SLIDE 4 The Kyoto Commitment: a New National “Balance Sheet in Development”?
SLIDE 5 What is the Current Value of Future Regulatory or Trade Sanction Risk?
SLIDE 6 How Does Uncertainty About Credit for Early Action Fit Into the Analysis?
SLIDE 7 What is the Current Cost of the Future Risk of the Introduction of Canadian Carbon Emission Limits?
SLIDE 8 Preconditions to Investment in Emission Reducing Activity
All investments, even in own operations in Annex B nations:
SLIDE 9 How Much Should an Entity Spend on Carbon Emission Offsets?
SLIDE 12 Rational Next Policy Development Steps
SLIDE 14 Why Are Few Governments Following This Course of Action?
SLIDE 15 What Government Measures Should You Anticipate in the Absence of
a Successful Credit for Early Action Initiative?
Winter, 2000
Canada’s Minister of Finance announces a series of new energy taxes, including
domestic electricity and natural gas consumption taxes and an initial $0.02
per litre transportation fuel tax that will increase to $0.10 per litre over
a five year period.
The taxes will not be carbon-weighted. Therefore, investment in
domestic emission reductions will not be including in the business sector’s
suite of risk management strategies. Fuels and electricity produced for
export will be tax exempt. The program will be described as “revenue neutral
to business”, including a commitment from the Minister to use most of the new
tax revenue to finance a reduction in corporate payroll tax deductions.
SLIDE 16 Winter, 2000, continued...
The initial transportation fuel tax alone will generate new annual Canadian
federal revenues of at least $725 million. By the time it reaches $0.10
per litre, the transportation fuel tax alone will account for $3.6 - $4.0 billion
in annual federal revenues.
Identifying the need to commit at least some of the new revenue to emission reducing activities, the Minister of Environment announces that $150 million of the new revenues will be directed to existing federal greenhouse issue public eduction, outreach and technology support programs. Additionally, the federal government will issue a tender call/reverse auction to purchase roughly $50 million in Emission Reductions from Canadians. The combination of the tax and tender call result in a net national reduction from Canada’s “business as usual” emissions forecast in the order of 1 to 3 million CO2-equivalent tonnes/yr for the Kyoto budget period.
SLIDE 17 Fall, 2000 to Winter, 2001...
Pursuing another new revenue-generating “environmental” measure, Canadian,
New Zealand and Australian first ministers announce their intentions to allocate
to specific entities roughly 1/2 of the Kyoto budget (300 million MTCO2E in
annual GHG emission rights in Canada), and signal that selected major point
sources will be required to hold allowances equal to total emissions for every
year starting 2005 and ending in 2012. The first ministers also announce
that a 7 year supply equal to 1/2 of the Kyoto budget ( 250 million rights per
year in Canada) will be auctioned in January 2005 (300 + 250 roughly = the Kyoto
budget). In Canada it is estimated that the auction should generate new
one-time federal revenues of at least $9 billion (250 million allowances x 7
years @ average auction price of $5).
SLIDE 18 Fall, 2000 to Winter 2001continued…
The policies stipulate that entities will not be required to hold allowances
for emissions derived from the production of fuels, RPPs and electricity for
export. At the time of the announcement, total annual emissions from the
Canadian entities that are included in the allowance-covered pool are in the
order of 700 million MTCO2E. In other words, the announcement also signals
that at least 150 million MTCO2E worth of Canadian emitting assets, not including
those dedicated to producing and transporting export product, must be abandoned
or restructured before or early in the 2005 - 2012 period.
COP6 is uneventful, due to inability of US negotiators to take any major
positions prior to 2000 presidential election.
SLIDE 19 Winter, 2001...
Major financial institutions realize that the announced total allowance
supply, after the auction, implies that at least 15% and maybe as much as 25%of
all of Canada’s carbon emitting asset base is worth no more than the cash it
can throw in the four years ending January 1, 2005. Assets are further
devalued due to investor market uncertainty regarding to the ultimate distribution
of allowances, which uncertainty will remain until the auction has taken place.
Bond ratings, lending rates and share value forecasts are adjusted --
down-- accordingly. All significant new investment in the Canadian assets
producing fossil fuel production or GHG emitting assets stops. Total one-time
adjustment on market value of Canadian shares: -$25 to -$50 billion.
SLIDE 20 Summer to Fall, 2001...
Canadian dollar falls to $0.50US. Dollar differential leads to increased
international demand for Canadian carbon-based products. Canadian government
considers this a manageable outcome, due to the perceived opportunity to increase
export revenues and trade surplus. But, due to equity market disinterest,
Canadian energy companies and bankers for Canadian energy companies have insufficient
access to cash to finance growth. Canadian government introduces GST exemptions
and accelerated depreciation rates for investment in export products only.
