The Pan-Canadian Framework on Clean Growth and Climate Change-The Ontario Controversy

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The federal government created an eloquent solution to the problem of carbon emissions and climate change. Their backstop GHG Act allows the provinces to create a number of homegrown solutions in order to deal with emissions within their own jurisdictions.

Ontario created perhaps the best and most integrated solution to the problem of emissions. The Ontario Climate Change Mitigation and Low-Carbon Economy Act, 2016 (the Ontario Act) established a standard cap and trade system described in the earlier article. In addition, the system integrates with the Western Climate Initiative (WCI) which provides access to an even greater market to buy and sell the most cost effective carbon credits.

The Ontario system compared a number of policy alternatives in its Five Year Climate Change Action Plan. The most cost effective alternative used the existing cap and trade system integrated with WCI. The policy concluded that the existing system would result by the year 2020 in a carbon charge of $18 in 2016 dollars.

We previously described how the federal government uses a solid constitutional ground to establish a national carbon charge. Ontario intends to argue against this ground with all available resources. This would provide great relief to Saskatchewan in its intent to also contest the GHG Act. The other provinces may follow suit, but from a risk management perspective Ontario and Saskatchewan businesses would be prudent to prepare for the federal carbon tax of $20 tonne in 2019 and establish the necessary processes and infrastructure now.

The Ontario government appears to be in the enviable position of avoiding the political cost of pricing carbon and can throw the entire responsibility on the federal government. Instead of businesses and consumers facing a potential Ontario based $18 cost per tonne of carbon by 2020, they will have the federal government’s $50 tonne instead. Interestingly, the Ontario government would be receiving greater revenues under the federal system.

The federal system would also be revenue neutral, but the Ontario government would not be as constrained in the use of the revenues. They still might model the innovations and adaptations outlined in the Ontario Climate Change Action Plan, but there is no indication that they plan to do so. Indeed, the funds could go directly back to the entities paying the tax. The carbon pricing signal would be lost, and Ontario would have lost a tremendous opportunity to invest in other innovations to shift into the low carbon economy.

However, Ontario regulated entities purchased $2.8 billion worth of credits already. Ford appears to be pleased that companies would not have to incur these costs in the future. The costs under the carbon tax would be even greater. The federal government would likely not be in a position to reimburse Ontario businesses the cost they have for purchasing credits that may extend as far as 2021. These revenues would have likely gone to the Ontario government and a portion to the WCI. The revenues generated in Ontario would have flowed mainly towards funding the various emissions reductions programs.

WCI does not provide information as to whether Ontario was a net purchaser or seller of carbon credits. An estimate by Ontario’s auditor general Bonnie Lysyk estimated that in 2016 that Ontario businesses would have to pay $466 million for WCI facilitated allowances.

Under section 33 of the Ontario Act, the Minister may retire emission allowances from circulation or may cancel Ontario emission allowances in accordance with the regulations in such circumstances as may be prescribed.  A less confrontation approach would simply be to conclude the Ontario Cap and Trade program naturally. Businesses would likely have no further need for these emission allowances since the province would no longer need to cap the level of emissions coming from the regulated industries.

Effective July 3rd, 2018 the provincial government revoked the cap and trade regulation, prohibiting all trading of emission allowances. Their Carbon website does not provide any further helpful information. The GreenON rebate program will be wound down, but the program will honor arrangement where contracts were signed before June 19th, 2018 for work to be completed by October 31st, 2018.

Ontario contemplates formation of a fund to invest in emission reduction technologies. With the dismantling of the Ontario Cap and Trade, The federal government intends to review the $420 million transfer to Ontario under the Low Carbon Economy Leadership fund.

Since the federal carbon charge is a separate type of system, we would anticipate business having to pay and collect this amount commencing January 1st, 2019. We would also anticipate the carbon tax running concurrently with the no longer required but already purchased carbon credits by Ontario regulated entities.

#pan-canadian

#emissions

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The pan-Canadian framework: Setting a price on carbon

air-air-pollution-climate-change-221012This is the second in a series of articles dealing with carbon tax and trading. The first article dealt with the history surrounding the UN treaty on climate change and the various attempts to implement the treaty which eventually culminated in the Paris Agreement. The pan-Canadian framework became Canada’s answer to reduce its overall greenhouse gas (GHG) emissions.

