NRGO Committee Meeting

STANDING COMMITTEE ON NATURAL RESOURCES AND GOVERNMENT OPERATIONS

COMITÉ PERMANENT DES RESSOURCES NATURELLES ET DES OPÉRATIONS GOUVERNEMENTALES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, June 11, 1998

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[English]

The Chairman (Mr. Brent St. Denis (Algoma—Manitoulin, Lib.)): I call to order the June 11 meeting of the Standing Committee on Natural Resources and Government Operations.

I will welcome Dr. Erik Haites in a few minutes and I am going to certainly acknowledge his presence here with us. First we will take five minutes to chat about committee business. Gilles wanted to say something. It was his initiative to invite Minister Massé to the committee. He has agreed to attend our meeting next week, if there is one.

Mr. Gilles Bernier (Tobique—Mactaquac, PC): Thank you, Mr. Chairman. The President of the Treasury Board was scheduled to meet with us in committee next week, but it looks pretty good now that none of us are going to be here next week.

Now that we know we probably won't be here next week it means that the president is not going to be here with us next week. Possibly when we resume in the fall the President of the Treasury Board could meet with the committee. I know it's hard for a minister to set a specific date, but perhaps we would play with a few dates for him to be here.

The Chairman: I'll ask the clerk on our behalf to touch base with the minister's office, on the assumption that we're not here next week and that meeting would be cancelled. I'll ask the clerk to try to get us a couple of dates as early as possible, maybe in August. If we could have a couple of possible dates for our return in the latter part of September to proceed with Mr. Massé, I'm sure he'd be agreeable to that. Okay, Gilles?

Mr. Gilles Bernier: Thank you very much.

The Chairman: We'll deal with the other committee business after we hear our witnesses.

I want to welcome Robert Hornung, who is with the Pembina Institute for Appropriate Development. He is the director of climate change. Dr. Erik Haites is a private consultant. His business is Margaree Consultants Inc. He is an expert in the field of climate change and I think maybe in emissions trading.

We are pleased to have both of you here with us today as we pursue the issue of climate change from a natural resources perspective. We'll start with Dr. Haites. I ask that each of you speak for 10 minutes or so. Then we'll have lots of time for members' questions. Dr. Haites, if you would, please go first.

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Dr. Erik Haites (Consultant, Margaree Consultants Inc.): Thank you, Mr. Chair.

I believe the clerk has circulated to members a copy of a document from the national round table on the environment and the economy on emissions trading. It's entitled “Briefing Document on Emissions Trading for Greenhouse Gases”. I was the author of that document and I propose basically to speak to that document at the moment.

Emissions trading is a mechanism that reduces the cost of environmental compliance. I want to stress that, that it is a mechanism that focuses on reducing costs, not changing the environmental objective. The environmental performance is set quite separately. Like any other environmental regulation, if there is non-compliance, you don't achieve the objective; if there is compliance then you should in principle achieve the objective.

Trading does not change the objective but it does reduce the cost of meeting whatever objective has been set. The way it does that is that for any environmental regulation there's usually a variation in compliance costs among the sources that are affected by that regulation. Trading simply allows sources that have low cost of compliance to do more than they are expected to under the regulation and to sell off the credits or allowances from the excess reductions, the extra reductions they've made to sources that have higher costs of compliance.

Presumably the price of the permits or allowances is less than the cost of control for the higher companies. They save some money by buying instead of implementing on their own. The sources that are able to do it at low cost earn some extra money by implementing larger reductions.

Participation in trading is completely voluntary. Like any commercial exchange, both parties should be satisfied with the outcome and they benefit from that outcome.

That is the basic environmental and economic premise of emissions trading.

Unfortunately the terminology is not very clear in this field; it is still evolving. I find it useful that in this document I've distinguished two major categories of emissions trading with two subsets of one of them.

The two major categories are cap and trade systems or allowance trading. That is the same mechanism, cap and trade or allowance trading. The second major mechanism is credit trading.

Within a cap and trade system the environmental regulator sets a cap on the total emissions of the particular pollutant from the sources that are affected by that regulation. Those sources are required to participate in the trading program. The cap representing total emissions is distributed among the participants in the trading program. They then have to monitor and report their actual emissions and they have to hold allowances equal to their actual emissions.

If their actual emissions are larger than the allowances that have been allocated to them, they have to buy from some of the other participants in the program. If their actual emissions are below the allowances that have been distributed to them, they have extra allowances that they can sell to others. The cap stays fixed. It's just a redistribution within that through trading that occurs.

Within a cap and trade system it's useful to distinguish between emissions rights trading, where you measure the actual emissions to the atmosphere, and substance trading, where you control a substance that is eventually released to the atmosphere and it's easier to control the substance than to measure the actual emissions.

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By the way, there are no ongoing operational emissions trading programs in Canada, but there are a number in the United States. The examples I will refer to are all American.

Emissions rights trading programs examples are the S0₂ trading program for electrical utilities in the United States and the south coast air quality management district where they have a reclaim program that controls both NO_x and SO_x emissions.

The substance trading programs that have operated in the United States have dealt with the lead content of leaded gasoline to help phase out the lead in gasoline and for CFCs to help phase out CFCs.

The credit trading program works on a slightly different principle. You measure the actual emissions from a particular source and document that you have taken action to reduce those emissions below what they would otherwise have been, or below what they would otherwise have been allowed to be. Usually you have a base line of what the emissions would have been or the level of emissions that would have been allowed. Then you reduce below that and claim credits for those reductions, which can then be sold to other sources for compliance purposes.

Each action to create credits is in some sense unique. Therefore the process of creating credits is usually more costly and slower than in a cap and trade program.

There have been emissions reduction credit trading programs in the United States basically on a municipal level for non-compliance with local pollutants as new sources come into the non-compliance areas. There have been some demonstration projects both in the United States and Canada.

Let me now turn to greenhouse gases and the Kyoto Protocol. The Kyoto Protocol includes three mechanisms for international emissions trading.

One mechanism is simply called emissions trading. I would classify it as a cap and trade system. The countries in annex B of the protocol who have accepted commitments for the period 2008-2012 have an assigned amount and portions of that assigned amount can be traded among countries in annex B. The allocation or distribution of the emissions rights is determined by the commitments in the protocol and those commitments can be traded.

The next mechanism is joint implementation among annex B countries. This is a credit trading program. Parties or entities from two or more parties within annex B can take steps to reduce emissions in one of the annex B countries and then transfer the emissions reductions to one of the investor countries.

The third mechanism is the clean development mechanism. Again this is a form of credit trading. Actions can be implemented in developing countries and the reductions can be used by the annex B countries to offset emissions in annex B countries like Canada. Canada could finance emissions reductions in developing countries and use the credits from those reductions to allow higher emissions within Canada.

The rules for those three mechanisms still have to be worked out. We don't know precisely the details of how they will work. In principle the fact that emissions trading for greenhouse gases is allowed on a global scale should lead to rather large cost savings in meeting the commitments under the Kyoto Protocol.

