Pain Without Gain: Canada and the Kyoto Protocol - Canadian Manufacturers & Exporters www.cme-mec.ca
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Pain Without Gain: Canada and the Kyoto Protocol Canadian Manufacturers & Exporters www.cme-mec.ca
Executive Summary Manufacturing has led other sectors of the
Contents Canadian economy in emissions reduction.
Climate change is one of the most important According to Natural Resources Canada,
and probably the most challenging environ- manufacturers cut energy-related GHG emis-
mental issue facing the world this century. sions by 1.9% between 1990 and 1999, as a
But climate change is more than an environ- result of voluntary actions aimed at both
Climate Change: improving energy efficiency and switching to
mental problem. It is also a significant politi-
The Context cleaner fuels.
cal, economic, and social challenge, because
-Page 2
how humanity responds to the environmental However, Canadians still face some daunting
The Kyoto concerns raised by climate change will have challenges in meeting our Kyoto target.
Protocol far-reaching impacts on economic conditions While manufacturers have made substantial
-Page 3 and living standards around the world. progress in reducing GHGs, emissions from
Canada’s Kyoto other sources continue to increase. On a
It is clear that the environmental problems
Challenge
posed by climate change are global in nature. business-as-usual basis, assuming current
-Page 5 trends in population growth, economic devel-
How to respond to those problems is also a
The Impact of global challenge. It demands a global opment, and energy consumption continue,
Kyoto approach — a common strategy across gov- Canada’s GHG emissions will be 40% (about
-Page 7 ernments. Canada will play its role, but our 240 million metric tons - Megatonnes) higher
commitments and the measures we adopt to than our Kyoto target by 2010.
Assessing the meet them must:
Economic The depth of GHG reductions that Canadians
Impacts of Kyoto
Be part of a meaningful international would have to achieve, with or without the
Compliance
-Page 9
strategy for limiting atmospheric purchase of credits in emissions trading, is
greenhouse gases; unprecedented. Canada will not be able to
Understanding achieve its Kyoto target without damaging
the Issue of Lead to genuine reductions in greenhouse our economic health and destroying jobs.
Investment gas emissions that are measurable, The economic analysis that has been carried
-Page 11 verifiable, practical, and economically out to date seriously underestimates the costs
feasible; and that would be involved in Kyoto compliance.
U.S. Initiatives
-Page 12 Studies that focus on the sectoral impacts of
Make a real and meaningful contribution
ratifying Kyoto point to economic impacts
in controlling greenhouse gas emissions
Competitiveness that would be far more severe than have been
Concerns over a long period of time.
suggested in theoretical modelling exercises
-Page 13 for the economy as a
It is not clear that the
Sectoral Impacts United Nations Kyoto whole.
-Page 14 protocol is the appro- Canadians need and deserve a better
priate mechanism for understanding of how the Kyoto Protocol Implementing the
The Bottom Line Canada in responding would work, how Canada plans to meet Kyoto Protocol would
-Page 16 to the challenges of its Kyoto target, and how those actions have a severely dam-
climate change. Our would affect our economy and our aging effect on
What is the lifestyles.
largest trading partner, Canada's energy and
Plan?
-Page 17 the United States, is manufacturing sectors.
not covered by the Production closures
Where Do We agreement. Developing countries are not across Canadian industry could result in the
Go from Here? bound to emission reduction targets either. permanent loss of 450,000 jobs in manufac-
-Page 18 There is still a large degree of uncertainty turing alone by 2010. Net job losses across
surrounding the rules, implementation, and the Canadian economy as a whole would be
CME Board of compliance requirements of the Kyoto even greater as a result of adjusting to a less
Directors
Resolution on
Protocol. That uncertainty raises questions carbon-intensive economic structure.
Climate Change about the effectiveness of the Kyoto Protocol
-Page 20 itself, as well as about the costs that would be Apart from these economic dislocations,
involved in its administration. More coun- Canadians would be required to make radical
tries are questioning their ability to meet their readjustments in our lifestyles — probably at
greenhouse gas (GHG) reduction targets considerable personal expense. We would all
under the agreement. have to:Drive less, drive smaller cars, or take take credit for participating in mitigating
public transit that would, in turn, require mechanisms along with the United States.
massive infrastructure spending on the part And we have to make sure that international
of governments; mechanisms for emissions reduction actually
work, not only on paper and in the minds of
Re-insulate our homes, change our the theoreticians, but in practice as well.
furnaces, windows and appliances;
Canada can and should lead in implementing
Pay up to 100% more for electricity, 60% cost-effective solutions to reducing GHG
more for natural gas, and 80% more for emissions. Those solutions, though, have to
gasoline; and be a part of a long-term, sustainable strategy
aimed at meeting the world's climate change
Pay more taxes, in part to finance challenge. Sustainability means that our
Canada’s purchase of emission credits. approach to that challenge must allow
Canadian industry to continuously enhance
Canadians need and deserve a better under- its competitiveness in attracting investment,
standing of how the Kyoto Protocol would upgrading technologies, strengthening pro-
work, how Canada plans to meet its Kyoto ductivity performance, and developing new
target, and how those actions would affect markets for its products and services — in
our economy and our lifestyles, before con- other words, to grow. At the end of the day,
sideration is given to the question of whether investment and innovation are the only guar-
or not we should ratify the agreement. If antees that Canadians will be able to find the
Canada ratifies Kyoto, it should be done technological solutions that will enable us to
because it makes sense for Canadians, not sustain real reductions in greenhouse gases
because of pressure from other countries in and real jobs and income growth beyond
pursuit of their own economic interests, and 2010.
not because a decision would conveniently
coincide with meetings of international offi- Climate Change: The Context
cials.
Climate change is one of the most important
If the result of implementing Kyoto is that and probably the most challenging of envi-
Canadian industry loses market share and ronmental issues facing the world this centu-
investment to competitors in the United ry. But climate change is more than an envi-
States and developing countries, then all ronmental problem. It is also a significant
Canadians will be poorer. But the global political, economic, and social challenge,
environment will not benefit, since green- because how human beings respond to the
house gases would still be produced by off- environmental concerns raised by climate
shore firms using less energy-efficient tech- change will have far-reaching consequences
nologies than those currently employed in for economic conditions and living standards
Canada. Canadians would experience signifi- around the world.
cant economic losses, but there would be no
gain for the environment as a whole. The issue of climate change is about global
warming - it is not about air quality or smog.