Carbon pricing forms the central component behind any market attempt to reduce GHG emissions other than using strict command and control regulations. Pricing sends a signal to the marketplace that products or operations relying on extensive carbon use can be less economically efficient than other products or operations that use less carbon.

The ability to emit any form of pollution into the environment without restrictions allows polluting entities to externalize those costs. This means that these entities do not have to incur the cost of cleanup while some other neighbour next door, or city or country incurs the eventual cost of that pollution. Sending a price signal essentially adds the cost of the pollution right into the cost of the product or operation itself. Anyone using that product or operation can now compare the cost with another product or operation that does not have such a carbon extensive expense attached to it. The market eventually switches to the low-carbon alternative.

This problem of externalizing costs can be seen in other areas. The globalization of the economy demonstrates this. Lower tariffs allow products that are produced more cheaply elsewhere into the country. The entire economy essentially benefits except for those that used to make the same item but at a higher cost. One group incurs the benefits while a different group incurs the cost such as job loss.

A more concrete example would the Alliance of Small Island States (AOSIS). This 44-member intergovernmental organization comprises low-lying coastal and small island countries formed to address global warming. The existence of many of these states are at risk owing to global warming and rising sea level. The group continues to threaten litigation with climate change related losses at potentially over $570 trillion.

The federal government places carbon pricing as the primary pillar to its pan-Canadian framework. The question then becomes can it legally achieve this goal.

The framework uses two basic mechanisms for this pricing under Bill C-74 which includes the Greenhouse Gas Pollution Pricing Act (GHG Act) and recently passed by the Senate. The first mechanism uses carbon taxation. The Act actually uses the term “charge” instead of tax, but tax seems to capture the concept fairly well also. The charge begins at $20 per CO2 equivalent for 2019 and increases at $10 per year until it reaches $50 in the year 2022.

The federal government’s jurisdiction over the environment can conflict with the provinces’ jurisdiction quite easily. The federal government’s jurisdiction over tax pursuant to s. 91(3) of the Constitution Act however appears quite clear. This section allows the federal government to raise money by any mode or system of taxation. However, the intent behind the GHG Act would be for it to be revenue neutral. The revenues raised would be returned to the provinces to facilitate climate adaptation and innovation in low carbon technology. The GHG Act does appear clear in that it raises revenue. The Constitution Act does not place a condition on raising money through taxes depending upon how the revenues can be spent.

The federal government can pass legislation in order to implement a treaty, but this does not override the provinces’ jurisdiction. The government also has authority under peace, order and good government. Carbon being emitted in one jurisdiction can have negative effects in another jurisdiction, but this would not seem to justify dealing with carbon on a national basis under this type of power.

A number of provinces intend to challenge the federal jurisdiction to place a charge on carbon emissions. Scholars have opined on this situation and came to the conclusion that the feds would likely succeed in any court challenge. Although this delays the inevitable, court challenges also allow a bad situation to continue. In addition, jurisdictions not modifying their economy to align themselves with a lower carbon future, shall soon become less competitive and be left behind by the global economy.

In the next article, we shall be examining how the second mechanism of carbon pricing, carbon trading, integrates with the tax proposal. Read the previous article here.

Gary Goodwin is the chief legal officer for a national conservation organization. He has been working in the environmental field for over 30 years.

Lawyers Daily July 6, 2018

 

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The pan-Canadian framework on clean growth and climate change Thursday, June 28, 2018 @ 8:52 AM | By Gary Goodwin

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The Canadian government now enters the final stages of implementing its Greenhouse Gas Pollution Pricing Act. The Act sets the regime for a charge on fossil fuels and for pricing industrial greenhouse gas (GHG) emissions. This provides a backstop action for other parts of the country that have not taken steps to pass their own legislation to deal GHG emissions. Concurrently, the incoming Ontario government intends to terminate its existing cap and trade legislation.

As Canadians enter interesting times with respect to federal and provincial jurisdictions and potential litigation for Ontario companies that have already started down the emissions trading path, we require some context establishing the existing socioeconomic environment. This begins a series of articles looking at how we got to this point, where we are now, and potentially what the future might look like legislatively. As others and Yogi Berra point out, it’s tough to make predictions, especially about the future.

The UN Framework Convention on Climate Change (UNFCCC) created the overall structure for 192 countries that signed and ratified this treaty dealing with GHGs. An important preamble of the treaty recognizes that the parties are concerned that human activities have been substantially increasing the atmospheric concentrations of GHGs. The importance of this should be restated in that although some commentators and politicians question the science behind climate change, we do not hear of any country wanting to withdraw from this global treaty.