I think I'll leave it there. There are some activities under way in Canada and the U.S. related to this. If members have questions, I'd be happy to answer them.

The Chairman: Thank you, Dr. Haites.

I think the issue of emissions credit trading will be critical to the whole process of achieving success in dealing with climate change. There is certainly a debate on both sides of the issue whether it will in fact work. We appreciate those opening comments.

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Mr. Hornung, we thank you for being here. We would appreciate roughly 10 minutes of opening remarks by yourself. Then we'll open the floor to questions.

Mr. Robert Hornung (Director, Climate Change, Pembina Institute for Appropriate Development): Mr. Chairman, I very much appreciate the opportunity to be here. I apologize for my late arrival.

There certainly is a lot of talk these days about emissions trading. In fact a sort of bandwagon has formed, is moving forward and is saying emissions trading is the way to deal with the climate change issue. I'm here to offer a word of caution.

I think that designed properly, emissions trading can be a very useful tool that can help Canada and other countries meet their emissions reduction commitments at a lower cost. Designed poorly, however, emissions trading could serve as a loophole that works against the environment objectives we're trying to pursue. It all comes down to the details, and we don't have a lot of the details yet on how these things are going to work.

To put some of this into context, I should point out that there actually is no functioning emissions trading system for greenhouse gases anywhere in the world at this time. As Dr. Haites indicated, the Kyoto Protocol does open the door to a range of potential emissions trading mechanisms where the details still have to be worked out.

Within Canada we have a couple of pilot programs going with respect to credit trading, one of the types of trading that Dr. Haites discussed, in British Columbia and Ontario. We actually have no working pilot program or anything with regard to allowance trading in Canada.

I want to focus a little bit on the Kyoto Protocol and give some examples of how emissions trading, if designed poorly, could go wrong. This isn't a prediction of what will happen under the Kyoto Protocol, but it's something that could happen and something we have to be aware of.

As Dr. Haites noted, there are provisions for emissions trading of allowances in the Kyoto Protocol. Essentially every country in annex B would receive allowances to emit a certain amount of greenhouse gases. In the year 2010 Canada would receive allowances to emit greenhouse gases up to 6% below its 1990 levels. All of the participating countries would receive similar allowances.

At that point, part of the reason there's a concern is that some of these allowances and some of the targets that have been set are not very challenging. Canada's target certainly is very challenging.

If we look at other countries—for example, Russia—Russia has a target under the Kyoto Protocol to stabilize its greenhouse gas emissions at 1990 levels by the year 2010. In the eight years since 1990, Russia's greenhouse gas emissions have fallen about 30%. Even under the most optimistic projections and scenarios, there's no expectation that Russia's emissions will actually get back up to 1990 levels by the year 2010, but they're allowed to emit that much. They will have allowances that they can sell.

Let us assume that Russia's emissions go back up 90% of the way, and they have 10% that they can sell. Canada could purchase one of those allowances. That would give Canada the opportunity to increase its emissions, exceed its target, but we haven't actually seen any real emissions reduction in Russia. Russia just happened to have some surplus allowances because that's the way they were allocated in the first place. That's a loss for the environment. That means we're seeing some countries increase emissions without seeing corresponding decreases in emissions. It's been labelled “hot air trading”, and it's a concern.

The other type of trading Erik talked about under the Kyoto Protocol is credit trading. We see that with joint implementation in the clean development mechanism. There are issues around that as well.

If Canada invests in an emissions reduction in a developing country, which is a good thing I would certainly admit, and that developing country, as is now the case under the Kyoto Protocol, doesn't have any binding commitment, that means Canada purchases its emissions reduction. It is allowed to increase its emissions, but you don't actually have any guarantee that emissions will decline overall because the emissions in the developing country may just shift somewhere else.

You may also have a situation where Canada invests in an emissions reduction in a developing country that would have happened anyway even if Canada had not made the investment. In that case Canada is allowed to increase its emissions, but from a business as usual scenario nothing has changed. The emissions reduction would have occurred anyway, so then again the environment loses.

This problem is called the issue of additionality, making sure that the emissions reductions that you're purchasing are going beyond what would have happened anyway.

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We know as we look out to the future and we see these scary projections that Canada's greenhouse gas emissions are going to be 19% above 1990 levels by the year 2010, that doesn't mean we're not doing anything in this country to reduce greenhouse gas emissions. Lots of things will be going on that are reducing greenhouse gas emissions.

We want to make sure that what we try to encourage through systems like emissions trading is that we actually do something more that forces that curve to come down. That means those emissions reductions have to be additional.

In that regard I would like to take a moment to address an issue that was raised in the House yesterday about Canada's position on the extent to which these flexibility mechanisms in the Kyoto Protocol should be used.

Environment Minister Stewart has made a number of public statements over the last few months indicating that Canada will achieve the majority of its emissions reductions at home.

At the international negotiations that are now going on in Bonn, a paper has been presented. Canada is one of the supporters of the paper in putting it forward. It suggests there actually be no limitations on the use of these flexibility mechanisms. In essence countries don't have to meet the majority of their emission reductions at home. They in fact could meet the majority of their emission reductions by purchasing either allowances or credits from outside Canada. I would argue that such a position is shortsighted for a number of reasons.

First off, under the Kyoto Protocol everyone agrees that one of the big things that's missing is that we don't have any binding commitments for developing countries. Developing countries are unlikely to join the protocol until they have some evidence that industrialized countries have taken some more dramatic action at home to reduce their emissions. If we're sending a signal that we're prepared to see industrialized countries meet most of their emission reduction commitments outside of home overseas, I would suggest that's not a very good signal to send to developing countries.

If in the end Canada remains committed to the position that the environment minister has stated in terms of Canada meeting the majority of its emission reduction commitments at home, I would suggest that we would probably want to make sure that all industrialized countries faced that same requirement and not allow other countries to get more emission reductions from outside the country.

I would argue finally that we always have to remember that Kyoto is just the first step down the road of climate protection. There are probably going to be bigger emission reduction commitments coming in the future. That means Canada has to start taking action now at home to prepare for the longer term changes we need to see in terms of making our economy less carbon intensive and more energy efficient.

I want to take a couple of minutes to talk about domestic emissions trading.

Credit trading programs, the type Dr. Haites talked about, if designed properly can make a useful and I would say probably a small contribution to total greenhouse gas emissions reductions. It's not an insignificant contribution and is something we should pursue.

There are some issues we'll have to grapple with as we try to design a credit trading system. In fact these issues are being grappled with through the pilot programs I discussed earlier.

One is the fact that there are high transaction costs for companies participating in a credit trading scheme. Essentially you've got to monitor and verify and get approval of every specific project and emission reduction credit. That's costly for a company. It may still be less costly than some other options, so it might be attractive, but it's not a cheap way to go.

There are issues around the measurement and verification of emission reductions. It's a lot easier for us to measure emission reductions generated by an energy efficiency project than emission reductions generated by a change in tillage practices that may sequester more carbon into the soil. That is not impossible to measure, but it's more difficult to measure and there are problems with that.