Canada needs a climate change strategy that Concerns are growing about how increases in
is appropriate to Canadian circumstances. atmospheric greenhouse gases (GHGs)
Our strategy should encourage industry to caused by human activities are contributing
continue to develop and adopt new and clean- to the natural greenhouse effect and raising
er production technologies. Canadian indus- the Earth's average temperature. While man-
try must and will continue to make progress made emissions account for only 2% of all
in reducing GHG emissions by improving sources of greenhouse gases worldwide, they
energy efficiency and adopting new and have increased sharply over the past century
cleaner production processes. and have been associated, in a growing vol-
ume of scientific studies, with the rising con-
Finally, Canada must take the lead in engag- centration of greenhouse gases observed in
ing the United States and Mexico in building the atmosphere.
constructive market-based solutions for
reducing GHG emissions across North Human activities affect a number of green-
America. Canada must be able to access and house gases emitted into the atmosphere.
Page 2Carbon dioxide (CO2) is the most prevalent But, these issues have wide-ranging econom-
of GHGs. The main source of man-made ic and social implications as well. Addressing
CO2 emissions is the combustion of fossil climate change requires fundamental changes
fuels for energy use. In 1998, the atmospher- to our economies and daily activities, ranging
ic concentration of CO2 was 365 parts per from transportation and industrial production,
million — roughly 30% higher than in 1940. to home heating, agricultural practices, and
Methane and nitrous oxide are GHGs whose resource use. The measures adopted by gov-
presence has also increased sharply over the ernments around the world will have impacts
past 60 years. Atmospheric concentrations of on economic growth and technological
methane have increased by 150% to 1.7 parts change, on international trade, investment,
per million in 1998, and concentrations of
and competitiveness, as well as on human
nitrous oxide have risen by 16% to 314 parts
per billion. Other GHGs emitted as a result energy consumption. They are issues that
of industrial processes, such as chlorofluoro- will affect lifestyles and living standards
carbons, hydrofluorocarbons, and tetrofluo- worldwide.
romethane, have become more widespread as
well, although their atmospheric concentra- It is clear that the environmental problems
posed by climate change are global in nature.
tions measured in parts per trillion are con- How to respond to those problems is also a
siderably lower. global challenge. It demands a global
approach — a common strategy across gov-
In addition to rising levels of greenhouse ernments. Canada will play its role, but our
gases in the atmosphere, scientists have also commitments and the measures we adopt to
observed increases in average temperatures meet them must:
and changing climatic conditions around the
world. Based on modelling experiments of Be part of a meaningful international
how human activities will affect the Earth’s strategy for limiting atmospheric
climate in the future, many in the scientific greenhouse gases;
community are predicting that higher concen-
trations of greenhouse gases will lead to con- Lead to genuine reductions in greenhouse
tinued global warming, local shifts in temper- gas emissions that are measurable,
verifiable, practical, and economically
ature and precipitation patterns and more
feasible; and
intense precipitation events, as well as to the
prospect of intense droughts and flooding. Make a real and meaningful contribution
in controlling greenhouse gas emissions
Scientists still have to resolve many questions over a long period of time.
about climate change in understanding:
The Kyoto Protocol
The complex chemical interactions
between man-made GHG emissions and The United Nations Kyoto Protocol is an
natural controls on atmospheric international agreement aimed at addressing
concentrations; the issue of climate change. The protocol
was agreed to in 1997. It commits developed
The relationship between atmospheric countries to collectively reduce GHG emis-
concentrations of GHGs and global sions to 5.2% below 1990 levels by the peri-
warming; and od 2008-2012. Canada’s share is a 6%
reduction below 1990 levels. Other devel-
The relationship between global warming oped countries face different emission reduc-
and specific regional climate events. tion commitments. Developing countries
and, of course, countries that are not party to
However, in spite of these uncertainties and the agreement are not required to meet targets
disagreements within the scientific communi- for greenhouse gas emissions.
ty itself, climate change has become an
important policy issue for governments The Kyoto protocol also introduces three
around the world. Policy-makers are turning market mechanisms that involve transferring
their attention to questions of how to limit emissions credits to help developed countries
greenhouse gas emissions and how to adapt meet their targets for reducing GHG emis-
to, or mitigate, the impacts of climate change. sions:
Page 3Emissions Trading. Those countries with International negotiations have continued
emissions targets are allowed to trade since the Kyoto protocol was agreed upon in
emission permits (portions of their national 1997, and after the United States pulled out
GHG allocation) among themselves; of the agreement in 2001. Negotiations have
focused on technical issues of implementa-
Joint Implementation. Developed tion, verification, and compliance. While
countries with emissions targets can credit there has been some clarification of the rules
emission-reducing investments they fund under which the Kyoto protocol would oper-
in other developed countries; and ate, there are still a number of important out-
standing issues, including:
The Clean Development Mechanism.
Developed countries with emissions Whether compliance with the protocol will
targets can also gain credits for emission- be legally binding. The legal nature of
reducing projects they fund in developing the consequences of non-compliance will
countries. be decided after the protocol comes into
force. An amendment would be required
Since 1997, 83 countries (including Canada) to make the protocol legally binding, and
have signed the Kyoto Protocol. However, each party would then have to decide
only 40 states — mainly developing countries whether or not to ratify the amendment.
— have actually ratified the agreement. The In short, it is far from clear whether any
country would be bound by its obligations
protocol can come into effect as a binding under Kyoto;
international agreement only if ratified by 55
countries, a total that must include countries How market mechanisms will work,
that account for at least 55% of GHG emis- including common rules for verification of
sions from developed nations. emission reductions, methodologies for
establishing baselines, the determination of
administrative costs, procedures for
GHG Emissions Targets under the Kyoto Protocol
approval, and opportunities for review and
public participation. While the principles
Change from 1990 Levels of market mechanisms and emission
credits are well established on paper, the
Canada -6.0% details of how these mechanisms would
United States* -7.0% work, their costs and consequences, are far
European Union -8.0% from clear;
Japan -6.0%
Russia 0.0% The rules for reporting, verifying, and
Central Europe -5.0 to -8.0% trading emissions credits based on carbon
Australia +8.0% sinks - reforestation and soil enhancement
New Zealand 0.0% projects that absorb carbon dioxide from
the environment;
* No longer party to the protocol.
