THE KYOTO PROTOCOL AND CANADA

1. THE KYOTO PROTOCOL AND CANADA CBA National Environmental , Energy and Resources Law Section/Department of Justice Annual MeetingOctober 22, 2004Ottawa Ontario Gray E. Taylorgtaylor@dwpv.com1 First Canadian Place, 44th Floor Toronto, ON M5X 1B1 Ph: 416 863 5533 Fax: 416 863 0871 www.dwpv.com

2. FRAMEWORK CONVENTION ON CLIMATECHANGE - 1992 • FCCC resulted from: • Scientific evidence • UN initiative • Experience from Vienna Convention on Protecting the Ozone Layer (1985) and the Montreal Protocol (1987 FCCC signed by 154 countries at Rio de Janiero Earth Summit in 1992 • FCCC in force March, 1994 • Ratified by all major countries including, US, Canada, EU, Japan, Russia, China and India • Goals included return by 2000 to 1990 GHS emission levels for developed countries (including countries with “economies in transition”))

3. KEY PRINCIPLES OF FCCC • Stabilization of GHG concentrations at non-dangerous levels • Actions to be • based on equity • in accordance with common but differentiated responsibilities • in accordance with respective capabilities • Leadership by developed countries • Consideration of developing countries to avoid disproportionate or abnormal burden or adverse effects of climate change • Cost effective (but precautionary) policies and measures • “Sustainable Development” goal • No disguised trade restrictions

4. KYOTO PROTOCOL • objective at the first Conference of the Parties in 1995 (COP1) in Berlin was to move to numerical, binding protocol (“Berlin Mandate”) • agreed December, 1997 but not in effect • numerical limits (“caps”) on developed country GHG emissions for 2008-2012 (see Annex B attached) • GHGs are CO2, methane, nitrous oxide, hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6) • non-compliance “penalties” • Kyoto Mechanisms

5. CAPSANNEX BParty Quantified Emission Limitation or Reduction Commitment (% of base year period) • Australia 108 Hungary* 94 Portugal 92 • Austria 92 Iceland 110 Romania * 92 • Belgium 92 Ireland 92 Russian • Bulgaria* 92 Italy 92 Federation* 100 • Canada 94 Japan 94 Slovakia* 92 • Croatia* 95 Latvia * 92 Slovenia* 92 • Czech Republic* 92 Liechtenstein 92 Spain 92 • Denmark 92 Lithuania * 92 Sweden 92 • Estonia* 92 Luxembourg 92 Switzerland 92 • European Community 92 Monaco 92 Ukraine* 100 • Finland 92 Netherlands 92 United Kingdom • France 92 New Zealand 100 92 • Germany 92 Norway 101 United States 93 • Greece 92 Poland * 94 • * Countries that are undergoing the process of transition to a market economy.

6. KYOTO PROTOCOL – RATIFICATION • To be effective, requires ratification by 55 developed countries with 55% • of the 1990 CO2 (not GHG) emission US is 36.1% of 1990 CO2 emissions • US not willing to ratify • Australia is 2.1% • unlikely to ratify • Canada is 3.3% • ratified (December, 2002) • Currently 43.9% of 1990 CO2 emissions have ratified • Russia is 17.4% 43.9% +17.4% 61.3% > 55%

7. KYOTO MECHANISMS • Emissions Trading*(*see next slide) • Countries can sell unneeded AAUs • Primarily “economies in transition” (Russia, Ukraine, Poland, etc. have “hot air”) • Other countries may trade too • Rely on other Kyoto Mechanisms • Rely on buying later • Rely on domestic reductions • Reserve requirement

8. Inter-Country Emissions Trading Overachievement Target Excess Cancelled excess Cancelled over achievement Emission Levels Before Emissions Trade After Emissions Trade AssumeCountry A’s cost to reduce excess is $100Country B’s cost to overachieve by same amount is $60Trade results in $40 savings which Country A and Country B can share

9. KYOTO MECHANISMS • Joint Implementation (“JI”) • projects in developed country parties that reduce GHG emissions • generate Emission Reduction Units (“ERUs”) • host country converts into AAU’s, CERs or RMUs) and assigns to another party or authorized participant*