The third issue I want to highlight is one which I talked about earlier, the issue of additionality. Even if Canada ratifies the Kyoto Protocol and it has a cap in place that says we're going to meet this 6% commitment, if we allow credit trading and a company makes an investment in Canada to reduce emissions, an investment that would have happened anyway, then essentially the company is allowed to increase its emissions.

We haven't really seen a net benefit because we would have expected that emission reduction to occur. We still have more emission reductions to get. The burden of getting those emission reductions is going to be shifted now to other companies, not the one that made that investment. There are some equity issues, in a sense some allocation issues, which make this additionality concern important.

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I will take a second to talk about allowance trading as well. In general you will find certainly within the environmental community a lot more support for allowance trading than for credit trading. That is simply because of the point Dr. Haites made earlier that in allowance trading you're setting a cap on emissions. You have determined what the environmental objective is. You have set the cap. The trading provides you with a more cost effective way to find that. From that perspective it's a good thing. It's still a very challenging thing to implement though for a couple of reasons.

Assume that we would set up a cap and trade system that only covers some emission sources in Canada. It's hard to imagine for example, getting homeowners into an emissions trading system, so let's say that it involved large industrial sources such as electric utilities or major energy-using companies.

How do we determine what the cap should be for those emission sources relative to what everybody else has to do to reduce emissions? It's a tough decision. What are the criteria used to try to allocate that, to determine that?

Let's say we decide what the total cap is that these companies are going to have. How do we allocate allowances under that cap? How much does each company get? How would that change over time? What happens if a new company comes into that area? How do we give it allowances?

Those are all very detailed, nitty-gritty questions. They sound like a real pain to have to deal with and they are a real pain to have to deal with. However, they completely determine the credibility and effectiveness of the system.

There is no right way to deal with those questions. There are different conceptions of what is equitable and what is fair. In fact, decisions dealing with a cap and trade system and allocation are going to be political decisions in the end. One thing we can say about dealing with the climate change issue in Canada is that it has been an area where it's been tough for eight years to develop any political consensus in terms of how to proceed.

I have one last word which is indirectly tied to emissions trading. It is something we have heard a lot of recently, called credit for early action. At their last joint ministers meeting, federal and provincial energy and environment ministers indicated that we would have a system in place in Canada for providing credit for early action in the spring of 1999.

Credit for early action is a good idea. I just wish I knew exactly what it meant. It's one of the most commonly used and least understood and poorly defined terms in the climate change debate.

There are a couple of ways we could look at it. If we wanted to say that companies should not be penalized in the future if there is an emissions trading system for taking early action now to reduce emissions, I think we would get a really broad consensus on that. Yes, we have to make sure that companies are not penalized.

If on the other hand the argument is companies should receive some form of positive credit under a future emissions trading system if they take early action now, that's also something we should probably look at and think about. I haven't seen very many actual workable schemes proposed in terms of how we would actually do that, but it's something we should look at.

For me, the whole credit for early action debate is symptomatic of the entire climate change debate in Canada. In a sense here is an example of our investing a lot of energy and a lot of time trying to define an incentive for companies to reduce greenhouse gas emissions that essentially kicks in if we do something in the future about emissions trading.

It's worth thinking about that, but I wish we were spending some more time in this country actually thinking about incentives that we could give to companies now, real incentives, to actually encourage them to reduce greenhouse gas emissions now. I would suggest that is something we'll need to pay more attention to in the months ahead.

The Chairman: Thank you very much, Mr. Hornung. We appreciate both opening remarks. Clearly this is a complex subject.

We're going to open the questions with Dave Chatters. Then we have Roy.

Mr. David Chatters (Athabasca, Ref.): Mr. Chairman, one thing that becomes clear the longer we investigate and talk about this is that there seems to be more questions being raised than answers being provided. Certainly our expert witnesses we brought in asked most of the questions that I'm asking. They are the people we bring in to answer the questions, so we're not making much progress.

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Mr. Roy Cullen (Etobicoke North, Lib.): The blind leading the blind.

Mr. David Chatters: Yes, truly.

I have some real concerns similar to what Mr. Hornung's concerns are about this whole system. Certainly I and Canadians everywhere have some real questions about how the system is going to work, how much it's going to cost, and who is going to pay for it.

This whole idea of emissions credits and emissions trading is going to require, it would appear to me, a massive bureaucracy of some kind to identify sources of greenhouse gases and then to monitor the reductions and the credits that are traded back and forth. It has to be a major challenge on a global scale to do that.

The other thing, and I mentioned it before in committee, is that it seems to me there is potential here to move huge amounts of economic activity out of Canada to other countries in the world, simply to maintain the status quo here in Canada. I heard talk about allowing domestic companies to increase greenhouse gas production by buying credits. I would suggest that this massive transfer of wealth and economic activity will be necessary just to be able to allow domestic industry to maintain the status quo rather than increase their emissions. That's a real concern.

We saw what happened to the mining industry when for a number of different reasons the mining industry moved out of Canada to other parts of the world. The same potential is certainly here in this whole scenario. That's another concern.

Again I think the whole issue about emissions trading was raised, what that's going to cost and who is going to oversee it. It only addresses probably one-third of the problem, the other two-thirds being transportation and human activity, the heating of houses, and the population growth around the world. All of those things don't seem to fit into this idea at all.

How are we going to get the rest of the problem involved and committed to change into reductions when we're not even talking about having a strategy in place until the end of 1999, and then having achieved something by 2008? The time lines are so tight to set up the kind of organization we're talking about here and to do all of this trading and transfer of economic activity and wealth. It is raising more and more questions rather than getting answers.

I would like you to comment on the whole scenario. It's really quite staggering.

Dr. Erik Haites: I will respond to three points that you made.

First is the need for a massive bureaucracy. I think the experience of the regulatory agencies in the U.S. that have implemented trading programs is that the staff and financial resources required to administer them are substantially less than the staff and resources required to administer other forms of environmental regulations.

Mr. David Chatters: That's only on the domestic.

Dr. Erik Haites: Yes.

Mr. David Chatters: We're talking about a global program.

Dr. Erik Haites: Agreed. I think some of the proposals on a global scale essentially require very little additional staff other than what would be required to determine compliance under the protocol in any case. One way of handling that is simply to levy some charges on trades to cover the additional costs, for example of the registry, to track the owner of the holdings. You could foresee that the whole system could be self-financing through fees.

Mr. David Chatters: Who would you see doing it?

Dr. Erik Haites: I would put it up for bid. What you need is a registry. There are dozens of stock markets around the world where registries of shareholders are maintained. The U.S. EPA has a system that tracks a couple of thousand participants in their SO₂ program. They might want to bid.

Mr. David Chatters: You see it as a private sector operation rather than an organization to which Canada would pay a membership fee.

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Dr. Erik Haites: I suspect that it will ultimately be responsible to the climate change secretariat or some international organization that can give direction to it. I don't see any reason why the operation couldn't be contracted out to any form of institution that currently runs a registry for stock or emissions trading or things of that sort.