Recognition of credits for cleaner energy
exports such as hydro- and nuclear
electricity and natural gas, an issue of
In 2001, the government of the United States, particular interest to Canada; and
an original signatory to the Kyoto Protocol,
announced that it would not ratify the agree- Whether, and under what terms,
ment nor bind itself to its emissions reduction developing countries, not currently obliged
target specified by the agreement. (The U.S. to reduce greenhouse gas emissions under
accounts for 34% of the emissions of all the Kyoto Protocol, could be brought
developed countries.) Other countries that under the terms of the agreement.
are major sources of greenhouse gases are not
under any obligation to cut their emissions There is still a large degree of uncertainty
either. Countries like China, India, Mexico, surrounding the rules, implementation, and
Brazil, South Korea and Indonesia either face compliance requirements of the Kyoto
no emission reduction targets under the Protocol. That uncertainty is already having
Kyoto Protocol or are not signatories to the a negative impact on capital investment deci-
agreement in the first place. sions in Canada. Additionally, it raises ques-
Page 4tions about the effectiveness of the Kyoto gases made up the remaining 1.2% of
Protocol itself, as well as about the costs that Canada’s total emissions, representing the
would be involved in its administration. equivalent of 7.8 Megatonnes of CO2.
More countries are also questioning their
ability to meet their GHG reduction targets as
stipulated under the protocol. Since the with-
drawal of the United States, Japan has
announced that it is unlikely to meet its emis-
sion reduction targets within the Kyoto time-
frame. A number of European nations have
also raised concerns about their ability to stay
within the 6% reduction target to which the
European Union has agreed.
The Canadian government is currently con-
sidering whether it should ratify the Kyoto
Protocol.
Canada’s Kyoto Challenge
Canada accounts for about 2% of the1 world's
man-made greenhouse gas emissions .
Under the terms of the Kyoto Protocol,
Canada would be obliged to cut greenhouse
gas emissions to 6% below 1990 levels by
2010, or earn credits through Kyoto's market
mechanisms to lower the volume of emis- With respect to the sources of man-made
sions that it would have to reduce. greenhouse gases in Canada, energy use for
transportation, heating, energy generation,
Canadians face some daunting challenges in and industrial and other public and private
meeting our Kyoto target. Canada is a large business purposes accounted for 79% of total
country, so we travel extensively. It is a rela- emissions in 1997. Emissions from non-
tively cold country, so heating is important. energy related industrial processes accounted
Resource processing is an important part of for a further 8%. Remaining emissions
our industrial base, so the energy intensity of resulted from agricultural practices, waste
our economy is relatively high. On top of management, land use changes, forestry prac-
that, fuel sources in Canada are relatively tices, and the use of solvents.
clean, so opportunities for fuel switching are
more limited than in other countries.
GHG EMISSIONS FROM TRANSPORTATION
On a per capita basis, Canadians are respon- AIR TRANSPORT 8%
sible for more man-made greenhouse gas RAILWAYS 4%
emissions than any other nation. In 1997, the DOMESTIC MARINE 4%
last year for which statistics are currently LIGHT-DUTY TRUCKS 21%
available, Canada’s GHG emissions amount- HEAVY DUTY TRUCKS & BUSES 27%
ed to the equivalent of 682 million metric AUTOMOBILES 36%
tons (Megatonnes) of carbon dioxide. This
represents approximately 22.5 tonnes of gas
per Canadian per year.2 The single largest contributor to GHG emis-
sions in Canada is fuel consumption for
About 520 Megatonnes of carbon dioxide transportation purposes. Energy used in
were emitted, accounting for 76% of transportation accounted for 28% of
Canada’s total GHG emissions in 1997. Canadian GHG emissions in 1997. Just over 1
Environment Canada,
Canada’s Greenhouse Gas
Methane accounted for 13% or the equivalent 36% of transportation-related GHG emissions Inventory, April 1999.
of 90 Megatonnes of CO2. Nitrous oxide came from automobiles and another 21% 2
For sources of GHGs, see
accounted for another 9%, or the equivalent from light trucks, vans, and other recreational Canada’s Greenhouse Gas
of 64 Megatonnes of CO2. Other greenhouse vehicles. Heavy trucks and buses accounted Inventory.
Page 5for another 27% of transportation related accounted for 4% of Canada’s total GHG
emissions. The remaining 16% were generat- emissions in 1997.
ed by air, rail, and domestic marine traffic.
Excluding petroleum refining and electricity
generation, Canadian industry directly
accounts for just under 19% of Canada's
total man-made GHG emissions — the
equivalent of about 124 Megatonnes of
CO2 in 1997. Of that total, 54% is derived
from energy used in industrial production,
and 46% of emissions are by-products of
non-energy related industrial processes.
Together, Canada’s mining and construc-
tion sectors account for about 11% of total
industrial emissions. Canadian manufac-
turers are the source of the remaining emis-
sions from industrial sources - amounting
to the equivalent of 109 Megatonnes of
CO2 in 1997.
The major sources of greenhouse gases
within Canada's manufacturing sector are
the primary metals, chemicals, petroleum
refining and coal products, paper, non-
metallic mineral products (lime, cement,
fertilizers), food, transportation equipment,
Apart from industrial sources, other impor- wood, and fabricated metal products indus-
tant contributors of GHG emissions in tries. Together, these sectors directly account
Canada include: for two-thirds of Canada's manufacturing out-
put and 60% of total employment in the man-
Electricity generation, which accounted ufacturing sector.3
for 16% of Canada’s total GHG emissions
in 1997;
The production of fossil fuels such as oil
and gas, petroleum refining, and coal
products, which accounted for 13% of
total GHG emissions;
Energy use by households for heating,
appliance and fireplace use, which
accounted for 7% of total GHG
emissions;
Energy use by commercial and other
institutional buildings, again for heating
and the use of appliances and
equipment, which accounted for 5% of
total emissions; Manufacturing has led other sectors of the
Canadian economy in emissions reduction.
