Thank you very much, Mr. Chairman, for inviting me today. I'll try to be brief.
The IETA is a non-profit business organization dedicated to ensuring that the objectives of the framework convention on climate change and climate protection are met through the establishment of an effective global system for trading greenhouse gas emissions by businesses in an economically efficient manner with societal equity and environmental integrity.
We represent 147 companies, many of them either Canadian companies or with large Canadian subsidiaries, and 49% of our companies are large emitters. You'll find the TransAltas and the Lefarges and my old company, Ontario Power, among them. What is more significant in telling you who we represent here is that 30 of these companies in total emit 1.7 billion tonnes of carbon dioxide. That is equivalent to the combined emissions of Germany and Canada. We're not talking about people who are coming because they want to make money in the trading side. It's a combination of people who are service providers, whether they're banks or lawyers. But 50% of them, 70 companies, emit more than the combined emissions of Canada and Germany. That's just for reference.
There's not one silver bullet. Effective policy to reduce greenhouse gas emissions must be based on three essential elements: carbon pricing, technological development, and other policies and measures targeting the removal of barriers to behavioural change. Leaving out any of these elements will significantly increase the cost of action. To reduce greenhouse gas emissions with the lowest possible social cost, it is fundamentally important to set the price for greenhouse gases. A price signal is inherently more efficient than any command regulatory approach. Putting an appropriate price on carbon means that people are faced with the environmental cost of their consumption. This will lead individuals and businesses to switch away from high-emission goods and services and invest in low-carbon alternatives, often at comparatively low substitution costs. Experience with the EU ETS market demonstrates clear correlation between short-term energy demand and the carbon market with a resulting temporary reduction in demand and induced fuel switching.
An MIT and Eni Enrico Mattei Foundation study of the impact of the EU ETS phase one shows a real reduction of 80 million tonnes in the pilot phase so far. Emissions trading has demonstrated the ability to deliver effective environmental policy at a far lower cost than command and control or tax-based approaches simply by allowing the market to set the appropriate price. The EU ETS is driving abatement within the EU, while the dramatic success of the U.S. clean air market in addressing air quality provides an irrefutable example of the power of market mechanisms.
A U.S. congressional budget office analysis of the sulphur dioxide program concluded that the use of market mechanisms has saved $2.5 billion of the original $5 billion of estimated compliance cost and has also resulted in overcompliance. You will see in the stack of slides some that are attributable to American Electric Power. It emits about 140 million tonnes of carbon every year. It's the largest carbon emitter in North America, and they say about the same thing that we say.
Environmental markets minimize government interventions, setting the constraints and allowing the market to help with acid allocation. In using a price signal the overall societal costs of compliance are minimized, allowing for resources to be allocated to other priorities. The global GHG market has resulted in a change in the business culture that is taking place in the corporate community and society at large, where the price of carbon has become one of the parameters that is part of the normal decision-making process. The most difficult thing to change is culture. Everything else follows. The price of carbon is changing the mindset in the corporate boards of Europe, let there be no doubt about that.
The development and employment of a wide range of low-carbon technology is essential in achieving the deep cuts in emissions that are needed. Carbon prices give an incentive to invest in new technology to reduce carbon. Many observers believe that carbon capture and sequestration must play a critical role in GHG mitigation, but without an incentive there is little reason to invest in this technology. The price of carbon is a necessary condition to drive change in the economy. Other policies may be necessary to drive technological change in the required timeframe--because we do have a required timeframe--but carbon pricing is a fundamental requirement.
