Prentice hits Washington, with cap (and trade) in hand

March 2, 2009 Globe snd Mail

OTTAWA -- GLOBAL ENERGY REPORTER

The Harper government is facing growing threats of environment-based protectionism from the U.S. as President Barack Obama moves forward aggressively with a climate-change plan that conservative critics are already blasting as a de facto, economy-wide carbon tax.

Canadian federal Environment Minister Jim Prentice lands in Washington today to pursue the Canada-U.S. co-operation on energy and the environment that was promised when the new President visited Ottawa two weeks ago.

In meetings with top administration officials, Mr. Prentice will push Canada's proposal for a continental system of emission caps and market-based permit trading that would align Canada's regulatory system with that of our largest trading partner.

But Mr. Obama's budget, released last week, makes it clear he is planning far more sweeping emissions rules than Ottawa's plan to impose regulations on the largest industrial emitters. And the President gave no indication during his trip to Canada that he was enthusiastic about Prime Minister Stephen Harper's idea for a bilateral agreement on climate change.

Mr. Prentice lands in a politically charged U.S. capital as the administration turns up the heat in the debate over environmental regulations.

He knows full well that the outcome of that debate will have far-reaching impacts on Canada - from oil sands producers worried about an environmental backlash to provincial utilities looking to export emissions-free power and individual Canadians whose economic wellbeing is inextricably tied to the health of the American economy.

There is a growing concern that Canadian exporters could face duties and other trade measures if the U.S. imposes tough rules on its businesses and views Canada as a laggard.

"It's very, very significant," said Lisa DeMarco, a Toronto-based lawyer at MacLeod Dixon and leading climate-change practitioner.

"What we see is a whole new way for them to use [environment exemptions in trade agreements] as a shield to allow for trade protectionism in goods of higher or different emissions intensity."

She said the threat goes far beyond Alberta's oil sands to include the chemical industry, steel, electricity exports and energy-intensive manufactured goods.

Mr. Obama's budget reflects his ambitious plan to cap greenhouse gas emissions by 2012, and to require fossil-fuel users to purchase permits to emit any carbon dioxide that results from the combustion of coal, oil or natural gas. The budget projected the emission allowances would raise $645-billion (U.S.) over seven years.

Republicans pounced immediately.

"Let's just be honest and call [the Obama plan] a carbon tax that will increase taxes on all Americans who drive a car, who have a job, who turn on a light switch, pure and simple," raged Representative John Boehner.

Though details have not been released, the U.S. system would have a far broader reach than Canada's approach.

Ottawa plans to set limits only for the largest industrial emitters, such as power plants, refineries, major oil developments and large manufacturers and resource processors. The federal regulations would be based on "intensity targets," which regulate emissions per unit of production, rather than "hard caps," which provide absolute limits.

As well, the Canadian federal effort would not cap emissions by end users of the fuel, which is where most emissions occur. Instead, Ottawa is relying on incentives, tax breaks and higher efficiency standards to encourage people to reduce their energy consumption.

Mr. Obama and the leading Democrats in Congress favour a plan that would impose hard caps. It would not only force producers to limit their own emissions, but require that, at some point in the production chain, processors such as refiners account for the emissions that would result from the final fuel use by households and businesses.

Analysts say Democrats plan to impose caps on some 80 per cent of energy use in the economy. Four Canadian provinces - Quebec, Ontario, Manitoba and British Columbia - plan to eventually extend caps beyond the large industrial sources as a result of their participation in the California-led Western Climate Initiative.

Based on budget figures, the Obama plan would raise gasoline prices by 15 cents a gallon by 2020, and would increase retail electricity rates by 6.8 per cent - and much more in coal-dependent states - said Veronique Bugnion, managing director at Point Carbon, a climate-change consultancy.

Corporate lobby groups are urging Washington to adopt measures to prevent investment from flowing offshore to jurisdictions with lighter regulations, a process known as "leakage" because it fails to achieve planned emission reductions. But those measures can also result in environment-related trade restrictions.

"If U.S. refineries have to have allowances for their own emissions but foreign refineries do not, it creates an incentive for refinery investment to relocate," said Russell Jones of the American Petroleum Institute.

"We think what the economists call a 'leakage issue' is a real issue."