10. KYOTO MECHANISMS • Clean Development Mechanism (“CDM”) • projects in developing countries that reduce GHG emissions against baseline • “baseline” is “what would have happened without project” • generates Certified Emission Reductions (“CERs”) that can be sold to developed country parties or authorized participants* • sustainable development goals

11. WHAT “KYOTO” MEANS • Allocation to developed country parties of “permits” to emit GHGs • First Commitment Period is 5 years (2008 – 2012) • Kyoto Registry • 5 x “cap” • allocated in Assigned Amount Units (AAUs) • Cap is Annex B % x 1990 GHG emissions • Total GHG emissions in First Commitment Period • cannot exceed AAU’s • UNLESS • country uses the Kyoto Mechanisms • Total GHG emissions to be less in total than all AAUs + CERs + ERUs + RMUs

12. KYOTO MECHANISMS • Private entities can participate directly in Kyoto Mechanisms if authorized by a party • Canada can authorize participation of • Canadian subsidiaries of US companies • entities from other countries • Provinces and cities • NGOs • but Canada will be responsible for ensuring each such entity’s participation complies with Kyoto

13. Canada’s Kyoto Challenge Projection Business as Usual 2010 Emissions 809 Mt (1999) 705 Mt Mt CO2 equivalent 1990 Emissions 607 Mt BAU Gap 238 Mt or 30% Kyoto Target 571 Mt Source: Canadian Climate Change Secretariat, January 2002

14. CURRENT FEDERAL PLAN • Total Need 240 million metric tonnes (Mt) of C02 equivalent reductions per year • Sources • Previous Canadian government initiatives (50 Mt) and sinks (30 Mt)= total 80 Mt • Both are suspect as to total • New Action total 100 Mt • Consumers 20 Mt • Domestic Emissions Trading System 55 Mt (sectoral, large final emitters) • Targeted measures • Renewables 11 Mt • Fugitive emissions and SME initiatives 5 Mt • Agriculture, Forestry and Municipal 20 Mt-28 Mt • Government International Purchases of GHG Reduction Credits 10 Mt • Remainder • to be determined (or Clean Energy Exports?) 60 Mt

15. LARGE FINAL EMITTERS (LFEs) • 55 Mt/yr of reductions required under Canadian Climate Change Plan • Domestic Covenants • Sectoral reductions of approximately 15% from recent intensity levels • Sectors: thermal electricity, oil and gas, mining and manufacturing • LFEs to be assisted by: • Domestic emissions trading * (* see next slide) • Access to offsets (agricultural, forestry and perhaps landfills and others) • Access to international permits • thus LFEs will purchase CERs and ERUs and perhaps AAUs

16. Closed Market Inter-CompanyEmissions Trading Overachievement Target Excess Cancelledexcess Cancelledover achievement Emission Levels Before Emissions Trade After Emissions Trade AssumeCompany A’s cost to reduce excess is $100Company B’s cost to overachieve by same amount is $60Trade results in $40 savings which Company A and Company B can share

17. Baseline Open Market Emissions Trading(i.e. “Offsets” Used) Cancelled excess Reduction No Longer Available Target Baseline Reduction Excess Emission Levels Before Emissions Trade After Emissions Trade AssumeCompany A’s cost to reduce excess is $100 Company B’s cost to overachieve by same amount is $60Trade results in $40 savings which Company A and Company B can share

18. CANADA’S INTERNATIONALPURCHASING OF KYOTO CREDITS • $15 million investment in Prototype Carbon Fund and more millions into the Biocarbon Fund and Community Development Carbon Fund • Climate Change Plan • Consider purchase of a minimum of 10 Mt/yr of “international permits” with priority to permits from CDM/JI projects • Collaborate with Canadian companies by “pooling” private sector and government expertise and purchasing power • AAU purchases by Canada (not private sector) to be “greened”

19. NATIONAL UNITY • Will Alberta or other Provinces challenge constitutionality of Kyoto?

20. Gray E. Taylorgtaylor@dwpv.com1 First Canadian Place, 44th FloorToronto, ON M5X 1B1Ph: 416 863 5533 Fax: 416 863 0871 www.dwpv.com