Concern growing over 'carbon leakage'
Call for a common front on emissions reduction
By Lorraine Mallinder
Financial Post (11/08)
Lawyers forecast that our rapidly heating planet will be buffeted by raging winds of protectionism should the international community fail to form a common front on emissions reductions at key climate talks next year.
"The world is showing more of a tendency towards protectionism right now," says Paul Wilson, a partner at law firm Fasken Martineau. "Looking at where we are with world markets, the question is whether we have the ability to do the right thing."
The United Nations talks, to be held in Copenhagen, will be dedicated to sealing a global deal to replace the 1997 Kyoto Protocol. The event will test the world's resolve to tackle climate change head-on.
An international deal would ensure that energy-intensive industries across the world face similar carbon-reduction targets, hence competing on level ground. Failure to seal a deal would create the perfect breeding ground for protectionism in economies, such as Canada and the United States, which are set to adopt punitive cap-and-trade schemes to curb emissions.
Canadian lawyers, knee-deep in the fine print of the schemes, which are being devised at provincial and federal levels, are especially worried about the prospect of energy-intensive industries shipping production to more permissive climes, a phenomenon known in the jargon as 'carbon leakage.' "The cost of regulation in one country or trading bloc could motivate some to move operations to areas that don't have carbon regulation," says Mr. Wilson.
With both Canada and the United States moving toward complex two-tier systems, a result of provinces and states having seized the initiative to devise legislation before reticent national governments, carbon leakage could occur.
The world is showing more of a tendency towards protectionism across regional, as well as national borders. "To the extent that some parts of the country are more regulated than others, there is potential for local leakage," says Douglas Clarke, a Montreal-based partner at Gowling Lafleur Henderson.
Ontario, Quebec, Manitoba and British Columbia plan to introduce hard caps on emissions that have more in common with the European Union's Emissions Trading Scheme than the mooted federal system.
Lawyers expect the federal system, which will be proposed at the beginning of next year with a start date of 2010, will take its lead from Alberta's emissions-reduction program, which relies on intensity-based targets that put the onus on efficient use of energy rather than actual emissions reductions.
Alex MacWilliam, a partner at the Calgary office of Fraser Milner Casgrain, cites historical precedents for local leakage. "Looking at what happened in California 10 years ago when environmental legislation was introduced, a lot of companies moved to Nevada. That's an example of what happened on a small scale," he says.
The complexity of the Canadian system is a microcosm of the chaos reigning at international level. With major economies battered by the credit crisis, governments could be called upon to offset competitive disadvantages by allocating free carbon credits, granting subsidies or slapping border tariffs on dirty imports.
It is feared that the application of border measures, in particular, could spark protracted trade wars, with major economies taking retaliatory measures and counter-measures to redress perceived competitive disadvantages.
The Western Climate Initiative, a collective of seven U. S. states and four Canadian provinces (Quebec, Ontario, Manitoba and British Columbia) has started to address the issue by looking at ways of controlling the carbon footprint of imports.
With many of the developed world's cap-and-trade systems still in the embryonic stage, the potential for carbon leakage to wreak havoc with international trade and investment flows remains unclear.
"The problem is trying to anticipate what that competitive imbalance might be. Given that so many jurisdictions have not yet laid out their carbon legislation, companies can't figure out the cost of compliance," Mr. MacWilliam says.