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The regulatory Wild West

Energy and environment
|Written By Glenn Kauth

Climate change may be a new frontier in Canadian law, but for Canadian businesses the lingering uncertainty about what governments will do about greenhouse gas regulations is starting to get old. “The problem that we have here is that we’re in a regulatory Wild West,” says Adam Chamberlain, the head of Borden Ladner Gervais LLP’s national climate change group in Toronto.

The federal government has outlined plans to regulate carbon emissions based on reductions by intensity. That much-criticized plan has potentially put Canada on a collision course with the new administration in the United States, which has called for a cap-and-trade system based on hard limits on emissions.

At the same time, a number of regional and provincial initiatives have sprouted up. In Canada, the most prominent is the Western Climate Initiative, which brings together British Columbia, Manitoba, Ontario, Quebec, and seven U.S. states in a bid to cut emissions by 15 per cent below 2005 levels by 2020 under a cap-and-trade system.

The result is a plethora of potentially competing regulations. And while corporate Canada has, in some cases, resisted aggressive action on climate change, the ongoing questions about what they’ll have to do to reduce their emissions has many companies changing their tune on the need for regulation. “Nature abhors a vacuum, and companies abhor a vacuum,” says Paul Manning of Willms & Shier Environmental Lawyers LLP. “They see this stuff coming, they hear the politicians talk, and the next question is, ‘What do we do about all of this?’” Chamberlain notes. “Even when Kyoto was first signed, we got questions: ‘What does this mean?’ The answers then were that it’s in the future. The difference now is that we think there will be answers to those questions in the coming years.”

The consequences can be a disincentive to investment. Among the chief questions in the electrical sector, for example, is who owns the “green attributes” in a carbon market in which businesses buy and sell credits for either exceeding or beating their emissions targets. “Our [economic] system is one where you can be certain [that] when you buy things, you actually own it,” says Chamberlain. But with only voluntary carbon markets in use now in much of the country, the ownership question can be tricky, something businesses are waiting for governments to resolve. “The government system will be more like securities,” Chamberlain points out. “It will set out all the rules on how that works. But we don’t have that yet.”

For producers of alternative energy, that conundrum is especially challenging. In Ontario, the government-run Ontario Power Authority, for example, keeps the green attributes, or carbon credits, generated by eco-friendly electrical facilities such as wind turbines. It is right to do so for the moment, Chamberlain argues, since the absence of carbon markets means it doesn’t know what price credits would garner and therefore how much revenue it would be granting to developers of private power.

But Dianne Saxe, an environmental lawyer who sits on the board of directors of the WindShare co-operative in Toronto, says the Ontario Power Authority’s position on green attributes has hampered that organization’s ability to expand beyond its initial wind turbine on the city’s waterfront. “The environmental attributes are one of the tools we have for funding local power generation. At the moment, because it is still relatively new and because of the absence of a supportive federal and provincial regulatory system, it’s still quite expensive to set up community power.”

At the same time, getting access to the electrical grid has also been difficult. Part of the reason WindShare had to put off plans to build a second facility on Ontario’s Bruce Peninsula was due to the Ontario Power Authority’s commitments to guarantee a certain amount of transmission capacity to the nearby nuclear plant. “That’s part of why the green energy act is so essential,” says Saxe, expressing hope that proposed legislation unveiled in February would address some of those complaints as Ontario works to transform its electricity system into an alternative energy leader.

Another business seeking answers is forestry company Domtar Inc., where vice president for sustainability Guy Boucher notes industry and government have been talking about what to do on climate change since the 1990s. “At the time, what industry was saying is what we needed was certainty,” says Boucher, who switched to the sustainability file after serving as Domtar’s vice president for legal affairs. “Ten years after, we’re still asking the same questions. I think sometimes we get tired of [attending] so many meetings that aren’t going anywhere.”

For Domtar, high energy prices have already pushed it to make investments that led to a 21-per-cent decrease in emissions from its mills between 2002 and 2007. (Boucher notes those reductions are in addition to any emissions cuts resulting from mill closures). So, the company hopes new regulations won’t harm its bottom line but it can’t be sure since the shape of a carbon market is unclear. When the former federal government began mulling its climate change plans a few years ago, the target year for reductions was 2000, Boucher notes. But with the current Conservative government saying it will take 2006 as a benchmark, Domtar might not find itself very far ahead.

At the same time, Boucher wonders how much credit companies will get for taking early action on emissions, something environmentalists say is important to encourage industry to make reductions now. Plus, businesses with facilities across the country need to know whether carbon targets will apply to individual plants or to the company as a whole. Certain mills at Domtar, for example, are able to make reductions more easily than others, meaning the company would prefer to see targets based on its overall emissions. As well, without price signals from a carbon market, Boucher says deciding how and where to take action is difficult. “It’s impossible. So what we do is [we] plan investments in terms of energy efficiency.”

For his part, Manning says Ontario’s proposed green energy act holds some promise for at least answering a few of the questions on the electricity front. While he believes the plan is more about meeting the province’s goal of phasing out coal-fired power generation rather than a bid to address climate change, he feels the law will be a major boon to the smaller producers that will supply much of the alternative energy Ontario is counting on. Plans for a new feed-in tariff that would guarantee producers a certain price for their power are a big incentive, he notes. As well, a proposed $5-billion investment in a so-called smart transmission grid will make building new projects more feasible, he adds.

But for Paul Cassidy, a partner with Blake Cassels & Graydon LLP in Vancouver, bold action is urgently needed because the competition to get ahead on the green energy front, including with several U.S. states, will be intense “because everybody wants to be a leader in this.” As a result, he’s not yet sure whether Ontario is going far enough.

In Alberta and B.C., industry has already had the chance to get used to carbon pricing schemes, but as Cassidy points out, the lack of a detailed federal plan means companies there still face uncertainty. And while Manning believes the need to conform with U.S. regulations means Canada’s federal government will jettison plans to limit emissions based on intensity in favour of hard caps, Cassidy says the key concern for businesses in the West is the need to ensure the rules target a broad range of sectors rather than just the oil industry.

As a result, he suspects B.C. might hit even small entities with new regulations as it irons out its cap-and-trade rules under the Western Climate Initiative this year, something he believes heralds at least one certainty in an area full of question marks: “This is not simply a matter of picking on oil companies,” he says. “There is going to be carbon regulation for everyone. That’s the only way it’s going to work. You would be dreaming in Technicolor if you think this isn’t going to get passed down to consumers.”