The IETA works to ensure that the conditions necessary to the formation and operation of trading regimes are present in the design, operation, and review of emerging and existing schemes. These basic conditions are listed below. I believe you have them. I'll go through them very quickly: transparency in the design, regulation, and review of emissions trading schemes; the release of market-sensitive data in a transparent, equitable, predictable, organized way; transparency in the decision-making process of the regulator; a sufficient number of participants and sufficient demand for allowances to drive emissions reduction and to facilitate a competitive, liquid, transparent, deep, and efficient market in allowances, which minimizes the costs of risk management inter alia through a tight bid-offer spread; the absence of artificial barriers and constraints, to prevent willing participants; low transaction costs, predictable process timelines, and limited bureaucracy; the market should be free to deliver the required emissions reductions with the minimum of intervention within a known, fixed, and achievable constraint on total emissions; market design should avoid mechanisms that seek to directly manage, cap, or maintain the associated price for emissions and/or to manage the associated supply and demand of allowances, with a view to indirectly managing, capping, or maintaining the price for allowances; and finally, in order to have an appropriate price discovery, the demand created as an expression of the political will must be met by the availability of an adequate supply of offsets from all available sources of real and verifiable offsets.
In this regard, it is our view that the Canadian government has placed Canadian industry in a difficult situation in the course of the last five years. It remains impossible today for Canadian business to make capital investments informed by a price for carbon. This is a critical obstacle to the success of Canadian climate change policy. Climate change cannot be addressed without a significant realignment of capital spending, and in the absence of policy certainty, that will not happen.
In Europe the use of a pilot phase has allowed the formation of experience and institutions. By contrast, and this is very important, Canadian business is being asked to assess the viability of abatement targets without knowledge of the compliance possibilities that will be available to them.
Canada must move to establish a regulatory GHG market with sufficient scarcity to allow a functional market. If there is no scarcity, there is no market. However, the Canadian economy lacks the diversity and size to provide a Canadian carbon market with a ready supply of low-cost reductions driven by differential costs of abatement.
Canadian manufacturing has made significant strides in improving its carbon efficiency. Many of them have testified in front of your committee, Mr. Chairman.
Canada will remain an energy exporter for the foreseeable future. Fossil fuels will be a critical part of the economy for at least the next generation. That is found in any report, including the IETA report. The world cannot make an overnight transition to a non-carbon economy. As such, it is essential to the liquidity of a Canadian carbon market that credits from abatements outside the capped sectors be permitted.
IETA supports the industry-provincial offsets group initiative to provide a framework for domestic offsets. Given Canada's position, whatever targets the government will choose, be it long or short or Kyoto, Canadian business must have access to the flexibility of emissions trading coupled with domestic trading. To do otherwise would place them at a disadvantage with their global competitors who have access to these instruments, including less costly offsets. They must be provided with the flexibility to choose between make or buy options for reductions, protecting economically critical sectors.
On this score, it is fundamental that project-based reduction credits from the clean development mechanism and joint implementation be permitted. These units are produced project by project and they are third-party verified by accredited and internationally reputable verifiers.
Canada's climate and energy policy, Mr. Chairman, cannot be developed in isolation from the United States, our largest trading partner. In the United States it is now considered a question of when, not if, a carbon constraint will be introduced at the federal level.
I will point out that Governor Schwarzenegger is sitting on the same platform with Prime Minister Blair in California, in vowing to link an emissions trading system. I am pointing out the Chicago Climate Exchange. I am pointing out the 16 bills sitting in the federal Congress looking at cap and trade, driven by a very good Republican senator, Senator McCain, and Governor Schwarzenegger. We're not talking about people who are prone to a lot of light thinking.
I would like to close by saying that in addition to an emissions trading system, there is a need for additional policies and measures. A structured mechanism to invest in long-term technology may be necessary to drive the necessary technological change in the required timeframe, where the corresponding price signal necessary to stimulate that investment alone will be socially acceptable.
The design of any non-market mechanism for compliance should be carefully considered to ensure that it is as neutral in effect as possible if the carbon market is to meet the expectation for driving change. In considering the design of the proposed technology fund, there are clear challenges. It may readily be seen as reacting as a price cap, and a price cap creates difficulties for market functioning. Equally, it may preclude formal linking to other markets that do not have similar compliance options. The existence of an alternative compliance mechanism can draw liquidity from the market.
However, having said all this, we also recognize the fact that other policies and measures are and may be necessary. It's just a matter of designing them in such a way that they are compatible and work together with the market, as opposed to working against each other.
Thank you, Mr. Chairman.