Climate Change: An Opportunity for a Bi-Lateral Approach

Although climate change has emerged as a major political issue in Canada and the United States, strategies to reduce greenhouse gases have taken notably different directions in both countries. This situation risks leading to contrasting regulatory frameworks for the reduction of greenhouse gas emissions and has the potential to seriously impede business and investment opportunities between the two countries. On May 22 and 23rd, the Canada Institute, in partnership with the Ottawa-based Public Policy Forum, hosted a conference that explored the prospects of using the shared economic space of Canada and the United States as a platform to create a bilateral strategy to address climate change.

The forum provided an opportunity for 50 Canadian and U.S. government officials, industry representatives, members of the academic community, and climate experts from the not-for-profit sector to discuss the prospects of harmonizing emissions regulations between Canada and the United States, as well as examine the necessary policies to spur technological innovation in both countries, and assess strategies to generate a competitive advantage for North American businesses in a carbon-constrained future. The forum began with a reception and dinner at the Canadian Embassy, held the evening of the 22nd. The Honorable Jim Prentice, Canada's Minister of Indian and Northern Affairs and Chair of the Cabinet Committee on Environment and Energy Security, delivered the keynote address at the reception.

Moving Toward a Bilateral Solution

There is a growing consensus across political and jurisdictional lines in both the private and public sector that now is the time to think seriously about how to implement an effective cap and trade scheme in Canada and the United States, argued Barry Rabe of the University of Michigan. Nevertheless, while the theory of a market-based emissions trading scheme has been embraced by many in the private and public sectors, actually implementing a successful system has proven to be extremely challenging in the past. Early attempts to create a carbon market—including two initiatives in Canada—the Ontario-Quebec Pilot Emissions Reduction Trading (PERT) program and the joint federal-provincial Greenhouse Gas Emissions Reduction Trading (GERT) program—have struggled to resolve such "political details" as allocating carbon credits and offsets, explained Rabe.

According to Rabe, establishing a carbon market between states and provinces with varying political interests and asymmetrical levels of power has proven to be a problem in the past, and will remain difficult obstacles to overcome in the future: "When you move [carbon trading] from theory into real world politics...it begins to get messy."

In addition to the lack of precedent in establishing successful carbon markets within North America, there remains a considerable degree of uncertainty as to whether the United States is interested in working with its North American partners to address climate change. John Drexhage, director of the International Institute for Sustainable Development's Energy and Climate Change Conference, maintained that while Canadian provincial and federal actors have expressed interest in coordinating with the United States to reduce greenhouse gas emissions, the United States—with the exception of California's recent collaboration with British Columbia—has not demonstrated a similar level of enthusiasm in partnering with Canada.

Drexhage stressed that any discussion of a bilateral solution to address climate change must include a broader discussion of what Canada can provide the United States in terms of energy security. He maintained that establishing a continental approach to climate change and energy would be a more effective strategy of encouraging the United States to work with Canada to reduce carbon emissions: "Clearly what Canada is able to provide vis-à-vis energy to the United States is only going to be rising in importance."

Initiating a bilateral approach to address climate change may be further complicated by the fact that states have emerged as the driving force in the United States to reduce greenhouse gases. Executive Vice-President and Chief Environmental Officer of KeySpan Energy David Manning maintained that although a "sea-change" in thinking has occurred at the federal level with respect to the need to address climate change, the country is far from creating a national framework to reduce greenhouse gases. Instead, regional agreements between states—such as the Western Regional Climate Action Initiative (WRACI) and the Northeastern Regional Greenhouse Gas Initiative (RGGI)—have emerged as the primary initiatives within the United States to reduce carbon emissions. However, this "patchwork approach to CO2 reduction" not only complicates efforts to establish a North American solution to climate change, it may also lead to economic and competitive inefficiencies. Of particular concern to companies in the energy sector, noted Manning, was the fact that regional agreements, such as RGGI and the WRACI, could encourage greater imports of energy in regulated regions from lower cost generators in non-regulated states.

Driving Technological Innovation

Carbon markets can be a powerful tool to stimulate technological innovation, argued Annie Petsonk, international counsel for Environmental Defense. Petsonk noted that "innovation is urgently needed" to address global warming, and argued that the implementation of a cap and trade system in the United States would help encourage investors to devote money and resources toward cleaner forms of energy and transportation. Petsonk encouraged Canada to work with the United States—particularly with interested members of Congress—to initiate discussion of a North American carbon market, stating that the two countries have the potential to create the largest carbon market in the world. The timing may be right to begin discussion of the issue, she maintained, noting that legislators in the United States are becoming more interested in developments taking place in the European Union's carbon market. Despite all the flaws in the EU's carbon market, argued Petsonk, the United States is concerned that, if the EU figures out how to "get technological innovation supercharged" as a result of having a market signal that encourages investment in cleaner technology, it could allow Europe to surpass the United States in the development of low-carbon technology.

