Canada invests in climate change programs, sees warmer relations with Biden administration

Climate change actions in Canada could be aided by what is likely to be a stronger commitment from the US on climate change under President-elect Joe Biden, as well as generally more positive relations between the two countries.

Canada Premier Justin Trudeau was among the first foreign leaders with whom Biden spoke after being declared President-elect in early November. "The two leaders look forward to cooperating on the fight against climate change, on migration, and on global security, and to working closely together within NATO and the G7," Trudeau said on 9 November.

Minister of Infrastructure and Communities Hon. Catherine McKenna added in a social media posting on 10 November that she expects a rapid change in attitude when the Biden administration takes over. "It's been a long, tough slog these past four years internationally on climate action," she tweeted.

Canada's climate change program

Canada's 2018 GHG emissions were ranked 11th globally, below Indonesia but ahead of Mexico, according to the Union of Concerned Scientists. At 0.56 gigatons per year, Canada stands at about 1/20th the emissions of China and 1/10th of the US.

Canada has a national program to reduce carbon emissions, the Greenhouse Gas Pollution Pricing Act (GGPPA), though its full rollout has been slowed by opposition from three provinces. The nation's Supreme Court heard oral arguments in litigation by the provinces in October and is expected to issue a ruling in early 2021.

The national pollution pricing program, which was enacted in 2018, includes a per-ton price on carbon that's levied on fuels. The law set the price this year at CAN$30/metric ton this year, and it will rise by $10/ton in 2021 and 2022. It also includes a cap-and-trade program for large emitters of greenhouse gases.

Of the country's 10 provinces, nine signed onto GGPPA in 2017-2018, while Saskatchewan opted to propose its own plan that would reach equal emissions reductions — an opt out allowed under GGPPA. However, since then Saskatchewan, Ontario and Alberta have sued, saying that the entire act was an unconstitutional usurpation of their authority. One court found in favor of Alberta, while two other courts found in favor of the national government, thus leading to the Supreme Court case.

On top of GGPPA, the government proposed new legislation on 19 November 2020 to reach net zero emissions by 2050, known as Bill C-12. This would come down particularly hard on the oil and gas industry, which the Environment Ministry says accounted for 26% of the country's emissions in 2019 and 5.3% of its gross domestic product.

All this activity comes in the shadow of Canada's giant neighbor, which is both a trading partner and a competitor when it comes to exports of oil, gas and manufactured goods.

"There's a consensus that a Biden presidency will strengthen cooperation with Canada on trade and environmental issues," said Jennifer King, a partner in the Toronto office of law firm Gowling WLG LLP. "[The Biden transition team] use the same phrasing that the Liberal Government uses in Canada: 'build back together,' to reflect using economic recovery from COVID-19 to build a greener economy."

If the US adopts a national carbon pricing program, which Biden says he's open to doing, it could strengthen support for Canada's program, King said. One of the domestic criticisms of Canada's program is that because the US doesn't tax carbon (except for some state-led regional programs), carbon 'leaks' out of Canada when operations are moved to the US and when imports from the US displace potentially Canadian-made products. "A US carbon price undercuts the claim Canada can't be more aggressive…and makes our industries not economically competitive," she said.

If the US toughens its stance on matters such as methane emissions from its oil and gas industry, that will strengthen Trudeau's hand at maintaining a hard line, added Robyn Gray, vice president in the Energy and Environment Practice at Sussex Strategy Group. "One of the claims made by opponents to Trudeau's programs has been that we are a small country [when it comes to emissions], so why are we doing this? That argument could be gone," Gray said.

Gray said that Trudeau could even point to Biden's appointment of former Secretary of State John Kerry as the climate change envoy on the White House National Security Council to illustrate how seriously the US is taking the issue, and justifying further activity in Canada as well.

Canada can also expect Biden not to back the Trump administration's policies to cancel or change cross-border agreements, including the carbon emissions-trading program between Quebec and California known as the Western Climate Initiative. This cap-and-trade program - in which emissions credits are auctioned on a regular basis - was designed to raise capital for emissions-reduction programs in Quebec and California.

Under Trump, the US Department of Justice sued to cancel the program, which began in 2014, and then added Ontario in 2018. The Trump administration argued that the agreement violates the limited authority that individual states have in the conduct of foreign affairs, and that the US was, in effect, helping Canada achieve its climate goals at the expense of US consumers and industry.

That lawsuit was dismissed in July 2020 by US District Court for the Eastern District of California Judge William Shubb (see link). "The agreement memorializes each jurisdiction's commitment to harmonizing their cap-and-trade programs to ensure compatibility while respecting each jurisdiction's individual sovereignty," Shubb wrote, later adding, "The United States has failed to identify a clear and express foreign policy that directly conflicts with California's cap-and-trade program."