Agricultural practices, including soils, According to Natural Resources Canada,
manure management, and enteric manufacturers cut energy-related GHG emis-
fermentation, which accounted for 9% of sions by 1.9% between 1990 and 1999,
total emissions; and through voluntary actions aimed at both
improving energy efficiency and switching to
3
Statistics Canada,
Manufacturing Industries of Land use change, forestry practices, and cleaner fuels. Manufacturers across Canada
Canada: National and waste management (including incineration, boosted their energy efficiency by 2% per
Provincial Areas 1998, 2001.
landfills and wastewater handling), which year between 1990 and 1999. While produc-
Page 6tion levels rose by 31.5% over that period,
energy use increased by only 9.1%. The total
energy saved by Canadian manufacturers was
equivalent to 73% of Canada’s total residen-
tial energy demand in 1999.4 Changes in
industrial processes and switching to less car-
bon-intensive fuels also contributed to the
overall reductions in GHG emissions made
by manufacturers since 1990.5
The record of Canadian manufacturers
between 1990 and 1999 reflects a long-term
trend in improving energy efficiency and
reducing greenhouse gas emissions.
Canada’s manufacturing sector has cut ener-
gy-related emissions by 15.8% since 1980.
In spite of the important progress that
Canadian manufacturers have made in reduc-
ing energy-related GHGs, Canada is a long
way from meeting its Kyoto target. 4.5% per year between 2002 and 2010. In
Emissions from other sources continue to other words, Canada’s emissions reductions
increase. would have to average out at about 1 tonne of
carbon per Canadian per year beginning in
The Canadian government estimates that 2002. No other country in the world faces
emission levels in Canada were 13.5% higher such a huge economic and social challenge.
in 2000 than in 1990. On a business-as-usual
basis, assuming that current trends in popula- The Impact of Kyoto
tion growth, economic development, and
energy consumption continue, Canada’s GHG The economic analysis completed to date
emissions will be 40% (about 240 shows that Canada would bear the highest
Megatonnes) higher than our Kyoto target by costs of all nations if it were to implement
2010. (Canada’s emissions gap has continu- the Kyoto Protocol. This conclusion is sub- 4
Canadian Industry Program
for Energy Conservation
ally been revised upwards from 20% in 1997 stantiated by studies carried out by (CIPEC), 1999/2000 Annual
to 27% and now to 40%.)6 researchers in Canada, the United States, Report, Natural Resources
Canada, 2001.
Australia, and at Oxford University in
To meet our Kyoto target, Canadians would Britain.7 5
See CIPEC 1999/2000
Annual Report; and
have to reduce GHG emissions by almost Canada’s Climate Change
Canada will face more difficulties than other Voluntary Challenge &
developed countries in Registry, Annual Report
2000, 2001.
achieving its Kyoto
target because: 6
Working assumption of
Analysis & Modelling Group,
Canada’s Climate Change
Canada is more Secretariat, as of February
2002
energy-intensive
but less carbon- 7
See Cooper, Livermore,
intensive than other Rossi, Wilson, & Walker, “A
Cross Country Quantitative
OECD economies Investigation using the
because of its low Oxford Global
Macroeconomic and Energy
reliance on coal. Model”; MacCracken,
One of the least Edmonds, Kim, & Sands,
“The Economics of the Kyoto
expensive ways of Protocol”; Tulpule, Brown,
reducing GHG Lim, Polidano, Pant, &
emissions is by Fischer, “The Kyoto Protocol:
An Economic Analysis using
switching from GTEM”; in Weyant (ed.), The
coal to natural gas, Costs of the Kyoto Protocol:
A Multi-Model Evaluation,
especially in the Special Issue of the Energy
generation of Journal, 1999.
Page 7electricity. About 20% of Canada’s CO2 their replacement by cleaner technologies;
emissions come from coal. This contrasts and
with an average for the European Union of
more than 30% and about 40% for the Recession and economic slowdown in
United States. Half the electricity in the Russia, some eastern European countries,
United States is generated from coal. The and Japan have weakened industrial
corresponding figure in Canada is only growth rates since 1990 and made
7.5%. As a result, there is limited scope adjustments to the Kyoto target for these
for low-cost abatement in Canada; economies easier to reach.8
The challenge ahead for Canada is daunting.
Manufacturing Takes the Lead
The Canadian government is working on the
Canadian manufacturers are making significant progress in reducing assumption that measures introduced in 2000
GHG emissions. as part of its five-year Action Plan, along
with credits purchased in international emis-
Improvements in energy efficiency - the use of less energy to produce sions trading and other market mechanisms,
more products - is an important factor contributing to the reduction of should cover most of the GHG reductions
GHG emissions. Increasing energy efficiency makes good business that Canada would have to make in order to
sense. It helps cut costs and it is usually tied to productivity gains meet its Kyoto target. This is itself a ques-
achieved as a result of more efficient processes or the use of new tech- tionable assumption. But even if it were
nologies that deliver higher value products. The adoption of new process
accurate, Canada would still be left with an
technologies that use less carbon-intensive fuels or emit fewer GHGs is
also making a difference in cutting emissions levels. emissions gap estimated at approximately 90
Megatonnes of CO2 equivalent (roughly 38%
Here are some of the achievements that Canadian manufacturers have of the total) by 2010.
made since 1990 in reducing the amount of energy used per unit of pro-
duction: Closing that gap would require a 15% reduc-
tion in GHGs related to energy use for trans-
Aluminum -50% portation, buildings, electricity generation,
Cement -4%* industrial and fossil fuel production, and sim-
Chemicals -4%**
ilarly a 15% cut in GHGs resulting from agri-
Electronics -58%
Food Processing -6% culture, waste and land use management, and
Petroleum Product -18% other industrial processes, by 2010.