We do not intend to debate the reality behind climate change, and we would only recommend self-directed research on this point. We would also recommend relying upon peer-reviewed research which is the “court of appeal” standard when it comes to climate change science. The Intergovernmental Panel on Climate Change is the international body for assessing the science related to climate change.

Historically, the 1997 Kyoto Protocol failed to fully implement the UNFCCC as it did not include the two largest emitters, China and the U.S. The Canadian government itself did not take serious steps to attempt to implement the protocol. With the legally binding obligations, the government needed to withdraw from the protocol to avoid some $14 billion in penalties.

A series of Conference of the Parties (COPs) under the UNFCCC umbrella attempted to re-establish some sort of unanimity on how to proceed further. These COPs finally culminated in the Paris Agreement in 2015. The nature of this agreement as a treaty can be somewhat questionable. President Barack Obama entered into the agreement by executive order and therefore did not require Senate approval required for treaties. This allowed President Donald Trump to provide notice by executive order of his administration’s intent to withdraw from the agreement. The U.S. can only provide notice to withdraw three years after the agreement comes into force for the country. The U.S. can then provide a one-year formal notice to withdraw. The total of all these periods finally culminates in November 2020, shortly before the end of his existing term.

As of June 2018, 195 UNFCCC members signed the agreement, and 178 became parties to it. The agreement aims to limit the increase of global average temperatures to 2 degrees C above preindustrial levels and hopefully to limit the increase to 1.5 degrees C to significantly reduce the risks and impact of climate change.

In the agreement, each country plans and reports on its own targets. The agreement does not contain any enforcement mechanism to compel countries to reach a certain level by any particular date and instead provides a method to globally drive fossil fuel divestment.

Each country determines its own “Nationally Determined Contributions” (NDCs) and that these NDCs should be ambitious.

An important aspect of the agreement includes the International Transfer of Mitigation Outcomes (ITMOS). This allows countries to use emission reductions outside their own jurisdictions. The various heterogeneous carbon trading systems require linkage in order to avoid double counting and other verification issues. The UNFCC can act as a type of global securities regulator, something that Canada was unable to do when examining a national securities regulator.

Under the agreement, Canada committed to reducing GHG emissions by 30 per cent below 2005 levels by 2030. The major strategy to reach this commitment can be found within the pan-Canadian framework. In future articles we will examine its four main pillars which include pricing carbon pollution, complementary climate actions, adaptation and innovation.

As expected, pricing carbon creates the greatest controversy. Exploring the reasoning behind pricing carbon will illuminate the further changes we can anticipate in Canada’s short-term economic future.

This is the first of a four-article series.

The pan-Canadian framework (developed with the provinces and territories and in consultation with Indigenous peoples) will ultimately impact almost all sectors of the Canadian economy. This future impact illustrates areas in which in-house counsel should be strategically reactive, and more importantly, proactive.

NAFTA: The times they are a changin’

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‘NAFTA has fundamentally failed’ thundered Robert Lighthizer, the US trade representative. Thundered perhaps overstates the delivery, but Canadians are understandably thunderstruck.

A fundamental failure sounds serious. Similar to a fundamental breach of a badly drawn contract but this time he claims that the entire $1.3 trillion dollar NAFTA region failed. This would be past everyone’s cumulative errors and omissions insurance, even if you totaled up all the insurance limits for all of the Canadian lawyers.

How did the US come to this overwhelming conclusion? When examining any policy matter, one spends most of their time drilling down to find the real essential issue. The worst approach applies a perfectly executed solution to the wrong problem. We can assume that the present US leader spent 140 characters on analyzing the issue as he does most things. We can also assume that this worst approach solution shall soon be upon us.

Their major complaint appears to be the huge current account deficit that the US has run up. The US simply imports more than it exports. Canada exports more goods, but our imports of US services exceeds this. Blame or thank Netflix for Canada’s trade deficit. The Canadian current account deficit increased beyond expectations last quarter. Therefore, we do not appear to be part of the problem, but unfortunately we will be part of the solution. Lighthizer must mean that NAFTA did not live up to its objectives.

NAFTA’s main objectives include national treatment, most-favored-nation treatment and transparency. The most favored nation treatment requires that whatever benefits you provide one treaty country, you should provide to all members of the treaty. National Treatment requires that foreign goods should be treated the same as domestic goods. The present US administration appears to have difficulty in applying that concept to immigrants however.