Mr. David Chatters: Who would put it up for bid?

Dr. Erik Haites: The climate change secretariat, presumably.

Mr. David Chatters: I suppose it makes sense, yes.

There has been a suggestion that the United Nations might have some responsibility in this. That's truly a frightening thought considering the efficiency of that organization.

Dr. Erik Haites: I agree. My sense is that private industries would prefer to see a private operation and would be quite amenable to full cost recovery.

The second point you raise is the cost of emissions trading and the potential that it might drive industry from Canada. I would respond to that in the following way.

If we impose obligations to limit emissions on sources in Canada, that imposes costs on them one way or another. They can either reduce emissions at their own operations and stay in Canada or they can buy credits. Presumably they would do whatever is lower cost.

Trading has the potential to mean that's lower cost, otherwise they probably wouldn't do it. To the extent then that they use trading, I would see that as potentially an argument saying that they are remaining more competitive and therefore there's a greater chance they would stay in Canada.

Mr. David Chatters: What you're talking about is they have two choices. Either they can undertake economic activity in other countries because it is cheaper to achieve results there, or they can buy credits from other countries that have credits to spare. You talked about Russia. Either way, you're talking about a shift of economic activity or a shift in economic wealth.

Dr. Erik Haites: No. I would say they have three choices. One is that they stay in Canada and implement measures in their own operations. The second is they stay in Canada and engage in emissions trading because that's lower cost than implementing the measures. The third is obviously that they move somewhere else.

My only point is that they would engage in emissions trading because that's lower cost than doing something domestically. Therefore emissions trading would reduce the likelihood of their moving to another country because of the high cost. It certainly doesn't prevent it, but I think it reduces the financial incentive to do that.

I take Mr. Hornung's point which he raised in his opening comments that we should take a longer term perspective on this and say that it may not be the best long run solution to allow everybody in Canada to buy credits equal to 100% of the reduction.

Mr. David Chatters: Is that a possibility? Does the Kyoto protocol not say that the majority of the reductions must occur domestically?

Dr. Erik Haites: The protocol says that the trading actions under emissions trading, joint implementation or the clean development mechanism, have to be supplemental. It is still a matter of vigorous debate as to what that means. Some countries are saying that it doesn't mean anything other than supplemental.

The third point you raised was how to capture emissions from sources other than large industry in a trading program. Conceptually there's a relatively simple way of doing that.

I'll talk about the energy related CO₂ emissions because that's over 80% of our total emissions but it can be done in other sectors as well. We would have a trading program for the carbon content of the fossil fuels at the point of production and import. Crude oil production, coal production, imports of crude oil, imports of petroleum products would have a limit on the total carbon content. That would then cover all fossil fuels used in Canada regardless of whether they are eventually turned into gasoline or used to generate electricity, heat homes or whatever. You in that sense cover all of those sources.

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Mr. David Chatters: A carbon tax.

Dr. Erik Haites: In effect. It's not a carbon tax if they're distributed free; it is a carbon tax if they are optioned.

Mr. David Chatters: Yes, we know.

Thank you, Mr. Chairman.

The Chairman: We can always come back to you, if you like. Roy Cullen. Oh, I'm sorry, Mr. Hornung. I should have offered you the time.

Mr. Robert Hornung: No, that's fine. Dr. Haites answered the questions quite well.

The only point I wanted to make was on the question of the transfer of wealth. It certainly will be an issue, for example, if Canada is purchasing a lot of its emission reductions elsewhere, that a bunch of money is flowing from the country. I would argue that there is some possibility that will also generate some spin-off benefits that will come back to the country.

For example, if Canada was able to credibly invest in the former Soviet Union using our expertise in the oil and gas sector to reduce methane emissions from leaky pipelines, there are a heck of a lot of leaky pipelines. If we go over there and prove we can do it well once, then maybe somebody else will ask us to do it at their pipeline as well. There are opportunities for business expansion as well in terms of doing this.

Mr. David Chatters: I don't think that's realistic, quite frankly. Our oil and gas industry went to the former Soviet Union and tried that. They have all given up and come back home with great financial costs. Something has to change before that's going to be a possibility.

Mr. Robert Hornung: That ties into the second point I was going to make. When we're talking about costs increasing and providing an incentive for companies to move out of Canada and go overseas, we have to recognize all the time the costs we're talking about. Energy costs are important for many companies but there are a whole bunch of other issues in terms of dealing with trying to set up operations in Kazakhstan or somewhere that are going to come up.

Mr. David Chatters: How you can expect payment.

Mr. Robert Hornung: There you go, right. There are a lot of disincentives to making that sort of move as well. I'll stop there.

The Chairman: Thank you. Mr. Cullen.

Mr. Roy Cullen: Thank you, Dr. Haites, Mr. Hornung. One of our jobs as politicians from time to time is to make the complex simple. Sometimes that is quite a task.

The Chairman: It's better if it starts out simple.

Mr. Roy Cullen: This is clearly not a simple area. I would like to first of all work on an example. Sometimes examples can be helpful in working us through the differentiations made in terms of approaches.

Before I do that, Mr. Hornung, you talked about the early action incentives. It is something I support. There are two ways of going about that. You talked about the need to give incentives early as well as credits. I think that this committee will also be seized at some point in time with other economic instruments in addition to tradable permits, tax incentives, etc. There is one reason I support it.

Maybe you could comment on the business of credits trading internationally. You talked about investments in foreign countries and trying to work credits that way. I have had some representation from companies that feel they will have some credit embedded in their products or services.

For example, the cement industry believes that on a life cycle basis their product is environmentally benign or less so than others. I know people in the wood products industry would debate that on a life cycle basis. But they came to me saying they will be looking for a whole bunch of credits for the cement they export. It caught me by surprise.

That is why the earlier we get to this the better because I think there are some expectations out there that may be unrealistic. There may be some people holding back. Could you talk about that briefly? Will there be a credit system for credits embedded in products? We've heard for example with respect to hydroelectricity, that we have a plan already but there should be some way of getting credit for that. Could you expand on that?

Mr. Robert Hornung: I'll take a crack at it. I'll try to do it with an example in terms of making the complex simple.

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Canada exports a lot of natural gas to the United States. There is no doubt that some of that natural gas is reducing U.S. greenhouse gas emissions because for example it is replacing the coal fired electric power station. Certainly we have had a number of people argue, and in fact the Canadian government has taken the position at different times, that we should be receiving credit for those emission reductions.

That debate has occurred once in the international community. It was not over that particular example; it occurred over hydroelectric exports in Scandinavia and that was shut down there. That doesn't mean it can come up again, but they've gone through it once.

Part of the problem is that it does add quite a bit to the complexity in terms of the monitoring and verification of what is going on. It is very easy for us to say we're shipping this gas down there and it's reducing emissions, but all we do is stick it in the pipeline. Where does it come out at the other end and what is it actually being used for? I am sure there are some applications where it's making a big difference. And I am sure there are other applications where maybe it's not.