Pulp & Paper -11%***
Rubber -54% The depth of GHG reductions that Canada
Steel -18% would have to achieve, with or without the
Textiles -15% purchase of credits in emissions trading, is
Transportation Equip. -18% unprecedented. Canada has never experi-
Total Manufacturing -20% enced a decade in which GHG emissions
have gone down. Now, within eight years,
* GHG emissions per unit of output fell by 26% between 1990 and 1999.
** Since 1992; GHG emissions per unit of output fell 37% between 1992 the objective is to reduce emissions by 15%
and 1999. at best and 40% if based on domestic actions
*** GHG emissions per unit of output fell by 34% between 1990 and alone.
1999.
These reductions could be achieved without
damaging economic growth only through a
Canada already relies heavily on hydro- combination of measures that would acceler-
electric power. In fact, Canada’s ratio of ate both improvements in energy efficiency
non-carbon electricity (nuclear, hydro and and reductions in the carbon intensity of
renewable) is projected to be among the industrial processes. To achieve this goal,
highest in the world by 2010 at nearly energy use in Canada would have to fall by
70% — without undertaking any Kyoto- 4.1% per year between 2002 and 2010 if the
related measures. This also restricts government's assumption that Canada can
Canada’s ability to reduce GHG emissions; rely on offsetting credits proved true. If,
however, Canada were required to meet its
Russia, central European countries, and Kyoto target through domestic actions alone,
8
See also Randle Wigle, the European Union will be able to rely on energy use would have to fall by 7.8% annu-
Sectoral Impacts of Kyoto
Compliance, Industry
the decommissioning of more energy- and ally over the next eight years. Efficiency
Canada, March 2001 carbon-intensive production systems and improvements required to sustain economic
Page 8and employment growth would, in other Another economic model, commissioned
words, have to be three times greater than the by the Analysis and Modelling Group of
best that Canada has been able to achieve Canada’s Climate Change Secretariat,
over the past 30 years.9 which takes specific emission reduction
opportunities into account concludes that
There is one further complication — there are Canada’s cost of meeting its Kyoto target
no technologies available today that can guar- would be $45 billion by 2010. This cost
antee such rapid improvements in energy effi- would reduce Canada’s cumulative
ciency. The bottom line is that Canada will economic growth rate by about 3%. In
not be able to achieve its Kyoto target with- other words, instead of expanding by 30%,
out damaging economic and employment the economy would grow by 27% between
growth. 1990 and 2010. That would mean an
annual real economic loss of about 0.4%
Assessing the Economic Impacts of over the next eight years.11
Kyoto Compliance
A great deal of research has been conducted CME Supports Voluntary Initiatives for Reducing Greenhouse Gases
concerning the economic costs that would be
entailed in meeting Canada’s Kyoto target. CIPEC - The Canadian Industry Program for Energy Conservation is a
Different models have been employed by public-private partnership, administered by the Office of Energy Efficiency
economists to assess the impacts of Kyoto of Natural Resources Canada. CIPEC aims to improve Canada's industrial
compliance on the Canadian economy. But energy efficiency by heightening awareness of the benefits of energy sav-
there is no consensus in the findings. And, ings and acknowledging the efforts and best practices of companies that
regardless of the modelling methodology lead the way.
employed, there are still big gaps between the
VCR - Canada's Climate Change Voluntary Challenge and Registry is
assumptions that they use and the reality of Canada's only national registry of voluntary greenhouse gas emissions. In
how the Canadian economy actually works. addition to sharing information about the progress of individual companies
In short, the models are incomplete, their in reducing GHG emissions, VCR is the mechanism for registering base-
assumptions are often wrong, and their find- line emission levels as well as corporate initiatives in cutting GHG emis-
ings are unreliable at best. sions.
Based on the analysis conducted to date, esti- The progress that Canadian industry has made in improving energy effi-
mates vary with respect to the cumulative ciency and reducing GHG emissions is outlined in CIPEC's 1999/2000
Annual Report and VCR's Annual Report for 2000.
costs of meeting Canada’s Kyoto target:
Environment Canada officials report that
Kyoto compliance would result in only a The variation in the results of economic mod-
1.0% decline in GDP (or $10 billion) over elling exercises reflects more than just a dis-
the next eight years; agreement over numbers. It shows that the
results depend on the assumptions used in the
A report published by Industry Canada in models. Additionally, some of the analysis
March 2001 also concludes that Canada’s indicates that compliance costs may be far
overall compliance cost is likely to be less from trivial, particularly when viewed in rela-
than 1.5% of GDP (or about $17 billion in tion to the economic slowdown that Canada
2010).10 However, the study also noted has experienced in 2001 and 2002.
that “Canada's most energy-intensive 9
See Natural Resouces
sectors can expect to decline markedly, The findings of the study conducted for the Canada, Canada’s
Emissions Outlook: An
though only dramatically for energy Climate Change Secretariat show that: Update, December 1999.
sectors themselves”. (The report does not
define the difference between a marked The cumulative impact of meeting See Sectoral Impacts of
10
Kyoto Compliance.
and a dramatic decline in production — or Canada’s Kyoto target would be the
the impact on employment that both terms equivalent of a one-year recession 11
See Infometrica,
Macroeconomic Impacts of
would imply.) These economic costs resulting in a net loss of 450,000 jobs; Kyoto Options: CIMS-Based
would be further reduced, the report Assessment Macro, Sector,
Provincial Results, 2000; and
concludes, if an international emissions Spread out over the entire eight-year Mark Jaccard, “Costing
trading system were to be established; but period between 2002 and 2010, the impact Greenhouse Gas Abatement:
of meeting Canada’s Kyoto target would Canada’s Technological and
Behavioural Potential”,
be a net annual loss of $5 billion in Isuma, Winter 2001.
