their commercial life.

This initiative included the first phase of IEA GHG Weyburn CO₂ Monitoring and Storage Project, which is a $42 million, four year international project that was established to enhance the understanding of geological storage of carbon dioxide associated with enhanced oil recovery. The Weyburn project, the first of its kind, is managed through NRCan's CANMET Energy Technology Centre Research Centre in Devon. In May 2005, the Minister of Finance announced that the Government of Canada is investing $6.75 million to support the final phase of IEA Weyburn CO₂ Geological Storage and Monitoring Project.

A key achievement in 2004 under the Carbon Dioxide Capture and Storage Incentive Program was the commencement of four demonstration projects using CO₂ to improve hydrocarbon recovery while permanently storing CO₂ in the geologic formation. It is expected that these demonstration projects may lead to full scale commercial projects capable of storing significant quantities of CO₂ in the years to come. A fifth demonstration project was approved for funding in 2005. As mentioned above, the 2005 Climate Change Plan's Partnership Fund will place a key priority on the cost sharing of carbon sequestration with the provinces and territories.

RECOMMENDATION 13

The Committee recommends that the government put in place as soon as possible a cap and trade mechanism covering as many sectors of the economy as practicable. In so doing it should make it clear that the cap will be reduced over time, on a sectoral basis.

In its 2005 Climate Change Plan, the Government announced its intention to put in place a system for emission reductions by large final emitters (LFEs) and outlined a framework to achieve significant reductions in a manner that supports the continued competitiveness of our industry. The Government followed up this broad framework with publication, on July 16, 2005 in the Canada Gazette, Part I, of a Notice of Intent to Regulate Greenhouse Gas Emissions by LFEs, which provides more detail on the proposed regulatory framework for public consultation.

The framework involves emission intensity targets by sectors. Existing facilities will be required to meet an emission intensity target based on a percentage reduction from projected levels. New facilities and major renovations and transformations of existing facilities will be required to meet a target based on best available technology economically achievable standards. Companies that do better than their target will create emission reduction credits which they can sell. Other compliance options include access to Kyoto units on the international carbon market and contributions to a technology investment fund.

The intention of the Government is to publish part of the detailed proposed regulatory framework for public consultation by the end of this calendar year.

In addition, the domestic Offset System is being developed to cover those activities and sectors of the economy and Canadian society that are not covered by the LFE regulations. This could include emission reductions by LFE companies in activities that are not covered by the LFE regulations. Verified emission reductions in these other sectors would generate emission reduction credits that could be sold either to the Government, through the Climate Fund, or to LFEs. The Offset System significantly expands the scope of emissions credit trading in Canada. The Government is working towards finalizing the elements of the Offset System such that emission reduction credits could be generated as early as next year.

RECOMMENDATION 14

In addition the Committee recommends that during this process, and subsequent to it, the government expedite international negotiations to ensure international compatibility of credits.

The current emerging international carbon market will function as a mosaic of international and domestic emissions trading schemes, project-based crediting mechanisms, and voluntary and sub-national trading markets. Some of these systems may be linked to the Kyoto framework, while others will operate independently. Credits from some systems may be tradeable internationally and others may instead circulate within closed domestic systems.

Canada is working to enhance the linkages between these various trading markets. For example, a common feature of both the European Union Emissions Trading System and the Canadian Large Final Emitter System that is currently under development is the eligibility of Kyoto credits obtained through the Clean Development Mechanism and Joint Implementation as a compliance option. Canada is working to improve the functioning of the Clean Development Mechanism, which will help to strengthen the linkages between these various systems. Canada is also seeking to develop a common international position on the use of “greened” Assigned Amount Units.

Canada has also initiated discussions on possible linkages between our domestic emissions trading system and the European Union Emissions Trading System. We are also interested in exploring the possibility of linking our domestic Offset System to that of the Northeast States and Australia, and have initiated discussions to that effect.

The 2005 Climate Change Plan contributes to this mosaic by setting out Canada's domestic emissions trading structure, including the LFE System, the implementation of a national project-based crediting system-the Offset System, and a fund for government purchases of domestic credits and Kyoto compliant units-the Climate Fund. Regulations are being drafted for the LFE System. A proposal for the design of the Offset System was recently released and steps are currently under way to identify how the Climate Fund will operationalize its purchases. It is clear that all international units obtained by the Fund must be Kyoto compliant.

Lessons learned from development of the Kyoto market systems, as well as linkages with non-Party initiatives, are both important building blocks for a comprehensive post 2012 regime.

RECOMMENDATION 15

The Committee recommends that the government refrain from purchasing international emission credits from nations with economies in transition or from any other source if they are not associated with significant environmental improvement.

The tenor of this recommendation is reflected in the 2005 Climate Change Plan. Here it is quite clear that, on behalf of the Government, the Climate Fund will purchase "only 'green' credits, i.e., credits that represent real and verified emissions reductions…; there will be no purchases of so called 'hot air."

