Energy Forum 11: Accelerating the Transformation of North American Energy Systems: How Much Should Canada and the United States Restrict International Offsets?

There is significant room for opportunity to reduce carbon emissions right now, said Elisabeth DeMarco of Macleod Dixon at the Canada Institute's eleventh Cross-Border Forum on Energy Issues. The invitation-only event brought together 50 senior level Canadian and U.S. government officials, energy industry representatives, and energy experts from the academic and not-for-profit communities to discuss the merits and drawbacks of using international offsets as a means of reducing North American carbon emissions. The forum was sponsored by Royal Dutch Shell, HART Energy Publishing, and the Canadian Embassy in Washington, DC.

The Pros and Cons of Offsets

Alexia Kelly of the World Resources Institute opened the forum by highlighting the importance and possible role of offsets in future U.S. efforts to address climate change. Two bills that contain offset allowances, the Clean Energy Security Act of 2009 and the Kerry-Boxer Bill, are currently being considered by the U.S. Congress. Kelly maintained that there is a case to be made both in favor and against using offsets as part of a cap and trade system to mitigate carbon emissions. Arguments in favor, said Kelly, often stress cost containment benefits and the potential for offsets to provide green technology and knowledge transfer to developing countries. In contrast, those opposed argue that offsets can be difficult and costly to administer and benefit some sectors at the expense of others.

It makes perfect sense for Canada and the United States to link when it comes to offsets, noted Dallas Burtraw of Resources for the Future. Burtraw said that given 80 percent of Canadian exports flow to the United States and 70 percent of its imports come from its southern neighbor, there is no question that the U.S. and Canadian economies are closely linked. Consequently, developing a bilateral system would help manage the costs and mitigate the economic impact of implementing a carbon offsets program.

On the international front, said Burtraw, debate still surrounds the ability of international offsets to make a significant contribution to emissions reductions. Focusing solely on this perspective overlooks the role of offsets in allowing developing countries a means of transitioning to greener technology, developing an entrepreneurial class, and improving environmental governance. He cautioned against the expansive use of offsets, however, noting that architects of environmental legislation must recognize that allowing for the use of permanent and expansive offsets would result in achieving global emission reduction targets at very high costs.

A View from Industry

Shell supports the implementation of a cap and trade system in Canada that allows for the broadest use of domestic and international offsets, said Gerry Ertel of Shell. He maintained that the need for Canada to consider the allowance of offset purchases is underscored by the country's recently announced 20 percent carbon reduction target by 2020 from 2006 emission levels. A recent study by Shell found that even with an aggressive domestic carbon reduction program, Canada would only achieve an emission reduction level of 10-12 percent. This would leave an 8 percent compliance gap that could be filled by offsets. Ertel stressed that the amount of domestic offsets available in Canada would fall well short of what was needed to achieve the country's emissions target. Thus, industry will have to be permitted to buy international offsets to comply with Canada's environmental standards. To this end, Ertel urged the Canadian government to join the United States and the European Union as supporters of international offsets.

Contrary to Shell's perspective, the Government of Alberta continues to argue against the use of international offsets. Andy Ridge, who serves in the Government of Alberta's Climate Change Policy Section, said that the Alberta government believes that developing transformative green technology can be achieved more quickly through direct investment rather than sending money into the international market. This position is reflected in Alberta's current environmental policy, noted Ridge. He explained that Alberta has established a price of $15 per ton on carbon. The revenue generated from this tax is deposited in a technology fund, which is then invested in technology that can help Alberta lower its carbon emissions. According to Ridge, Alberta's government has already invested $2 billion in carbon capture and storage.

Moving Forward

International and domestic offsets represent a promising means of reducing global emissions, said DeMarco. As oppose to waiting for new groundbreaking green technology to develop, DeMarco stressed that significant carbon emission reductions can now take place using existing technology. Meaningful reductions must take place with widespread participation from the global community so as not to put any one country at a disadvantage.

DeMarco argued that the current resurgence of environmental protectionist policies decimates the concept of free trade and runs the risk of fragmenting currently established and integrated markets. She cited the divergent environmental regulatory paths of Canada and the United States as particularly troubling given the two countries' highly integrated electrical and oil and gas sectors. A possible solution, said DeMarco, is to implement common international emission standards for sectors such as steel, cement, and energy that have a global market.

Bruce Usher of EcoSecurities noted that carbon markets have incredible potential to motivate industry to reduce their carbon emissions. Usher dispelled the notion that the allowance of international offset purchases by Canadian and U.S. companies would have a negative impact on North American competitiveness. In fact, said Usher, international offsets would not diminish competitiveness any more than international trade. Usher reiterated DeMarco's arguiment that time is a luxury that the world can no longer afford when it comes to emissions reductions. He maintained that developing countries can significantly reduce their own emissions by utilizing existing simple green technologies. Usher cautioned that international offsets do not represent the sole answer to reduce carbon emissions, but rather represents "one arrow in the quiver." In addition to carbon offsets, noted Usher, countries must also use other tools at their disposal, including carbon taxes, technology funds, and research and development.

Following the off-the-record forum discussion, a luncheon was held featuring an address by Kenneth Berlin of Skadden, Arps, Slate, Meagher & Flom, LLP. Berlin acknowledged that while technology exists that can help reduce global carbon emissions, achieving the deep emissions cuts desired by several nations will require the development of myriad new technologies. Deploying these technologies in a timely fashion, said Berlin, will be particularly difficult. To this end, considerable effort will be needed to overcome non-market barriers, such as private industry fears of using new and unproven products on costly projects. Berlin maintained that allowing the purchase of international offsets will be a crucial cost containment measure and can greatly contribute to achieving the emissions reductions targets outlined in current U.S. environmental legislation.

By Ken Crist, Program Associate, Canada Institute