There is another level of complexity when you get to the life cycle question that you talked about. If we have a natural gas fuelled vehicle and a gasoline fuelled vehicle, if they're both sitting here in Ottawa, you could probably say the natural gas vehicle is going to produce less carbon dioxide emissions. It is not as clear though with a natural gas fuelled vehicle in the United States, where the natural gas is produced in a sour gas well in northeastern B.C. and has to be pipelined all the way down to the U.S. and then goes into the car and you add this sort of life cycle emissions, whether it actually comes out ahead of oil and gasoline at that point. Frankly, there hasn't been enough analysis done of that.

You get to another level of complexity when you talk about cement, or energy intensive products. We produce a lot of heavily energy intensive products in Canada. There have been some discussions as to should we get credit for that. We also import a lot of energy intensive products. I haven't heard too many people saying that we should take the responsibility for those. Again, we don't have the data. It is a whole order of magnitude, and is more difficult to try to set up a system that deals with that.

In terms of your plea to keep the complex simple, if we start taking those steps and going into that, I think we will move very rapidly into a system that will become quite unworkable.

Dr. Erik Haites: If I could just comment briefly.

I think the rules for determining your national emissions are agreed to by the framework convention on climate change. They reflect an emissions inventory approach that has been developed by the intergovernmental panel on climate change. They have looked at this issue of the embedded carbon and have essentially decided that it's unworkable.

There are a few academic studies around for some countries. By and large they suggest that when you look at all trade, the countries that have been studied are not usually big net gainers or net losers from the embedded emissions in the products. As Robert suggested, we take credit for the natural gas emissions; are we also going to take credit for the upstream emissions from the tar sands oil that is exported? There is a lot of debate. Some sectors may come out ahead, but I think it is impractical internationally.

Mr. Roy Cullen: Okay. Maybe we'll come back to that later. Dr. Haites, I wanted to give you a chance to comment on Mr. Hornung's concerns on higher trading, flexibility provisions, additionality and early action. Before we do that, I wondered if you could just take a pencil and write down a few numbers for me. Do we have a moment, Mr. Chair, because it may help the whole committee understand this concept a little better.

I came from the forest products industry so I'm more familiar with water effluents, but let us say in jurisdiction one we have two plants, plant A and plant B. On this cap and trade type of scenario the allocation is 1,000 units of greenhouse gases, whatever they are. Plant A is allocated 500 and plant B is allocated 500. Plant A is currently at 300 and plant B is currently at 1,200. Let us say we have that same situation in jurisdiction two, which we could call Alberta or Ontario. It is really a proxy for international or different jurisdictions because the issues may be similar, although I'm not sure if they are internationally versus domestically trading.

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Let us say we have the same scenario of 1,000 allocated, both allocated 500, and one at 300 and one at 1,200. The one at 1,200 says it's going to be difficult for him to get to 500, but he can buy 200 from plant A and then he has to do the rest. He's got to ask what is the price of that and in his whole business case is it a worthwhile proposition.

You made a differentiation between—and I don't know if I have the terminology correct—allowance trading versus substances trading and then credit trading. I think you were talking about credit trading more in an international context but perhaps not. Could you tell me how those different concepts would be applied given this kind of scenario?

Dr. Erik Haites: The example you have set out is really an example of a cap and trade or allowance trading system because you have in both countries a cap of 1,000 for resources. That cap is fully allocated.

To see the difference for a credit trading system, let us go to jurisdiction two. We eliminate the initial allocation of 1,000 and we say that jurisdiction two is a developing country. It has no commitment under the Kyoto Protocol. We have two sources, one with actual emissions of 300 and one with actual emissions of 1,200 for a total of 1,500.

Jurisdiction one is Canada, an annex B country. We would then have a cap and trade system within Canada. Company B would buy 200 allowances from company A that were surplus. It still needs to get 500. It would then go internationally to the developing country and look for projects with those two companies.

Since company B in the developing country has larger emissions, it's the more likely candidate to be able to reduce 500 emissions. They say “We will implement a project at your facility to reduce your actual emissions to 700. Once we've demonstrated that that reduction has been achieved, we will take those 500 tonnes as credit back to Canada”. They will still have actual emissions of 1,200. They will have gotten 500 allowances from Canada. They bought 200 from company A in Canada and they've got 700 tonnes from credits internationally.

Mr. Roy Cullen: That project internationally, there's no real pressure on that company to get it down. They haven't been allocated a certain limit, so the business case for them is what? Is it productivity enhancement?

Dr. Erik Haites: The business case is that company B from Canada would pay them to get those 500 tonnes. They would pay to implement efficiency measures or whatever it takes to get the 500 unit reduction.

Mr. Roy Cullen: I see. Company B gets a bit of a free ride in terms of the investment.

Dr. Erik Haites: That's right. The intent is that in the developing countries the participants in these projects get access to better technology and other environmental benefits. For example, reducing the CO₂ emissions at company B in the developing country probably also reduces the sulphur emissions and oxide emissions and they may be faced with regulations on those. There would be other benefits that they would get.

Mr. Roy Cullen: Each deal would be slightly different. There might be something in it for them, some productivity enhancement. There might be some international aid, contributions, whatever.

Dr. Erik Haites: That's right.

Mr. Roy Cullen: I'll stop here, Mr. Chairman, because I know others have questions. I thought I heard you say the term “substances trading”. How does that fit into this?

Dr. Erik Haites: Again, let us take Canada in this case and jurisdiction one, companies A and B. For example, it is too hard to actually measure at the end of the stack for the SF6 emissions from magnesium plants. It's a diverse source. It leaks out through windows and doors every time someone opens the door, so you can't actually measure it.

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It is much easier to measure the total quantity they buy. They have to buy it, they don't make it. You allocate permits that allow you to buy so much of the quantity and then you enforce it on the purchasing records.

Mr. Roy Cullen: You use it at the front end.

Dr. Erik Haites: You assume that all of it's going to be emitted at some point. It's going to leak away. Because they have to have permits to buy it and those permits are worth something, the companies have an incentive to minimize the leakage because that reduces their cost.

Mr. Roy Cullen: I see.

The Chairman: Thank you, Roy. We'll go to Pierre de Savoye.

[Translation]

Mr. Pierre de Savoye (Portneuf, BQ): You referred to the emission of greenhouse gases, CO₂ in particular. To control greenhouse gases there are other things we can do aside from limiting their output: we can also control absorption, the sinks. Unless I am mistaken, it would be possible for businesses to negotiate emission rights not only by reducing their emission rates, but also by planting trees. Could you say a few words about that, Mr. Haites? Mr. Hornung can continue after you, I'm sure.

[English]

Dr. Erik Haites: What you say is correct. You can actually reduce emissions or sequester emissions.

The Kyoto Protocol provides in principle for enhancing sinks but again, like emissions trading, the rules have to be worked out. I think the rules on sinks are going to be even more complicated than the rules on emissions trading.

