Kyoto and the Conservatives: although the current government's approach to the Kyoto protocol has yet to be clearly laid out, count on offsets to be part of the climate change plan.

As Canadians watched the first Conservative government of the Kyoto era being sworn in at Rideau Hall in Ottawa, many questions arose regarding the policy directions the Harper government will pursue. The Conservative Party election platform was clear and unequivocal in such areas as reductions in the Goods and Services Tax, childcare tax credits and the Accountability Act. But in the realm of environmental policy, including climate change, the policy declarations are less clear.

This could be interpreted as fundamental agreement with the policies of the Martin government, with only plans for some fine-tuning or minor changes at the margins. But it could equally mean that major policy shifts are being considered. The latter is less likely, considering that this is a minority government. But after being out of power for 12 years, and having undergone the complex process of creating the new Conservative Party of Canada from two rival parties, the actions of the new government are difficult to predict.

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The outcome will largely depend upon caucus discipline. Will the party seek to reward its base supporters, including Kyoto sceptics, now that it is finally in power? Or will it constrain this tendency and govern as a national government, with the goal of proving it is a mainstream party that responds to all regions of Canada? Will a new Prime Minister and an Environment Minister from Alberta make a difference?

Made in Canada

What the Conservative Party platform actually said about climate change was that it would take a "made in Canada" approach. The meaning of that hackneyed expression is unclear but it does leave some wiggle room. During the campaign, Harper did state that Canada would not abrogate the Kyoto treaty, which the previous government ratified. Does this mean the Harper government will actively endeavour to live up to the obligations of the treaty or be content to fall short of our international obligations? Prime Minister Harper may be planning to assess how widespread falling short of national commitments proves to be across the international community. If Canada is one of several nations failing to meet its greenhouse gas emission reduction targets, the criticism will be muted.

Another related policy pronouncement during the campaign was the promise to introduce a Clean Air Act. This could shift the relevant priority away from greenhouse gas emissions to pollution prevention. If the legislation is modelled on the U.S. legislation, it will introduce mandatory reductions. Ironically, the Liberal government approach of reliance upon voluntary measures and incentives in its climate change plan and other environmental policies may have been less intrusive for business.

Offsets still onside

Whatever course of action the Conservative government takes on climate change, it would be reasonable to assume that a system of offsets will be a major feature of its policy. This policy instrument is voluntary, it is market-based and cost-effective. These characteristics will appeal to even the most laissez-faire Conservative factions. Given the growing international consensus that global warming is an increasingly serious problem, and that Canada has ratified the Kyoto Accord, offsets will remain a core policy lever for the Conservative government. Mandatory measures such as the Large Final Emitters provisions would be a more likely part of the policy to be changed, reverting to incentive-based policy levers.

The other consideration is the relative importance of offsets in the climate change plan. The Liberal plan, called "Project Green," does not explicitly attribute a specific emission reduction target to offsets. But through the process of elimination of explicit measures such as Large Final Emitters, the renewable energy incentives and greening government operations, clearly the majority of emission reductions were to come from offsets. The Large Final Emitters provisions, for example, were forecast to achieve only 45 mega tonnes of reductions of greenhouse gas emissions or 16.7% of the national goal, even though these 700 companies represent 50% of Canada's emissions. In addition, a price cap of $15 per tonne was assured.

One factor Prime Minister Harper will take into account as he considers his options on climate change is the polling results that indicate Kyoto is very popular with Canadians. While many of the 700 companies who had the Large Final Emitter regime imposed upon them were vocal critics of Project Green, many Canadians will want to submit voluntary offset projects to the government for approval. Not only will they realize some economic gain, they will want to do their part to reduce emissions.

Offsets defined

The emissions trading plan for Canada, which will be implemented by a new institution called the Climate Fund, is composed of a mandatory element and a voluntary element. The mandatory element is the 700 companies whose emissions have been capped by the government. These companies, called Large Final Emitters, must invest in technology that reduces their emissions or, if they prefer, they can trade emission permits with others to meet their obligations. The Climate Fund will be the clearinghouse for trading between parties or may be the purchaser of the permits to help make the market more efficient.

The voluntary participants of the emissions trading plan will develop projects that may earn credits called offsets. This will entail either reductions or sequestration of greenhouse gas emissions. Reductions occur when emissions released into the atmosphere are reduced from a source, given a condition of "additionality." This is a bureaucratic expression meaning the project would exceed "business as usual" practices. An example is a real estate developer including a district heating plant and renewable energy technology in a new housing project rather than conventional space heating.

Sequestration occurs when greenhouse gas emissions in the atmosphere are trapped in a "sink," such as soil and trees. For example, farmers who practice low-till or zero-till practices or forestry companies that engage in state-of-the-art forestry management practices can earn offsets for the resulting sequestration of greenhouse gas emissions. As with reductions, some evidence of additionality is required. How best to measure and encourage incremental biological sinks has not yet been finalized and consultations with stakeholders and the provincial and territorial governments are ongoing. A not-for-profit research foundation called BIOCAP Canada is engaged in researching biological sinks.

In addition to the foregoing examples of projects that can earn offset credits, the Project Green document issued by Environment Canada lists other examples:

* businesses that develop innovative ways to reduce emissions through recycling and energy efficiency;

* companies and municipalities that invest in their communities by encouraging alternative modes of transportation;

* municipalities that capture landfill gases such as methane and use it to generate electricity;

* Large Final Emitters that exceed their regulated emissions;

* new electricity generation projects that lead to incremental emissions reductions;

* remote communities that convert from diesel to renewable or lower impact energy sources for electricity generation; and

* companies and their employees that pool collective emission reductions such as telecommuting or distributed work.

From this list, the government clearly expects offsets to be widely used by many sectors of the economy and is depending upon the initiative of many groups in society to come forward with proposed projects.

Implementing an offsets regime

The previous government set aside $1 billion over 5 years in the 2005 budget to establish the Climate Fund. In its Project Green booklet, the government predicted total funding of $4-5 billion for the Climate Fund through to 2012. In addition, a Partnership Fund to cost share major projects with the provinces and territories was established with initial funding of $250 million over 5 years, which could rise to $2-3 billion through to 2012.

In addition to administrative costs to run these new programs, clearly the intent is to subsidize the economics of a number of projects. A cost per tonne of carbon dioxide equivalent of $10 has been assumed.

Legislation to implement the Climate Fund is ready to be introduced in the House of Commons. If no major changes are proposed by the government, speedy passage is clearly possible as the three opposition parties are all strong Kyoto supporters. Environment Minister Rona Ambrose may decide to embark upon a fresh round of consultations, however, before presenting the Conservative climate change plan to Parliament.

A chief executive officer for the Climate Fund has been appointed, which is a crucial first step in creating a new institution. Growing pains can, however, be expected as with any new entity breaking new ground and operating on such a large scale. The initial applicants to the Climate Fund will be caught up in a breaking-in process as the staff of the Fund is trained, policies are refined and operational procedures are established.

It is far from clear whether engaging in greenhouse gas emissions offset credits will be profitable, or whether the subsidies provided by the Climate Fund will make the exercise worthwhile. Nonetheless, many organizations and individuals will want to explore this new process for both financial and altruistic reasons. Many private and public sector organizations have adopted policies of sustainable development and environmental stewardship as part of their business plans and codes of conduct and will want to support the government's climate change plan.

It will be important for executives in the public and the private sector and those professionals who advise them to monitor the development of the Climate Fund and its offset credits closely in the months ahead.

John M. Banigan is vice-president of Tactix Government Consulting Inc. He is a former ADM Industry at Industry Canada.