Western Climate Initiative auctions are held monthly, and the most recent was held on 24 November. It was the first auction since the start of the coronavirus pandemic in which all of the allowances were sold, and at an average price of US$16.93/metric ton, or slightly above the floor price of US$16.68/ton. The auction also included purchases of all available futures allowances for use through 2023, and these sold for US$17.35/ton, indicating that demand will be solid going forward. The November auction raised US$580 million for California's climate funds and CAD$190 million (US$146 million) for Quebec and Ontario.

If the US delays on a carbon tax—which is very possible, given congressional gridlock and the politically sensitive issue—Biden could be facing a decision about a new form of Canadian carbon pricing. On 30 November, Trudeau said the government is studying imposing "border carbon adjustments," in the form of a fee on imports from countries without carbon pricing. Biden has said he's open to the idea as well, thus potentially creating an issue at which the countries could cooperate or be in conflict if one gets in front of the other.

Biden's opposition to the Keystone XL pipeline that moves Canadian crude into the US is another area in which climate issues and trade matters come in conflict. "As a mid-sized economy dependent on trade for two-thirds of its GDP [gross domestic product], Canada is highly vulnerable to any disruption to the global trading system," stated the Business Council of Canada. The U.S. and China are Canada's first and third-largest trading partners, representing 60 percent of the total value of Canadian trade in 2018."

Canada's green recovery

At the same time, Canada's efforts to jump-start its economic recovery from COVID-19 includes investments in projects that will reduce emissions as well.

"Despite the pandemic, climate is still on the top of the agenda. If anything, it has sharpened the focus on what can we do about external threats," said Liane Langstaff, an associate in the Toronto office of Gowling WLG.

On 29 October, Natural Resources Canada, the federal agency in charge of energy production oversight, announced a CAD$750 million Emissions Reduction Fund to reduce methane and GHG emissions. The funds include supporting technologies to reduce offshore GHG emissions; and improve the environmental performance of offshore oil spill monitoring, detection and response activities; and facilitating work by upstream and midstream oil and gas companies to reduce or eliminate routine venting of methane during operations.

"The aim of the fund is to increase the international competitiveness of the Canadian oil and gas sector, while also making Canada a key player in the international clean technology market," said Natural Resources Minister Seamus O'Regan in a statement.

The GHG program is a small part of CAD$52 billion in new spending for COVID-19 relief committed so far by the national government. The investments so far have had a salutary effect, as Conference Board of Canada said that real GDP grew by 8.9% in the third quarter of 2020, compared with the second quarter when shutdowns were peaking.

In a speech on 30 November, Canada Finance Minister and Deputy Prime Minister Chrystia Freeland said that the government's stimulus program will eventually reach CAN$100 billion, which she called "the largest economic relief package for our country since the Second World War."

Not only are new policies and extra funding in place, but decarbonization is getting a boost from the private sector. Major corporations, including oil and gas companies such as Enbridge and Terra Nova, have announced net-zero-by-2050 promises this year. Global manufacturers with large presence in Canada, such as Ford Canada and 3M Canada, have commitments as well, with 3M aiming for 100% renewable energy use by 2025 across its global operations.

Investors are raising the stakes as well. In November, a consortium of eight pension funds that manage CAD$1.6 trillion called on all public companies to increase their disclosure of their ESG activities, including emissions levels and future goals. "The final piece is disclosure," said Langstaff. "Securities legislation always requires material disclosure and the financial impact of risks, but what's changing is an understanding of climate change as a material risk. Now you're starting to see regulators saying you can't just say it's a risk, but you must start to quantify it and how you will mitigate it…. [and we are] seeing boards of directors asking us to advise them about the risks."

Challenges ahead

But challenges lie ahead in the emissions area, particularly if the Supreme Court finds in favor of the provinces on the national carbon tax. "Canada defines the province's powers and leaves all residual power to the federal government," King explained, which is the mirror image of how the US leaves residual power in the hands of individual states.

In Canada, the provinces have authority over electric generation, oil and gas production and forestry. The federal government has authority over marine shipping, railways and cross-province activities. "Environmental matters are not specifically assigned in Canada in the 1857 Constitution… but courts recognize it as amorphous and all-encompassing," King said. "Jurisdiction is shared."

Under GGPPA, individual provinces can opt out of the national system if they create a system that the national government says is equivalent or stronger. The lawsuit is challenging the federal government's ability to impose the national standard and also to judge a province's standard as inadequate. Ontario's alternative pricing scheme has been rejected twice, and a third plan was announced two days before oral argument at the Supreme Court.

The uncertainties over GGPPA have led to delays in the implementation of carbon offset programs, according to Langstaff.In sum, much of Canada's momentum on setting and meeting ambitious climate goals will rely on the Supreme Court ruling, but a reset of relations with the US could open up new opportunities as well. "The United States and other countries around the globe are preparing for a post-COVID world that looks significantly different than the one before. Canadian policymakers cannot return to business as usual. If anything, the election of Mr. Biden should challenge the Canadian government to think coherently about its economic policy and consider how it will increase its overall economic competitiveness," the Business Council of Canada stated on 9 November.

Posted 03 December 2020 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit