Continental cap-and-trade: Canada, the United States, and climate change partnership in North America.

• Author: Childs, J. Scott

1. INTRODUCTION II. BACKGROUND OF FEDERAL CAP-AND-TRADE POLICIES WITHIN UNITED STATES AND CANADA A. United States Federal Policy and Cap-and-Trade B. Canadian Federal Policy and Cap-and-Trade III. CANADIAN OIL SANDS ARE CRITICAL COMPONENT TO CONTINENTAL CAP-AND-TRADE DEBATE A. Oil Sands Production is Expensive and Creates High Emissions B. Alberta Developed Unique Climate Change Strategy IV. REGIONAL FRAMEWORKS AND FACILITATING INSTITUTIONS PROMOTE NORTH AMERICAN CLIMATE CHANGE COOPERATION A. Regional Alliances Between Canadian and American Jurisdictions Serve as Focal Points for Trans-Boundary Cooperation B. Important Facilitating Institutions for Continental Cap-and Trade Already in Place V. ENERGY AND ENVIRONMENTAL DISCUSSIONS BETWEEN THE UNITED STATES AND CANADA PROMOTE COOPERATION BUT BARRIERS TO AGREEMENT PERSIST A. Canada and the United States Agreed to Clean Energy Dialogue B. The United States has a Strong Interest in Carbon Capture and Sequestration Technology Because of High Emissions From Coal Consumption C. Canada's Intensity-Based Emissions Proposal may be Incompatible with United States' Hard Cap System D. Regional Agreements Will Impact Federal Cap-and-Trade Policies within the United States and Canada, but These Initiatives May Languish VI. ALBERTA INCREASINGLY ISOLATED WITHIN CONTINENTAL CAP-AND-TRADE DEBATE A. Alberta's Favorable Response to Clean Energy Dialogue B. Oil Sands Heavily Impacted by American Low Carbon Fuel Standards C. Proposal for Securing Alberta's Cooperation VII. ADDITIONAL CONSIDERATIONS A. Mexico Could be Important North American Cap-and-Trade Partner B. Continental Cap-and-Trade Considered in Light of North American Free Trade Agreement C. North American Cap-and-Trade System Must Consider Problems of E. U. Emissions Reduction Scheme VIII. CONCLUSION I. INTRODUCTION

   Canada and the United States share an energy relationship that is unsurpassed by any other two countries in the world. More oil, natural gas, and electricity are imported into the United States from Canada than from any other country. (1) As the largest energy consumer in the world, (2) the United States is an invaluable customer of Canadian energy production. Because of the size and importance of this relationship, Canada's energy and environmental policies can have a tremendous economic impact on the United States and vice versa. Specifically, these two countries face similar challenges in reducing greenhouse gas emissions while maintaining their critical energy relationship. As the U.S. and Canadian federal governments consider implementing domestic cap-and-trade programs for carbon dioxide emissions, each country's proposals reveal the high degree of interdependence characterizing this North American relationship. While some linkage between these two countries' eventual cap-and-trade systems is inevitable, the United States and Canada should actively negotiate a continental cap-and-trade system for carbon emissions.

   If carefully crafted, this system would preserve North American energy security while promoting the development of carbon-reducing technologies. Such a comprehensive framework would also maintain the vital economic relationship between Canada and the United States by sustaining energy production and innovation. Additionally, continental cooperation would avoid potential international trade disputes that could threaten the strong ties between these two countries. Though not the primary focus of this paper, Mexico may also be a willing partner to such an agreement, likely strengthening the continental cap-and-trade framework even further. While there are many advantages to such a comprehensive emissions trading scheme, the initiation of this endeavor presents numerous legal challenges to Canada and the United States. The oil sands within the province of Alberta represent a sensitive issue for many environmentalists, and the United States' dependence on coal creates similar political concerns. Current federal proposals within Canada and the United States differ in some significant ways, and the timeline for final passage of domestic cap-and-trade programs is unclear. Finally, regional cap-and-trade partnerships--already in place in North America--offer both an opportunity and a challenge to the development of a comprehensive continental partnership.

   In this paper, Part I provides background on U.S. and Canadian domestic federal policies pertaining to cap-and-trade and reduction of greenhouse gas emissions. Part II summarizes the important role the oil sands of Alberta play in the North America energy framework and discusses Albertan provincial climate change policy. Part III characterizes the numerous regional cap-and-trade alliances and continental facilitating institutions in North America. Part IV addresses specific challenges and opportunities pertaining to Canadian and American partnership on cap-and-trade, and Part V analyzes Alberta's increasingly isolated role within North America. Part VI discusses additional considerations to continental cap-and-trade, including the possibility of Mexico entering such an agreement.

2. BACKGROUND OF FEDERAL CAP-AND-TRADE POLICIES WITHIN UNITED STATES AND CANADA

   A. United States Federal Policy and Cap-and-Trade

   As of November 2009, the United States does not have a national carbon dioxide emissions reduction scheme. Historically, there has been strong political opposition to mandatory greenhouse gas reductions; moreover, the U.S. Senate has refused to ratify the leading international climate change treaty currently in force, the Kyoto Protocol (Kyoto) of 1997. (3) The Kyoto plan requires industrialized states to reduce their overall carbon dioxide emissions through a cap-and-trade system by an average of 5.2% below 1990 emissions levels by a designated year between 2008 and 2012. (4) In general, a cap-and-trade plan is a system where a jurisdiction sets a cap on the annual emissions of a particular gaseous substance from within its territory. (5) Specific industries are granted a set number of emissions allowances, and these allowances can be sold to third parties if the industry emits less than it was delegated. (6) If a particular industry wants to emit more than its designated amount of the gaseous substance, it can purchase allowances from the aforementioned companies who under-emit. (7) Each year, the jurisdiction reduces the total number of allowances available by a small percentage, leading to an overall reduction in emissions within the country. (8) Kyoto failed in the United States in part because the framework includes exceptions for developing nations such as China and India. (9) Under Kyoto, most developing countries do not have to impose mandatory caps on carbon dioxide emissions through a comprehensive cap-and-trade system. (10) Though the United States did sign Kyoto, the Senate feared such a plan would unfairly detriment the American economy within the global market, and the treaty was not ratified. (11)

   More than a decade later, implementation of a mandatory cap-and-trade system is a clear priority within the Obama Administration. (12) During his campaign for the presidency, then-Senator Obama's energy platform included promises that the United States would "[i]mplement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80% by 2050." (13) This represented a "hard" cap on emissions because the plan called for 80% reductions from the total emissions of the previous baseline year of 1990. (14) Since his inauguration as President in January of 2009, Obama has maintained a policy of pursuing cap-and-trade to reduce carbon emissions by 80%. (15) With international climate change talks forthcoming in Copenhagen, Denmark, during December of 2009, President Obama's chief climate negotiator has stated that he expects the United States to be involved in these discussions "in a robust way." (16) Congressman Ed Markey, the Democratic chairman of the House Commerce and Energy Subcommittee on Energy and the Environment, also declared that his party's goal is to pass comprehensive greenhouse gas emissions legislation that allows the United States to become a leader in global climate change negotiations. (17)

   While historically less environmentally oriented than its Democratic counterpart, notable members of the Republican Party have indicated potential shifts in climate policy as well. During his time on the campaign trail, Republican presidential nominee John McCain distanced himself from then-President George W. Bush by advocating mandatory caps on greenhouse gas emissions. (18) McCain's cap-and-trade plan was less stringent than Obama's plan and advocated an only 60% reduction in carbon emissions by the year 2050; (19) however, McCain's proposal demonstrates a changing political climate within the United States and indicates that President Obama can potentially formulate bipartisan support for climate legislation. Senator Lindsey Graham (R-S.C.) offered further bipartisan support, co-writing an op-ed piece with Senator John Kerry (D-Mass.), acknowledging the reality of climate change and calling for a "market-based system that will provide both flexibility and time for big polluters to come into compliance." (20) Though some Republicans are receptive to cap-and-trade, most members of the party maintain strong opposition to mandatory emissions reduction. (21) During a hearing before the Senate Environment and Public Works Committee in February 2009, Republican senators referred to cap-and-trade as "a huge unfair tax" and "a trillion-dollar climate bailout." (22)

   In proposing a cap-and-trade plan, the President will have to overcome past Congressional struggles in passing a meaningful carbon reduction framework into law. One of the more recent examples is the Lieberman-Warner Climate Security Act of 2008, a bill that sought to impose a cap-and-trade system to reduce greenhouse gas emissions by 70% by the year 2050...