Harnessing Market Forces & Reducing GHG Emissions

The Climate Fund established in Budget 2005 is a market-based, results-oriented mechanism to encourage emission reduction initiatives. Creation of this transformative institution is the single most important distinguishing feature between this Plan and the Government’s past approaches to climate change. This Government believes that market-based approaches are critical to integrating climate change considerations into the day-to-day decisions of Canada’s citizens and businesses, and unleashing the power of innovation so as to move Canada towards a low emissions trajectory.

Legislation establishing the Climate Fund was passed by Parliament and proclaimed October 3, 2005

Climate Fund

The purpose of the Climate Fund is to create a permanent institution for the purchase of emissions reduction and removal credits on behalf of the Government of Canada that will be one of the primary tools for Canada’s approach to climate change. By tapping the potential of the market, Canada will:

• stimulate innovation;
• enable Canadians to take action;
• encourage energy efficiency;
• deliver cost-effective reductions and sequestration;
• drive the adoption of best available technologies; and
• stimulate the development of a domestic emissions trading system.

The Climate Fund will be results-based, with a focus on real and verifiable emission reductions.

The Minister of the Environment has the responsibility for the overall direction of the Climate Fund Agency and will receive advice from an Advisory Board comprised of knowledgeable representatives from a range of industrial sectors, stakeholder groups and other levels of governments.

The day-to-day operations of the Climate Fund Agency will be managed by a President Designate, Mr. Allan F. Amey, a position he will take on as of November 14, 2005. Mr. Amey will assume the role of President of the Agency as of January 1, 2006.

To ensure transparency and accountability in its operations, the Climate Fund Agency will prepare an Annual Corporate Business Plan and Annual Report which will be tabled in Parliament by the Minister of the Environment. It will also undergo an annual audit by the Auditor General of Canada.

Approach

Announced in Budget 2005, the Climate Fund will purchase, as of March 31, 2006, domestic emission reductions and, in those cases which are demonstrably in the national interest, international reductions that are recognized under the Kyoto Protocol. It will make its purchases through a competitive process.

Domestic reductions
As a first step, individuals and organizations planning to substantially reduce or sequester emissions will be able to apply under the soon to be created domestic offset system to have their projects recognized as eligible for offset credits. Credits that have been issued for qualifying projects will be purchased by the Fund pursuant to a competitive process, and retired on behalf of Canada’s commitment to Kyoto. Opportunities for reductions and sequestration will be available across the economy. Potential examples include:

• farmers who adopt low-till or zero-till practices;
• forestry companies that engage in state-of-the-art forest management practices;
• property developers that include district heating and renewable energy elements in their plans for new sub-divisions;
• businesses that develop innovative ways to reduce emissions through recycling and energy efficiency;
• companies and municipalities that invest in their communities by encouraging alternative transportation modes;
• municipalities that capture landfill gas and use it to generate electricity;
• large emitters that do better than their regulated emission targets;
• new electricity generation projects that lead to incremental GHG emissions displacement;
• remote communities that convert electricity generation from diesel to renewable sources; and
• companies and their employees that pool collective emission reductions from activities such as tele-commuting.

The Climate Fund will also engage in advance purchase of emission reductions from large strategic projects in partnership with the private sector. For example, projects that have the potential of generating significant GHG emissions in which the cost per tonne is initially high but is expected to fall over time could be considered if the project would contribute to the structural change necessary to move Canada to lower carbon intensity over the longer-term. Conditions around advance purchases will be set so as to require repayment to the Fund should the associated GHG reductions not be realized.

International investments
The Climate Fund’s primary mandate is to promote domestic GHG emission reductions, with a view to positioning Canada to compete in the 21st century carbon-constrained global economy. The Fund will also invest in internationally recognized Kyoto emission reductions through the Clean Development Mechanism and Joint Implementation, as well as through procedures for “greening” other international credits. Only “green” credits – i.e. credits that represent real and verified emission reductions – will be recognized; there will be no purchases of so-called “hot air”.

Investment in international emission reductions will be undertaken in a manner that advances Canada’s broader sustainability interests. Specifically, investment in international emission reduction projects would have at least one of the following characteristics:

• apply Canadian technology;
• improve Canada’s international competitiveness;
• expand Canada’s trade or otherwise advance our national interest (e.g., deliver environmental benefits by reducing the mercury that reaches our borders);
• advance Canada’s international development objectives.

In the initial years, Fund purchases will primarily be directed to domestic projects. During this period, participation in the international market will mostly take the form of purchases from emission reduction projects in developing countries, and some purchases of options for future investment in “greened” credits. It is expected that the Fund’s participation in the international carbon market will evolve over time, as we gain experience and our domestic climate change regime develops.

To facilitate the process of international purchases, the Government may develop Memoranda of Understanding (MoUs) with countries of interest. The “greening” of any international credit purchases could be governed by a bilateral agreement between the governments of Canada and the seller country in which Canada would want to ensure both environmental benefits and trade benefits for Canadian companies. Such agreements would ensure environmental benefits by stipulating that 100 percent of the proceeds from the purchase must be reinvested in projects and activities that contribute to GHG reductions in the seller country.

Reductions

Budget 2005 provided minimum funding of $1 billion. It is estimated that the Climate Fund could yield in the order of 75-115 megatonnes of reductions annually in the 2008-2012 period, with funding in the order of $4 to 5 billion.

It is not possible to predict how many of these reductions will occur domestically. The Climate Fund will give a priority to domestic emission reductions. However, the amount of domestic emission reductions that will be realized depends on many factors, including: the entrepreneurial spirit of Canadians and their interest in finding innovative means of reducing emissions; the success of the Climate Fund in tapping into that spirit of entrepreneurship and innovation; how “market friendly” are the rules for domestic offset creation; and the economic and fiscal circumstances at that time. The Government has great confidence in the innovative spirit of Canadians; a great deal of interest is already being expressed with respect to the Climate Fund.

The Climate Fund will also invest internationally. However, just as it is not possible to predict the scale of domestic emission reductions, it is not possible to say at this point how many international reductions Canada may seek to purchase.