Page 9economic activity and a net decline of It is assumed that investments in new
approximately 75,000 jobs per year; cleaner technologies will take place
immediately, simply in order to meet the
There would be significantly worse Kyoto target. The models assume that
impacts in key energy-intensive sectors of investments will be made regardless of
industry, including real declines in financial rates of return, the age and
production and employment levels across turnover of existing equipment, or the fact
Canada’s manufacturing and primary that emission-reducing technologies
sectors — impacts that would be greatly available on the market may not be
magnified if Canada were to attempt to adequate to meet Canada’s Kyoto target by
reach its Kyoto target without the 2010. GDP effects in the models are
participation of the United States; and overvalued as a result of economic activity
that will supposedly be driven by these
The analysis predicts sharp increases in hypothetical investments;
energy costs. For Canadian residential
consumers, electricity prices are expected Transaction costs for participating in the
to jump by 10 to 100% (rising to 8.5 to 16 market-based mechanisms under the Kyoto
cents per kilowatt hour) depending on the Protocol are assumed to be negligible;
province and pricing policy. The price of
natural gas is forecast to rise by 60% to The analysis does not account for
$15 per gigajoule. And gasoline prices spill-over effects from one sector to
are expected to increase to at least $1.10 another, an especially important
per litre.12 consideration for industries that depend on
the efficiency of their supply chains and
business networks. How, for instance, will
The economic analysis and modelling exercises undertaken by adjustments in Canada’s steel and
the Canadian government and Canada's Climate Change aluminum, rubber and plastic, electronics,
Secretariat seriously underestimate the costs that would be metal fabricating, and petroleum refining
involved in Kyoto compliance. industries affect automotive production?
How will higher energy and transportation
costs affect manufacturing
It is also important to take a look at the competitiveness? How will the costs of
assumptions that underlie the economic mod- government actions affect fiscal policy?
els being used by the government in assess- How will closures in the manufacturing
ing the costs of Kyoto compliance, both to sector affect the rest of the economy, and
understand their limitations and to determine particularly the communities most affected
their credibility. Many of these assumptions by plant shutdowns? These are complex
can and should be challenged: questions. They require a far more
complex modelling exercise than has been
No one agrees on the extent to which carried out to date; and
Canada will have to reduce GHG
emissions by 2010 to meet its Kyoto The models do not account for the full
obligations; range of factors that affect trade and
investment flows, or the competitiveness
Most analyses assume that higher energy of Canadian industry, particularly in light
costs are compensated for in some way, of the U.S. withdrawal from Kyoto. In
either by government or by higher prices fact, there has still been no thorough
charged to consumers. This limits the analysis carried out with respect to the
economic impacts to changes in economic impact of Kyoto ratification on
production costs and final product prices Canada without U.S. participation.
resulting from investments in new
emission-reducing technologies; Because they do not address these concerns,
the economic analysis and modelling exercis-
None of the models has taken into account es undertaken by the Canadian government
the impact of higher costs on capital and Canada’s Climate Change Secretariat
investment decisions or on Canada’s ability seriously underestimate the costs that would
to compete for investment and product be involved in Kyoto compliance.
12
Jaccard, Isuma mandates in global capital markets;
Page 10Understanding the Issue of Investment Innovative solutions to the climate change
challenge will create market opportunities
One of the most serious shortcomings of the for new energy-efficient technologies and
analysis and the models being used to assess materials. If technological solutions do
the economic impacts of Kyoto compliance exist, the timeframe required for their
on the Canadian economy is their treatment development, widespread adoption, and
of capital investment. Investments are simply effective implementation will extend well
assumed to occur if required to maintain mar- beyond the end of this decade.
ket share. No consideration is given to how
investment decisions are made or how higher The rate at which industry is capable of
costs might make it more difficult for Canada renewing its capital stock is determined
to compete for investment and product man- not only by the life expectancy or the rate
dates in global capital markets. Investments of obsolescence of existing machinery and
equipment, but also by the rate at which
are assumed to take place regardless of the companies are actually replenishing their
age, life expectancy, or value of existing capital assets through new capital
assets. They are assumed to occur whether or acquisitions intended to replace or
not adequate emission-reducing technologies augment existing plant and equipment.
are actually available. No consideration is The rate of capital turnover is determined
given to the time required to operationalize on one hand by the age, capability, and
new technologies, or to the costs involved in depreciated value of the existing capital
capital replacement and technology manage- stock, and on the other by the rates of
ment. return that are expected on investments in
new technologies, plant, and equipment.
These investment issues are key to under-
standing the economic implications of Kyoto Capital investment activity on the part of
compliance. Canadian manufacturers is closely related
to their cash flow (gross profit)
A reduction of GHG emissions on a scale performance. Gross profits determine the
that would meet Canada's Kyoto financial resources that companies have to
commitments would require Canadian invest in new technologies, plant, and
industry to upgrade or replace existing equipment. They are a source of cash for
production systems with new more energy- internally financed investments. And, they
efficient structures and production provide the earnings in the form of interest
technologies. and dividends paid to external investors
who provide funds raised in capital
For industry, investments in new energy- markets.
efficient technologies and capital upgrades
have to make financial sense. They must The rate of return that companies expect
be affordable and they must deliver returns on their capital investments will determine
that are at least comparable to those that whether decisions will be taken to proceed
can be made by alternative investments in with those investments in the first place.
productive assets. In today's global capital markets, Canada's
ability to retain and attract investment
Those sectors with the greatest depends on maintaining rates of return that
concentration of capital are also some of are at least as competitive as those of other
the most highly energy- and carbon- industrial economies, and particularly of
intensive sectors of Canadian industry. our major trading partners.
The average service life of machinery and
equipment in those sectors is higher than Energy costs are an important component
the industrial average. Even with further of the cost structure of Canadian industry,
reductions in the average service life of especially for more capital- and energy-
machinery and equipment as a result of the intensive manufacturing sectors. Cost
development of new technologies, the savings achieved through improvements in
most capital- and energy-intensive sectors the energy efficiency of existing
of Canadian industry will not go through a production systems or by investments in
complete capital replacement cycle before new, more energy-efficient technologies
the year 2010. lead to improved profit performance and
higher rates of return on invested capital.