Edward Lowe, General Manager of GE Energy's Gasification Market Development, also stressed the importance of energy innovation in combating climate change, and highlighted the potential of clean coal technology to vastly reduce greenhouse gas emissions. He stressed, however, that any effort to accelerate the deployment of low-carbon technology must include predictable and stable, long-term public policies that encourage technological innovation; substantial investment by technology providers; and collaboration among multiple stakeholders in the private and public sector to successfully implement and ensure the widespread distribution of low-carbon technology. David Lewin, EPCOR's senior vice president of integrated coal gasification combined-cycle (IGCC) development, echoed Lowe's remarks and maintained that since 20 percent of Canada's electricity is generated from coal, any strategy to improve air quality within Canada must include the widespread implementation of clean coal technology.

Suncor Energy, Inc. Senior Vice President of Sustainable Development Gordon Lambert argued that rather than focusing solely on the "nightmare scenario" of what will occur if no action is taken to reduce carbon emissions, climate change should be portrayed as a potential investment opportunity. He stressed that the implementation of a carbon market must be coupled with a sound North American energy strategy to effectively address climate change. In order to achieve a sound energy strategy, however, additional discussion needs to take place on the most sustainable and efficient energy solutions for North America. Lambert suggested that the North American Competitiveness Council—a trilateral forum created in March 2006 by the leaders of Canada, Mexico, and the United States to improve the secure flow of goods and people within North America—could act as a potentially " key lever" for developing a shared vision on energy and climate change.

Capitalizing on Climate Change

To remain successful, financial institutions must incorporate the impact of climate change in future investment decisions, argued Diana Smallridge, managing director of Green Capital Advisors. Smallridge said that investment firms not only risk reputational damage if they continue to invest in high-carbon emitting industries, they may also miss unique opportunities to invest in potentially lucrative low-carbon technology and emissions trading. She noted that insurers, banks, and other financial intermediaries can have a significant impact on mitigating the effects of climate change by investing in green municipal infrastructure, promoting building codes that encourage water and energy savings, and developing new approaches to prevent "catastrophic losses" as a result of changing weather patterns. Smallridge maintained that financial institutions must accept that climate change will increasingly impact all aspects of their business, and should invest accordingly: "You can't afford not to take [climate change] into account."

Fred Wellington, senior financial analyst of the World Resources Institute, agreed with Smallridge's remarks, contending that companies must develop a business strategy that incorporates the implications of climate strategy to remain competitive. Drawing from work on his recently published article, "Competitive Advantage on a Warming Planet," Wellington proposed a four-step process to help companies successfully mitigate their exposure to climate risks:

1. Quantify your company's direct carbon footprint
2. Assess your company's carbon-related risks and opportunities
3. Take the necessary measures to adapt your company in response to risks and opportunities
4. Implement these measures more efficiently than your competitors

Chief Executive and founder of Innovest Strategic Value Advisors Matthew Kiernan reiterated Wellington's assertion that companies must take measures to adapt their business strategies to the realities of a carbon-constrained future. He cautioned, however, that while an increasing number of investors are aware of the implications of climate change, this awareness has not translated into investment strategies that incorporate—and ultimately price—climate risks. There is still a "distressing tendency" among institutional investors around the world, argued Kiernan, to disregard the risks of climate change in their investment decisions. Kiernan also said that while a carbon tax would be easier to create and maintain than a cap and trade system, the implementation of a carbon tax is not considered a viable option to reduce carbon emissions among legislators in Canada or the United States.

Taking Action

Following the presentations, participants and panelists participated in a closed-door roundtable discussion to discuss issues and themes highlighted throughout the conference. Participants reiterated the need for increased U.S.-Canadian collaboration on developing a bilateral approach to climate change. Given the importance of Canada's economic relationship with the United States, several participants suggested that Canada should assume more of a leadership role in initiating bilateral solutions to reduce carbon emissions. One participant feared Canada would emerge as a "policy taker," rather than taking the lead in creating a North American solution to reduce greenhouse gases. While a majority of participants highlighted the potential of a North American cap and trade system as an effective way to address global warming, several cautioned that it would be an extremely difficult and lengthy process to overcome the "politics" of creating an effective system.

The evening before the conference, the Honorable Jim Prentice delivered a keynote address highlighting climate change as an increasingly important issue in Canada's relationship with the United States: "As we move ahead with our Canadian plan, we are very conscious of our responsibility to be joint stewards of our shared environment in North America."

Drafted by Ken Crist.