Let us assume that some agreement is reached on that. Then the carbon sequestered in sinks is very amenable to creating credits that could then be purchased and used and sold as part of an emissions trading program. I would see that sinks are easily integrated with a trading program in the form of credits for the actual carbon sequestered, giving rise to credits which can then be bought by sources that are participating in a trading program, whatever form that trading program takes.

[Translation]

Mr. Pierre de Savoye: Let's take a business that would say: “I have emission rights that limit my emissions to so many thousands or millions of tons. I actually emit more than that, and so I will plant a forest in Canada to absorb the excess of CO₂. There, I'm even.” Is that scenario possible?

[English]

Mr. Robert Hornung: My answer would be yes, it's quite feasible theoretically. A number of methodological concerns and concerns about measurement and verification would have to be addressed. As Dr. Haites pointed out, the Kyoto Protocol is not very clear on this point.

There are going to be presumably through sequestration many different things you could do. You can plant trees. Some people would argue that they would like to receive credit for doing something that will avoid trees being cut down. Some people would like to get credit for changing a forest management practice so that trees grow faster. All of these things.

There are varying levels of uncertainty about how you can measure that and how comfortable you can feel with that. That all has to be figured out. In theory yes, and in theory there's a significant chunk of potential there in terms of helping us deal with this problem, but I would suggest there really needs to be a lot of work done.

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Canada could be a leader in this in terms of pushing for some international standardization and comfort with methodologies that would allow us to bring these things into the system. Right now I think it would be very hard to do so, but I certainly think it should and probably will happen at some point.

[Translation]

Mr. Pierre de Savoye: Would an approach like that one not be an incentive to stop certain countries such as Brazil from cutting down tropical forests? Mr. Hornung.

[English]

Mr. Robert Hornung: No, it would be. I would argue and in fact we've always taken the position that Canada should be doing all it can to encourage greater carbon sequestration, whether it's in agricultural soils, which is a big topic of discussion in western Canada at the moment, or whether it's through improved forestry practices.

If Canada wants to receive international recognition for that sort of work though, Canada has to do a lot of work on the methodologies and on the techniques used to monitor and verify that so that other countries are going to feel comfortable with that. Given that, I think it would provide some valuable incentives.

Dr. Erik Haites: I agree with all of that. I agree with your example that it could provide an incentive to limit the burning in Brazil and other areas. I think you have to be very careful not to create a situation where you first provide an incentive to burn it all down and then replant it to get credit.

Mr. Robert Hornung: Just to follow up on that, it's something that seems ridiculous, but there are certainly a number of people who have read the text in the Kyoto Protocol and say that that is exactly the incentive the Kyoto Protocol provides right now. They say that it makes more sense to cut everything down so that you can get the credit from stuff growing up afterward.

[Translation]

Mr. Pierre de Savoye: I would like to continue in that same vein for a few moments, Mr. Chairman, and then I will ask another question. When you fix CO₂ in vegetation, that fixation is not permanent; the plants lose their leaves and the leaves quietly oxidize and emit the CO₂ back into the atmosphere. In short, isn't that a bit like pushing the snow down the driveway, rather than shovelling it immediately? Is it really a solution?

[English]

Mr. Robert Hornung: You have highlighted one example of why the measurement and verification is a difficult question.

One way that has been proposed in order to deal with the sequestration is in essence that you discount the value of the credit. For example, you feel with sequestration that you've sequestered 500 tonnes and that is fine but there's a lot of uncertainty about the measurement, so the actual credit you're going to get is 400 tonnes instead of 500 tonnes. It is going to be discounted 20% to allow for this.

Obviously, agreeing on a discount factor would also be a huge discussion. The idea of permanence, what happens if you invest in a carbon sequestration project and the trees burn down? Who is responsible for those emissions? What happens? All those issues have to be worked through.

We're avoiding making the complex simple here, but it is a complex area.

[Translation]

Mr. Pierre de Savoye: We talked about CO₂ and oil. We talked about oil being used as fuel, but a large part of the oil is not used as fuel. Polymers are made with it for the purpose of making clothing. How is the polymerization of oil accounted for in emission credits, Mr. Haites?

[English]

Dr. Erik Haites: Yes, one of the difficult issues that will have to be addressed in whether you have emissions trading or another form of regulation is the use of petroleum products as feedstocks for petrochemicals, fertilizers, and so forth.

I am not an expert in this area, but my reading of the literature suggests that most of the products that are created have a lifetime of a few years to maybe a decade or two. It is really a limited number of products like asphalt where there is very long term sequestration. In fact even though it's used as a feedstock, it is released to the atmosphere as it decays within years to decades. That is relatively short compared to the life in the atmosphere.

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There is an argument for slightly different treatment but not complete exemption on environmental grounds. On economic grounds the cost of the feedstock is a major cost to the final product. If that becomes too high as a result of the regulations or trading program, in effect that is going to drive that industry to countries where there are no limits under the protocol simply because the energy costs are too high. The economic effect of causing the industry to relocate has to be balanced against that environmental impact.

Mr. Robert Hornung: I have nothing to add to that.

[Translation]

Mr. Pierre de Savoye: Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. de Savoye.

[English]

Mr. Godin, please.

[Translation]

Mr. Yvon Godin (Acadie—Bathurst, NDP): First of all, I want to welcome you here. I also want to point out that I believe I did my share since last year, I planted 28 trees on my land. So I've made a bit of a contribution.

I'm worried about what will happen to us here in Canada if we can buy emission credits from other countries and don't do our share to eliminate greenhouse gases here. By so doing, won't we be running the risk of harming the health of Canadian men and women? If everyone does it in every country in the world, that means it would be around here too. The problem we should face is that we Canadians would be surrounded by pollution whereas other countries would be cleaning up their corner of the planet. In fact, we would be in a kind of gas chamber, in a way.

[English]

Dr. Erik Haites: The Kyoto Protocol has these provisions and the wording in it is that the international trades will be supplemental to domestic action. As has been mentioned several times, the interpretation of that is still to be negotiated.

I don't see that that prevents any individual country, like Canada, from saying that regardless of the international interpretation, we wish to do more at home and that we have good reasons for doing that because of the extra environmental benefits. Actions to reduce greenhouse gas emissions from energy use will reduce the NO_x and SO_x and VOCs emissions and therefore improve yields, health benefits. For that reason we want to restrict the use of credits from other countries and do more at home.

Similarly for sequestration, planting more trees in Canada may have other health and economic benefits that we want to encourage. We could for very sound reasons decide that it was appropriate to limit the purchases of credits from other countries and hence have to do more in Canada.

Mr. Robert Hornung: We only have in a sense limited resources that we can turn to this issue. I do sometimes wonder that our focus and our effort to scramble and find these emission reduction opportunities outside Canada sometimes distracts us from what we could be doing in Canada.

You could find a fairly broad consensus that there are things we can do in Canada which make economic sense and provide multiple environmental benefits and help to protect the climate. There is going to be a wide range of disagreement as to how much of that stuff is really out there.

Some people are going to argue you could meet the Kyoto target by just doing stuff at home and it would all be cost effective. Other people are going to argue that no, it is just a tiny part of it.