Canadian government forecasts “4 year” payback on this “investment” in
export industries.
SLIDE 21 Fall, 2001...
In carbon-exporting nations, GST rate is accelerated and depreciation
rate decelerated for producers of domestically consumed energy products.
All costs of new national “export market development strategy” are ultimately
born by captive domestic consumers of domestically-produced fuels and energy.
Purchasing power of Canadians declines while real cost of energy to Canadian
consumers quadruples.
Under leadership of Canada, New Zealand and Australia, with support from South Africa, focus at COP7 is agreeing on JI rules governing trading among Annex B nations.
SLIDE 22 Winter, 2002...
The US, Japan and leading EU governments announce domestic GHG emission limits and domestic quota allocations that are higher than Kyoto targets. US quota is initially capped at about 30%above current emission levels for the US sources included in the allowance allocation process, scheduled to decline to 10% below 1990 levels over 30 years. US justifies this with plan to make up difference in allocation/credit “imports”. US law requires allowances/quota to move through the market along with any domestic transfer of fossil fuels, electricity and RPPs (i.e. no one in the US wholesale market can take possession of specified energy products unless they are also in possession of quota, accounting method modeled after GST).
SLIDE 23 Winter, 2002…
Through domestic legislative initiatives, domestic quota in carbon-importing
nations is initially allocated to strategically important US, Japanese and EU
corporate entities, including electric utilities, oil refiners and domestic
coal producers. A very small annual government auction is integrated in
the US allowance supply. Exporters of fossil fuels, electricity and RPPs
to the US are required to hold/acquire allowances on the same basis as US domestic
producers/consumers are, but exporters to these markets do not receive initial
allocation.
Exporters must acquire sufficient quota to maintain existing export levels
from US, Japanese and EU electric utilities, oil refiners and coal producers,
or at those countries’ annual auction.
SLIDE 24 Summer to Fall, 2002...
Carbon importing nations also introduce domestic legislation that bans
the export of allocation/credits. This is, effectively, the first new
internationally sanctioned global currency trade restriction to be introduced
in 50 years.
At COP8, carbon importing nations support proposal to allocate “hot air”
to Kazakhstan, other Caspian Sea border nations, Argentina, Columbia, Brazil,
Indonesia and China. Revenues from hot air sales are invested in the development
of non-OPEC carbon reserves.
Immediately after COP8, the US, Japan, Germany and Great Britain announce
major hot air “purchases”. US, Japanese, German and Britishn announce
their “compliance” with Kyoto cap is clearly within reach...even if no actual
emission reductions in GHG occur within their boundaries or globally.
SLIDE 25 Winter, 2003...
The Canadian, Australian and other governments realize that they are
permanent price takers in global carbon commodity markets and that the lion’s
share of the cost of acquiring US, Japanese and EU market carbon quota will
be born by Canadian, Australian, South American, South African and Mexican exporters
of hydrocarbons, carbon-based fuels and electricity. Further, revenues
from US, Japanese and EU quota sales will largely go to owners of US, Japanese
and EU-based refineries, electric utilities, coal and RPP producers, financing
innovation to reduce their dependence on carbon and hydrocarbon imports.
Importers make concessions to OPEC for global security reasons.
Non-OPEC carbon and hydrocarbon exporters challenge the new non-tariff
barrier to trade at the WTO.
SLIDE 27 Winter, 2003 to sometime in 2006...
The carbon quota mechanism effects a permanent transfer of wealth from
carbon producers to carbon consumers.
The Canadian government enters into negotiations with the US to establish
a single North American energy market. Throughout North America, (mostly
Canadian) jobs are lost in regions previously dedicated to resource extraction,
and wealth converges in low-wage regions dedicated to value-added production.
The US government directs funding to the restructuring of US resource dependent
communities, but not to Canadian resource dependent communities. The effective
elimination of the border between Canadian and US energy markets does not translate
into US aid for ailing Canadian resource dependent communities. After
all, a US trade deficit still needs to be eliminated.
SLIDE 28 Linking GHG Research and Policy
“Researchers have already cast much darkness on this subject and if they continue
their investigations we shall soon know nothing about it” -- Mark Twain (allegedly)
The challenge is to balance scientific uncertainties against market values.
Balancing uncertainty and price is something the market does. Policy makers
should focus on creating an environment that encourages the market to value
reductions and permits the market to take appropriate investment risk.