The other main objectives include eliminating barriers to trade, promoting fair competition, increasing investment opportunities, providing intellectual property rights, creating effective procedures for the resolution of disputes and establishing a framework for cooperation to expand and enhance the benefits of the agreement.

NAFTA scores highly on all these criteria. Duties have been reduced or eliminated. The US sees promoting fair competition as unfair to US business. The concept of free trade and fair competition relies upon comparative advantage. If a country provides some better or cheaper good or service, then it should produce more of that and less of whatever good or service it can’t produce as well as another country. The hollowing out of the US textile industry flowed naturally, but not willing, from this underlying concept of free trade. The US objection to this type of competition appears that not only must the US win all competitions, but all other countries must lose. A simple sum/zero look at the world.  Canadians prefer more of a synergistic grow the maple pie type of relationship.

Under normal, or average circumstances, this idea of competition should allow the best suited country to succeed. However, times are never normal. We rely upon the averages. For example, using quantitative easing the US Federal Reserve increased its financial assets 5 times as before the financial crisis in an attempt to keep interest rates low and to stimulate their economy.  Now that the fed intends to start selling off these assets to normalize, average, things out, the chickens coming home to roost might collapse the hen house.

As part of the NAFTA negotiations, the US demands that US firms have access to Canadian government contracts and that Canadian firms cannot access US government contracts to the same extent. This position comes across as, and please excuse the legal jargon, sucking and blowing at the same time. As the Art of the Deal suggests, you should ask for everything and the more outrageous the better.

Some of the US NAFTA failure arguments do not hold water. As a side note, we are better off to mention not water since the US may look north once again. The North American Power and Water Alliance plan to divert rivers into the US died a justifiable death, but rising from the dead has become very popular in the zombie fixated culture. Back to the main point, the US unemployment has dropped to levels not seen for years. The US manufactures more goods than ever. The GDP for all three countries has risen to three times since the start of the agreement.

The US complaint of job loss occurred but this was mainly the result of increased efficiency and automation. Job loss also occurred as a result of other countries having a comparative advantage. Admittedly, NAFTA diffuses the benefits and focuses the costs elsewhere. Some groups benefit but other groups are paying the costs in job loss.  Buggy whip manufacturing is not coming back anytime soon. Neither is coal.

NAFTA provides a dispute mechanism for the effective resolutions of disputes. The US claims that this infringes upon their sovereignty and want to default to the US court system. Having an independent dispute settlement system remains the best practice as evidenced by the WTO’s own dispute system. . They have a very fine system, but US litigation lawyers would not necessarily call it effective, or efficient.

NAFTA recognizes the importance of several multi-lateral environmental treaties and that these treaties prevail over NAFTA. The treaties cover ozone depletion, transportation of hazardous goods and prohibitions of trade in endangered species. Attempting to expand this list may prove difficult. The treaty between the US and Mexico on Cooperation for the Protection and Improvement of the Environment in the Border Area takes on a degree of tragic irony.  

Although NAFTA negotiation time lines were tight, Trump has recently indicated that there is ‘no rush’ and things seem to be ‘moving along nicely’. The next round of negotiations begin at the end of January. Canada has developed some innovative options to deal with the US requirement for 50% US content for automobiles. Essentially the concept is include several other car components that weren’t previously taken into account in the percentage calculation. If you have a bad ratio, then by strategically adding different stuff to the numerator and the demoninator you can make a percentage look better.

The US poison pill requirement to get rid of the objective tribunals and use the US court system still stands. Canada retorted by filing with the WTO almost 200 instances of the US retaliating to dumping by alleging countries exported subsidized products at artificially low prices. Lighthizer has called this WTO action ‘ill advised’. Although this sounds threatening as in an organized crime sort of way, it actually sounds less so than his damning observations of NAFTA fundamental failure.

Trump does sound a bit more conciliatory in his recent remarks. The recent WTO challenge may move his simple bluster into a simply angry notification to withdraw. Financial advisers suggest purchasing US dollars if this occurs. Although this sounds more like a gamble than an investment when trying to determine how the president might react to someone confronting him.

How does this impact the overall legal profession? Clients require legal assistance during booming and desperate economic times. Their needs become more acute during time of economic flux. Law firms could position themselves for handling the disruption of goods and supply chains should NAFTA be amended, or worst case, be terminated. The times they are a changin’.

 

Photo credit

Julius Silver