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My feeling is that we're never going to answer that question through economic modelling and studies. We have had hundreds of models run in North America about how much it's going to cost to reduce greenhouse gas emissions and they give you answers from it's going to be wonderful to it's going to be a disaster.

The only way we're actually going to find out is to start doing something. That might mean starting with pilot projects. You start on a small scale and see what you come up with, but it's only going to be real world experience that actually answers this question for us.

Certainly we should be looking at ways that allow us to increase flexibility, allow us to proceed cost effectively and in a way that's credible and effective. We've also got to be looking at what the real potential is here at home, because I don't think there's a good enough handle on that yet.

[Translation]

Mr. Yvon Godin: The comments you made about the natural gas we sold to the United States which really contributed to reducing gas emissions were very interesting. We talked about the natural gas there is here in Canada. During hearings of this committee, I have repeatedly argued in favour of building a natural gas pipeline to move gas from Sable Island to Bernier so that all Canadians could use it.

Don't you think we should consider giving consumers a credit similar to the one power companies gave them to convert their gas or fuel consumption systems to electric systems? Shouldn't we give all Canadians the opportunity of converting their heating system to natural gas?

[English]

Mr. Robert Hornung: There is no doubt that natural gas has a very important role to play at least as a transition fuel in terms of helping us to deal with this problem.

Yes, there are a lot of opportunities in Canada for increased natural gas use. I remember an editorial in, of all places, the Edmonton Journal. It stated that maybe this climate change thing wouldn't be quite so bad, that one thing we could do in Alberta is we could stop using coal to power our electric utilities. We could use natural gas instead. The natural gas would probably all come from Alberta and maybe that's not a bad thing.

There are opportunities like that. You do have to be careful in the sense that, to what extent do you want to be promoting natural gas use in provinces that are using hydroelectricity primarily? If you take that step, then you end up actually increasing your emissions. It's definitely an area.

For example, in the Clinton administration's proposal before Congress for their climate technology initiative, one of the positive financial incentives they put in was to encourage investment in natural gas co-generation to produce electricity. It's more efficient, cleaner and it makes a lot of sense. They're actually trying to stimulate that. We have a whole bunch of barriers to that in Canada, starting with the monopoly structure in a lot of the provincial electrical utilities.

We should be looking at opportunities like that. As you say, there are things we can be doing at home in terms of fuel switching, to lower carbon fuels in terms of energy efficiency, and ultimately in terms of renewable energy over the longer term.

Dr. Erik Haites: If I could add one small comment, in principle I would agree with everything Robert said. We agree on many things. In practice there will be some very difficult situations.

Sable Island gas is an example. That's in Nova Scotia. At the moment in Nova Scotia most of the electricity is generated from coal mined in Nova Scotia. There will be far fewer jobs in producing natural gas than there currently are in producing coal. If you switched to natural gas, you create a lot of unemployment in Cape Breton which currently has high unemployment.

Similarly in New Brunswick, the coal they use is largely from New Brunswick. If you switch that to natural gas, you probably reduce coal mining employment in those areas. Some other consequences would come to play before you made those decisions.

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Mr. Yvon Godin: I want to get this straight. What I was actually looking at is how do we do it gradually and how do we look at things. Instead of the fuel they have in their houses, they could switch to gas. Then as you go along, the coal industries go down and they start to replace them. Think of the vision that you have to have for the future. That's the way I'm looking at it.

Dr. Erik Haites: You have to have that vision.

Mr. Robert Hornung: Let me add just one comment to that. Some of this is going on. For example, our organization has spent a lot of time looking at submissions to the voluntary challenge program.

One of the submissions that I've always found quite interesting is from a natural gas utility in Ontario called Consumers Gas. One of the things they've done in their submission is they have tried to quantify not only emission reductions in their own operations that are generated by their activities, but also what emission reductions they're generating by getting people to switch from oil to natural gas, or getting people to switch from an inefficient gas heater to an efficient gas heater. There are some really interesting numbers there. It's worth looking at. There are opportunities.

The Chairman: I think we have short concluding questions from Dave and Roy.

Mr. David Chatters: Your comments are very interesting. Certainly from a private sector view, I don't argue with the things you say but unfortunately, in this country politics get into the mix. There are already commitments by the Prime Minister and others that one region wouldn't benefit unduly over another and all the rest of it. It skews the whole thing.

I wanted you to comment for a moment on the dollars, the cost. Do you see this concept of emissions trading is going to be a cost willing buyer proposal? We've already had some transactions in the area of a dollar a tonne for carbon. I think Premier Tobin has been floating the idea of $100 a tonne on his Churchill Falls project. Of course, the government has already committed a substantial amount of money to that project.

There is a consortium in western Canada looking for support that would allow coal technology and the 76,000 jobs in Canada that depend on the coal industry, to continue to use coal to generate electricity and all the other things without the carbon emissions. They don't seem to be able to get support. It can be seen where politics come into the mix of things and skew the whole idea.

I'd like you to comment on who is going to set the price per tonne of carbon or whatever unit it's based on and how that will work.

Dr. Erik Haites: You raise a very interesting point. I wrote this in a report back in 1989. Emissions trading is actually a way to help overcome this roadblock.

Under emissions trading you can allocate responsibilities in one way. We had the example where the two companies were each allocated 500 units, but their emissions were different. You allocate in one way and the costs and who actually implements things gets sorted out by the market. Those who can do it cheapest, do it and they make a little extra money from it. Those who are faced with costly reductions are able to reduce the cost to themselves of meeting their fair share of the burden by buying it from the source.

Mr. David Chatters: The market sets the price.

Dr. Erik Haites: The market sets the price. And if I were in Mr. Tobin's shoes, I would argue the price up to $100 a tonne, too.

Mr. David Chatters: It would appear the United States is moving ahead with this whole concept and probably will implement the Kyoto Protocol without ever ratifying it. That's a possibility. It is moving to grab up the dollar a tonne bargains before they're all gone. There seems to be a rush to get in on the cheap stuff.

Mr. Robert Hornung: Just to comment on that, there's no doubt the United States has made it very clear that emissions trading is the tool it's going to use to deal with this problem.

In terms of the market prices, it's easy to get a dollar a tonne carbon now because the credits don't actually mean anything. When those credits start to have more value and we have systems in place, I expect you're going to see the price go up. I don't expect it to go to $100 a tonne. For those people who are now making the dollar a tonne investments, it's an investment with a risk. There is absolutely no guarantee in the end that those things are going to be worth anything. However, if they guessed right, they're going to be looking pretty smart.

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The Chairman: Thank you. The last word to you Roy.

Mr. Roy Cullen: I have a couple of questions. You mentioned that how we're going to find out whether emissions trading works is to actually start doing something and getting it into motion. We don't have any experience in Canada. The United States have some. Could you describe that, where it is, what it is, how it works, is it working well, or is it too early to tell?

Dr. Erik Haites: They have had several different programs, some of which have worked very well. Others have been abysmal failures. Most of them have been somewhere in between. As with anything, you can have lousy regulations and you can have effective regulations.