Page 11Manufacturing companies will invest in Cutting GHG intensity by 18% over the
new energy-efficient technologies and next 10 years. Greenhouse gas intensity is
capital improvements as long as the the ratio of greenhouse gas emissions to
returns on those investments are equal to economic output. The President’s goal is
or higher than returns that they could earn to lower the rate of emissions from an
on capital investments in other productive estimated 183 tonnes per million dollars of
assets. The energy cost savings that can GDP in 2002 to 151 tonnes per million
be expected as a result of the energy dollars of GDP in 2012. The objective is
efficiency improvements required by to significantly slow the growth of GHG
Canadian manufacturers to meet the Kyoto emissions while sustaining the economic
target will generate capital investments in growth needed to finance investments in a
new technologies as well as in plant and new, cleaner energy structure;
equipment upgrades.
Protecting and providing transferable
However, analysis conducted for Canada's credits for emission reductions. The U.S.
Climate Change Secretariat13 shows that, in government will ensure that businesses
every manufacturing sector in Canada, the that register voluntary reductions are not
amount of investment generated from energy penalized under future policy decisions.
savings alone falls far short of covering the Credit will be given to companies that can
capital costs that would be required to com- show real emissions reductions;
pletely replace existing production systems
by more carbon-efficient technologies. If a Reviewing progress and taking additional
higher rate of capital turnover is required to action if necessary in 2012. Actions at that
meet the Kyoto target, then adequate and time may include a broad, market-based
competitive returns on that capital investment program, as well as additional initiatives to
are required, but they will not be realized as a accelerate technology;
result of energy cost savings alone. Adequate
returns on investment in new cleaner tech- Total spending of $4.5 billion U.S. for
nologies will only be obtained if there are climate change related activities and a
other cost savings or value adding capabili- five-year $4.6 billion commitment to tax
ties that can also be achieved from those credits for renewable energy sources; and
investments.
A comprehensive range of new and
Technological solutions to climate change expanded domestic and international
depend on rates of capital turnover, attractive policies, including:
rates of return on new investment, and the
availability of cost-effective and productivity Expanded research and development
enhancing technologies — in short, upon the of climate-related science and
pace of innovation in Canada and profitable technology;
growth prospects for Canadian industry. Expanded use of renewable energy;
Business sector challenges;
U.S. Initiatives Improvements in the transportation
sector;
Investments in new technology and sustain- Incentives for sequestration; and,
ing economic growth are the focal points of Enhanced support for climate
climate change initiatives that have been observation and mitigation in the
introduced by President Bush as an alterna- developing world.
tive to U.S. participation in the Kyoto proto-
col. Rather than making drastic reductions in
greenhouse gas emissions that would cut eco-
The President has committed the United nomic growth and erode long-term invest-
States to a new strategy to cut greenhouse gas ments in clean energy — as the U.S. govern-
intensity by 18% over the next 10 years. The ment acknowledges the Kyoto protocol
initiative also supports climate change would have required — the President's
research and ensures that the U.S. economy is growth-based approach is aimed at accelerat-
“not unfairly penalized” through implementa- ing the development of new technologies and
13
Energy Savings & Capital
Investment in Canadian
tion of the Kyoto agreement. The American encouraging partnerships on climate change
Industry, 1999. plan involves: issues with the developing world.
Page 12The U.S. approach to climate change sets the Declining rates of investment. Canada’s
competitive bar even higher for Canadian share of foreign direct investment in North
industry. Even without having to comply America tumbled from 15% in 1985 to
with Canada’s Kyoto targets, industry in this about 8% in 2000. Moreover, while
country will now face U.S. competitors and capital investment on the part of Canadian
customers supported by a comprehensive industry has increased over the past
plan that will boost their technological capa- decade, it has not risen rapidly enough to
bilities. Canada would not earn credit under offset the depreciation or retirement of
the Kyoto Protocol for participating in U.S. existing technologies. The real
technology development or emissions trading depreciated value of the capital stock
projects, because the United States is not employed by Canadian industry fell by 5%
party to the agreement. between 1990 and 1999. In the United
States, it rose by 15% over that same
Competitiveness Concerns period of time; and
Investment decisions are only one of a num- Inconsistent public policy and regulatory
ber of factors affecting the competitiveness of objectives both within and across federal
the Canadian economy that have been neg- and provincial jurisdictions. Compliance
lected in the economic analysis that currently with environmental regulations, for
informs the Canadian government's approach instance, often requires the use of more
to Kyoto compliance. There are important energy and carbon-intensive technologies
gaps in our understanding of the economic and production systems.
consequences of Kyoto ratification. These
issues must be addressed before any informed Kyoto compliance would add to Canada’s
decisions with respect to Canada’s appropri- competitive challenges in a number of ways
ate response to climate change can be made.14 that economic models have so far failed to
take into account:
In the first place, the impacts of Kyoto imple-
mentation have to be considered in light of The short (eight-year) timeframe for
the current competitive performance of the meeting the Kyoto target would require a
Canadian economy and that of our major radical restructuring of the mix of
industries. Canada would be obliged to meet economic activity and of consumer
its Kyoto target in an economic environment lifestyles in Canada that could be
already characterized by: accomplished only with significant fiscal
and regulatory interventions by
A growing gap in productivity growth in government, affecting both industry and
relation to our major trading partner, the individual Canadians. No account is made
United States; for the short-term costs that would result
from these adjustments, or for their fiscal
The declining value of the Canadian dollar and monetary impacts (increased
in relation to its U.S. counterpart, which government spending, lower tax revenue,
may partially offset increases in export and a lower dollar) — all of which would
costs, but makes investments in new likely lead to different long-term
technologies and product innovation more consequences than the economic models
expensive, slows down rates of capital suggest.
turnover, and depresses real income levels
and rates of return on investment; Kyoto compliance would result in higher
operating and capital costs for Canadian
High rates of overcapacity in most manufacturers in relation to those incurred
industrial sectors in the global economy, by their competitors operating in the
which in turn create intense competitive United States, or in other countries like
pressures in domestic and export markets, Mexico, Brazil, Indonesia, South Korea,
drive down commodity and industrial China, and India, that are either outside the
14
For a broad overview of
competitiveness issues, see
selling prices, and mean that any
additional costs of production must usually Kyoto framework or exempt from Ronald Hirshhorn, Assessing
the Competitiveness Impacts
be absorbed by industry itself — few emissions reduction targets under the of Climate Change Policies,
manufacturers today can pass higher costs agreement. If costs are passed on to Industry Canada, 2000; and
Industry Table Overview
along to their customers without losing customers, Canadian industry risks losing Report, National Climate
market share; market share in the United States (the Change Process, 2000.
