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The case for early action

" Early action" is greenhouse gas reduction action taking place after 1990 and prior to the 2008 to 2012 compliance period established by the Protocol. It includes activities during the pre-Kyoto period of 1990 to 1997 and the post-Kyoto period of 1998 to 2007. In the context of credit and banking, early action encompasses:

• actions by individual emitters to manage their own operational emissions;
• domestic offset projects;
• Joint Implementation (JI) projects involving Annex I (developed) countries; and
• action in the developing world under the Clean Development Mechanism (CDM) of the Protocol.

Credit and banking

The focus of this paper is on credit and banking, since the lack of a clear policy signal by government on this incentive option has been identified as a major obstacle to companies moving greenhouse gas reduction projects from the planning stages into implementation.

Within a credit and banking framework, credits provide assurance to participants that the reductions can be registered and used against their potential future emission reduction obligations. Through banking, participants are allowed to accumulate multiple years of annual early emission reductions so as to contribute to meeting or exceeding any future obligations.

Canada can enhance the reduction contribution from the voluntary approach by introducing a credit and banking incentive. Such an approach will be attractive to both corporations with high energy costs and significant or increasing greenhouse gas emissions and to entrepreneurs seeking investments in innovative technologies. With the right signals, credit and banking can facilitate investment in:

• plant and equipment upgrades and capital stock turnover that reduces energy use and related greenhouse gas emissions; and
• offset projects that allow companies to reduce or sequester emissions outside their operations as part of their risk management strategies.

While substantial reductions can be encouraged through a credit and banking incentive, this approach cannot fulfill all of Canada's greenhouse gas reduction requirements under the Protocol. There will be an ongoing role for targeted traditional standards and regulations, where they have been shown to be effective.

Defining credit and banking

The lack of clarity around some key issues has been identified as an important barrier to the endorsement of crediting and banking in Canada. The following definitions, developed in consultation with various stakeholders groups, are intended to clarify the basic concepts of a credit and banking program for early action. Other definitions and issues will be addressed during the program design phase.

• What is a reduction? - To qualify as a greenhouse gas reduction, an action must result in the atmosphere experiencing a net reduction in greenhouse gas emissions. Actions can include reductions in greenhouse gas emissions and the removal of carbon from the atmosphere through sequestration. The reductions can occur within the participants' facilities or through offset projects outside their operations.
• How is a reduction measured? - A reduction is measured against a baseline. The baseline is determined by the emissions path that would have occurred in the absence of the early action.
• How does a reduction become a credit? - A reduction becomes a credit when i) the action has been implemented, ii) the action generates a reduction, and iii) the reduction has been verified.
• How can credit be used by an organization? - A credit can be:
• used to ensure that the organization taking early action will not be penalized under a future regulatory regime;
• accumulated on an annual basis (banked) and used against possible future compliance requirements; and
• traded within a present or future emission trading system.

Approach to credit and banking

Some businesses have already demonstrated a willingness to voluntarily undertake actions to reduce greenhouse gas emissions. Government can further stimulate business in this direction by providing a credit and banking incentive. This involves two steps:

Step 1: credit for early action - Credit for early action allows companies the opportunity to register validated reduction actions for credit.

• Advantages of credit for early action: removes a barrier to action; does not constrain future regulatory options; and poses minimal costs to government.
• Disadvantages: while worthwhile, credit for early action is likely insufficient to achieve major growth in early actions resulting in emission reductions.

As such, this step represents the minimum credit incentive to encourage early action.

Step 2: banking of credit - Organizations achieving validated reductions during the early action period can receive the cumulative total of reduction credits up to 2007. These credits can be used to fulfill possible future reduction obligations or traded in an emissions trading system.

• Advantages of banking of credit: provides enhanced incentive to stimulate additional early action; promotes the creation of a market for greenhouse gas reductions; generates early experience in trading; and places domestic actions on the same footing as international actions.
• Disadvantages: may require the assignment of a portion of the compliance period budget for early actions; non-participants could face more stringent reduction targets during the compliance period; if poorly designed, poses risk of creating unforeseen loopholes; and may require greater infrastructure and support to implement program.

Credit for early greenhouse gas action has been part of the U.S. voluntary program since the mid-1990s. With this commitment, U.S. businesses have been encouraged to take early action and to incorporate greenhouse gas reductions in their decision-making.

Explicit assurance of credit and banking, as an incentive for early action, can achieve similar benefits in Canada and overcome barriers to further greenhouse gas reductions.

Recommendations:

It is recommended that:

• Government, at the earliest possible date, provide assurance of credit for early action so that participants in action are not disadvantaged in the future in relation to non-participants.
• Government state, at the earliest possible date, its firm support for banking of credits for early action and establish a stakeholder group (table) to develop a credit and banking system for Canada. This table should be responsible for completing the design of the system for implementation early in 1999.