Emissions trading is no different from that. The successes are the program for lead and leaded gasoline phase-out and the SO₂ trading program that is currently under way.

Mr. Roy Cullen: Is that national or by state?

Dr. Erik Haites: It's national.

The failures, you mentioned you are more familiar with water discharges. There are some trading programs for discharges to water sources where basically there have been too few participants so you essentially have no trading. There's a trading program for the performance of heavy duty truck engines again where there has been no trading. I think it's too small a market and too cumbersome procedures.

Mr. Roy Cullen: Have they essentially been cap and trade systems?

Dr. Erik Haites: Most of them are cap and trade systems.

Mr. Roy Cullen: With a trading exchange or is it more internal?

Dr. Erik Haites: No, none of the markets are so big that you would have a listing on an exchange. It's all done through brokers.

The biggest market at the moment that has ever existed is the SO₂ program. They're currently trading about seven to eight million tonnes of SO₂ a year. Historically the price has been around $100 a tonne, so $700 or $800 million per year of total trading activity. It's now about $150 a tonne so it's over $1 billion.

If I could, Mr. Chair, I think Mr. Cullen asked me to comment very briefly on another thing.

Mr. Roy Cullen: That was actually my final question. Mr. Hornung raised some serious issues on the topics that we mentioned, other trading, flexibility, additionality, early action and a couple of others. Could you give us your perspective and comments?

Dr. Erik Haites: First, hot air is one. I would like to point out that you put hot air into the example you created. Company A was allocated 500 units. Their actual emissions are 300 so they have 200 units of hot air according to that example by definition.

It is a matter of perspective. The issue is the environmental performance of a trading program depends on the cap, the 1,000 units in your case and in the case of the Kyoto protocol, it's the 5.2% reduction overall from the annex B countries. That's the environmental standard that you judge. How you allocate within that is a matter of equity.

My interpretation would be that the countries in annex B decided that Russia and Ukraine needed to have some incentives to participate and so they got higher allowances than their actual emissions. As long as you judge the performance of the protocol by the 5.2%, that's the environmental performance and the rest is an equity issue.

Mr. Roy Cullen: As long as you meet the target.

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Dr. Erik Haites: As long as everybody meets the targets, agreed.

That raises another issue. One of the concerns I'm sure Mr. Hornung has about emissions trading is that domestically in a trading program you have an environmental regulator with legal authority to enforce compliance. Internationally it's very hard to enforce compliance on sovereign countries.

Because the things you're trading now have value or by making the emissions rights tradable, you've given them value so you in fact create a financial incentive for non-compliance. That puts the onus on the design of the rules for the international trading system to reverse that incentive and create a financial incentive to comply as opposed to the reverse. I think that can be done but it's certainly not yet clear that it will be done.

The issue of additionality is a very important one for the clean development mechanism or a domestic credit trading program. I think additionality needs to be a test but because every action is unique, you end up making a judgment on how much is additional.

Mr. Roy Cullen: It's similar to the concept when we formerly had grant programs. Some would argue that that investment was going to go ahead anyway and they just wrapped it into a grant. It's the same concept.

Dr. Erik Haites: It's exactly the same concept. One of the pilot projects under way in Canada at the moment is one called PERT in Ontario that focuses mostly on ground level ozone but also on CO₂.

One of the actions was that Ontario Hydro purchased credits from a company called Protect Air that did the inspection of vehicles. They identified I think it was 140 old vehicles, clunkers if you will, that had very high emission rates. They took those vehicles off the road on the presumption that that would reduce emissions, but by how much?

There were tests to show that they were high emitting vehicles but what is the standard against which you measure the reduction? Is it brand new vehicles? Most of the people who own those vehicles would not be in a position to buy new vehicles. Is it a similar vehicle? In this case there's no reduction but clearly by taking these vehicles off the road you think you've done something.

We ended up agreeing that a reasonable standard was the average for all of the vehicles on the road, but is that the right number or the wrong number? You ultimately come down to a matter of judgment of something that's reasonable. That will be the case in every single project. You will never know what would have happened and so you have to make some judgment.

Additionality is a criteria but we have to set up procedures where it's transparent, what the decision is and that it is more or less applied consistently.

I don't have anything further to say on supplementarity. I think that's open for debate and Canada might want to do something different from what is allowed internationally. We can make different arguments on that.

On credit for early action, I think the situation is even more complicated than Robert said. You can get universal agreement that sources that implement measures now should not be penalized as a result of that.

You can make a case for offering some incentives but that then places you in the position that you might still design your future regulations in a way that in addition to giving those incentives also ensures that they weren't harmed. It gives them a double bonus unintentionally, unless you make that incentive conditional that it might disappear if their current provisions are protected. It can become extremely complicated.

After 2000, assuming the clean development mechanism goes ahead, the alternative is simply to buy credits from developing countries. Therefore the incentives to do things in Canada have to be at least as attractive as buying from the clean development mechanism because there it's essentially guaranteed that that credit will be usable.

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The situation on credit for early action I think is enormously complicated. It is going to change over time as the market price of credits from the clean development mechanism changes starting in 2000.

Mr. Robert Hornung: A very brief final comment just to say that I think the answers to the last few questions have again emphasized the point that the devil is in the details. This is complex.

When you start talking about how you operationalize additionality and what does that mean, that's a tough question. What is credit for early action? That's a tough question. They are not questions we can slough off. If we're setting up a system like this, we're talking about real value. We're talking about the distribution of wealth here. It's going to take a lot of slogging, but if we don't do it we may inadvertently be distributing wealth and value in ways that we hadn't intended and hadn't thought through.

Mr. David Chatters: And we've only got until November to get this straightened out.

Mr. Robert Hornung: No, I wouldn't say that.

Dr. Erik Haites: They're trying to straighten out the international rules in November. I think that will probably not affect the rules that we would adopt within Canada.

Mr. David Chatters: Okay.

The Chairman: Colleagues, I'd like on all our behalf to thank Dr. Haites and Mr. Hornung for being here with us today.

It's tough enough at times to understand something that already exists. We're trying to understand something that is very much in the minds of many of those who are trying to imagine how this would work. I think it's important for us to get a handle on this so that we can assist in some way our government, the Government of Canada, in playing its role internationally and of course its role domestically as well.

With that, I'd like thank you both. I'm not going to adjourn the meeting exactly right now, but I'll thank you and excuse you.

I want to say, colleagues, that we are expecting votes very shortly. The bells will ring shortly.

We don't have a quorum to go into our in camera meeting. I want for the record to tell you that on the two motions that we received, I am forced under the rules to make the ruling that both of them are out of order. The motion that Ken Epp presented was virtually the same as the one that was voted down some time ago. On Mr. Gilmour's motion on the Senate, because the House voted on the estimates on Tuesday night, his motion is also out of order. I want to put that on the record.

I wish you a very happy and safe summer. I expect that we are going to be adjourning the House today or tomorrow. Colleagues, have a good one. With that, we're adjourned.