Page 13destination for approximately 63% of overcapacity. In many sectors, spare
Canada's total manufacturing output), production capacity in the United States or
within Canada, as well as in other a minor expansion in U.S. facilities could
countries. be sufficient to supply the Canadian
market. As a result, higher production
Canada’s export-intensive industries have costs due to Kyoto implementation in
maintained their competitive position in Canada could lead not only to lower levels
part because of reliable and competitively of investment but also to the prospect of
priced energy to run their operations, and widespread closures of production
because of efficient transportation systems facilities.
to deliver their goods to the U.S. market.
If Kyoto compliance were to lead to a Uncertainties over whether or not Canada
significant increase in energy costs will be part of Kyoto, and over the terms
(particularly electricity and natural gas) of how the agreement would be
and negatively affects the cost and implemented, are already increasing the
efficiency of transportation systems in risks associated with making investments
Canada, then many Canadian exporters in this country.
would face the threat of being priced out
of the U.S. market. If the result of implementing Kyoto is that
Canadian industry loses market share and
If higher costs were to be absorbed by investment to competitors in the United
Canadian industry — a more likely scenario, States and developing countries, then all
given the intensity of international Canadians will be poorer. But, the global
competition — they would reduce cash flow environment will not benefit, since offshore
and erode rates of return on capital firms using less energy-efficient technologies
investments. Unless energy savings or than those currently being employed in
other gains from the introduction of more Canada would still produce greenhouse
efficient or higher-value production gases. Canadians would experience signifi-
technologies were to offset those costs, the cant economic losses, but there would be no
outcome would be lower rates of capital gain for the environment as a whole.
investment. Businesses scour the world
today in search of investment opportunities Sectoral Impacts
offering them competitive rates of return.
Lower profit margins earned on A number of studies focusing on the sectoral
investments in Canada mean that it would impacts of Kyoto ratification have been car-
become even more difficult to attract or ried out as part of the national consultation
retain capital investment and product process led by Canada’s Climate Change
mandates in this country. They also mean Secretariat.15 Most of these studies assume
that the rate of capital replacement would that each sector would be required to reduce
slow down, making it less likely that greenhouse gases to 6% below 1990 levels by
carbon-intensive manufacturers would 2010. Some are more detailed than others.
invest in new cleaner technologies within The results point to economic impacts that
the Kyoto timeframe. would be far more severe than have been
suggested in theoretical modelling exercises
Investments that are made simply to for the economy as a whole. The impacts for
reduce GHG emissions, without other electricity and some key manufacturing
benefits in efficiency improvement or industries are summarized below:
product innovation, would further erode
the productivity performance of Canadian Electricity
industry. The cost of premature
replacement of existing capital could put The long-lived nature of electricity
firms and industries at a significant generating equipment means that the
competitive disadvantage vis-à-vis introduction of less carbon-intensive
producers in other countries that do not technologies is physically impractical
face such requirements. within the Kyoto timeframe.
International industrial markets are Accelerating the retirement of existing
See Industry Table
15
Overview Report. characterized today by high levels of equipment would result in stranded
Page 14investment costs that would have to be The closures of refineries and marketing
borne by both consumers and shareholders. sites would result in a combined
permanent loss of at least 12,000 jobs in
Achieving the Kyoto target would Canada, a total that might be higher
primarily affect coal-fired electricity depending on the number of retail outlets
generation. The cost of coal-fired thermal shut down.
electricity is expected to increase by 50%.
Steel
For Canadian residential consumers,
electricity prices are expected to jump by Profit margins in the steel industry are
10 to 100% (rising to 8.5 to 16 cents per already very thin — 26 steel companies in
kilowatt hour) depending on the province North America are in some stage of
and pricing policy. bankruptcy, including Algoma Steel.
Impacts on the electricity sector would be Kyoto implementation would lead to a
felt most strongly in Alberta and Ontario. cost increase of 9% to 15% relative to U.S.
and other imports, eliminating any cost
Higher electricity costs in deregulated advantage that Canadian producers now
markets would lead to a displacement of command. Foreign imports into the
electricity generation to less expensive Canadian market have already doubled,
jurisdictions, and most likely the absorbing most of the growth in demand,
displacement of emissions, investment, over the past decade.
and jobs to the United States.
Cost increases of this magnitude would
Petroleum Refining eliminate profit margins for most Canadian
steel producers, forcing the closure of
Reduced demand for petroleum products several companies and a significant
in Canada would result in significant downsizing for the rest.
overcapacity in Canada's refining industry.
Economic impacts would be most keenly
While demand for petroleum products felt in Ontario, the location of 75% of
would continue to rise in the United States, Canada’s steel producing capacity.
partially offsetting impacts on Canadian
producers, operating costs in Canada Total job losses connected to closures and
would also increase relative to those in the restructuring of the steel industry would
U.S. leading to lower profit margins on exceed 30,000 in Ontario and another
exports. More Canadian demand would be 5,000 in other provinces.
met by imports from the United States.
Closures and downsizing among steel
Reduced demand and lower returns on producers would affect supply to
invested capital would result in at least automotive and other machinery and
two refinery closures in Canada one in fabricated metal manufacturers,
Ontario and the other in Quebec or jeopardizing jobs and the long-term future
Atlantic Canada. of those industries in Canada.
Gasoline prices are expected to increase to Chemicals
at least $1.10 per litre.
Higher feedstock and capital costs would
Lower demand in Canada would also erode the cost competitiveness of
result in the closure of more than 2,000 Canadian exports in the U.S. market,
service stations across the country, leading which account for 65% of Canadian
to job losses in the retail sector. Service chemical production.
stations near the U.S. border would be
particularly vulnerable as cross-border Canada is only marginally competitive
fill-ups would increase to take advantage with respect to returns on investment in
of lower gasoline prices south of the the chemical industry. Higher costs from
border. Kyoto compliance could lead to a
5 percentage point reduction in rates of
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