In the specific case of emission credits from countries with economies in transition, the 2005 Climate Change Plan further outlined the broad modalities for “greening” which the Climate Fund would follow. It states that "the greening of any international credit purchases would be governed by a bilateral agreement between the Government of Canada and the seller country in which Canada would want to ensure both environmental and trade benefits for Canadian companies. Such agreements would ensure environmental benefits by stipulating that 100 percent of the proceeds from the purchase be reinvested in projects and activities that contribute to GHG emission reductions in the seller country.”

Canada has an interest in ensuring that countries and companies trade only in “green” permits backed by environmental benefits.

RECOMMENDATION 16

The Committee recommends that the government use caution in purchasing domestic offset credits, leaving the majority for trading within the LFE trading scheme. The money allotted to this aspect of the Climate Fund should be used more to support capital intensive and risk related projects with great potential for emissions reductions.

The 2005 Climate Change Plan changed the role that the Offset System would play in meeting Canada's climate change commitment. It is a key part of the 2005 Climate Change Plan and the potential for emission reductions is believed to be significant.

The issue of competition with the large final emitters (LFEs) must be looked at in the context that the LFEs have many options available to them. For example, in addition to offset credits, LFEs can meet their obligations through:

1. achieving in house reductions;
2. purchasing reductions made by other LFEs;
3. purchasing international credits; and
4. making contributions to the Technology Investment Fund up to an maximum of nine megatonnes. There will also be access to a $15 per tonne price assurance.

Government involvement in this market is expected to help stimulate the development of the Offset System to the overall benefit of LFEs.

Finally, the spirit of the second half of this recommendation -- that the Climate Fund invest in capital intensive projects with great potential for emissions reductions -- has been reflected in the 2005 Climate Change Plan. For example, the Plan clearly states that one of the purposes of the Fund is to "engage in advance purchase of emission reductions from large strategic projects in partnership with the private sector". The example of projects given is also in line with the recommendation: "projects that have the potential for generating significant GHG emission reductions in which the cost per tonne is initially high but is expected to fall over time could be considered…"

RECOMMENDATION 17

The Committee recommends that the government, in cooperation with the provinces and territories, develop a climate change adaptation strategy.

The Government agrees that an adaptation framework is important for Canada. The 2005 Climate Change Plan sets the stage for successful action on adaptation in Canada.

Within the international negotiation context, adaptation continues to be a key issue for developing countries. Addressing adaptation in a meaningful way is essential to developing a successful future international climate change regime.

At the recent G8 Gleneagles meeting, the declaration by G8 leaders stated that adaptation is a high priority for all nations. As work continues on adaptation strategies within developed countries, the G8 nations undertook to work with developing countries on building capacity to help them improve their resilience and integrate adaptation goals into sustainable development strategies.

The Gleneagles Action Plan provided a four point plan to manage the impact of climate change, which included international climate science, the need of countries for information and capacity to integrate climate, environmental, health, economic and social factors into development planning and resilience strategies, supporting UNFCCC aims for developing countries to improve their capacity for adaptation and strengthening global capacity to build resilience.

Canada is already experiencing the effects of global climate change and incurring costs to adapt to it. Although efforts to move towards stabilization of atmospheric concentrations of greenhouse gases through emission reductions are important and necessary, it is also recognized that the rate and magnitude of climate change will continue to demand social adaptation strategies to minimize the risks to quality of life. Adaptation therefore is a necessary, and complementary, policy response to climate change mitigation.

The Government is currently working to develop a federal policy framework to guide our approach to adaptation to climate change. We are also working with a number of stakeholders, municipalities, provinces and territories, and international partners on various aspects of the adaptation issue. Our approach to climate change adaptation must incorporate both a domestic and international focus, because while we must respond to climate change impacts within our borders, we will also face challenges arising from climate change impacts on other nations. Adaptation must be a key component of a successful international climate change regime.

The Government has been actively engaged in pursuing research, partnerships and action on adaptation for over a decade, both within Canada and abroad. To illustrate just a few of many possible examples, the Government has:

• partnered in the establishment and operation of the OURANOS organization in Quebec (along with the Government of Quebec, and Hydro Québec);
• worked with municipalities to explore and deliver adaptation solutions relating to hazards from extreme events;
• worked with China on adaptation solutions as part of the Canada China Climate Change Collaboration; and
• worked to develop an Aboriginal and Northern Adaptation Strategy with northern Aboriginal organizations, federal and territorial agencies, as well as with other partners, in order to respond to the rapid warming of the North and the impacts it is having on the sustainability of various ways of life.

Since 1998, the Government of Canada's Climate Change Impacts and Adaptation Program has played a key role in developing the knowledge base, research capacity and engaging stakeholders on the adaptation issue on a national level. The goal of the program is to enable governments and Canadians to plan for dealing with the safety, security, economic and environmental risks and opportunities stemming from climate change. Through this program, the Government has been actively working with the provinces and territories for the past three years to develop an intergovernmental framework for collaboration on adaptation.