Thank you, Mr. Chairman.
I am Andrei Marcu. I'm the president of the International Emissions Trading Association. It's a not-for-profit business association that is dedicated to ensuring that the objectives of the UN Framework Convention on Climate Change are met through the establishment of effective global systems for trading in greenhouse gas emissions in an economically efficient manner, while maintaining societal equity and environmental integrity.
For those of you who don't know who we are, we are an association of 140 companies from around the world, with a heavy Canadian component. Our second chairman was Bob Page, from TransAlta, and our current chairman is Dan Gagnier, from Alcan. I also happen to be Canadian, and I've spent most of my career not on the trading floors, but in the power industry in Ontario. Our organization is split fifty-fifty: half of it is industrial emitters, and half of it is people who provide services in the carbon-trading market.
I'll give you the example of our board. It includes Holcim, cement; Norsk Hydro and Alcan, aluminum; CVRD, which has just acquired Inco; RWE, the largest power emitter in Germany; Toyota Motor Company; American Electric Power, the largest coal-fired company in the U.S.; Shell and BP; as well as the Chicago Climate Exchange, with Dr. Richard Sandor being on my board. That's just for background.
Recent reports, including the one by Nicholas Stern, show that the long-term cost of climate change would be vastly greater than taking immediate steps to reduce greenhouse gas emissions in order to avoid cost. Immediately taking steps to address climate change is the pro-growth policy in the long term. Effective policy to reduce greenhouse emissions must be based on three essential elements: carbon pricing, technological development, and 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 a price for greenhouse gases. A price signal is inherently more efficient than any command-and-control regulatory approach. Putting an appropriate price on carbon, explicitly through tax or trading or implicitly through regulation, 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 to invest in low-carbon alternatives, often at comparatively low substitution costs. Experience within the EU emissions trading system market demonstrates clear correlation between short-term energy demand and the carbon market, with the resulting temporary reduction in demand and induced fuel switching.
Emission trading has demonstrated the ability to deliver effective environmental policy outcomes at a far lower cost than command-and-control or tax-based approaches, simply by allowing a market to set the appropriate price. We have heard repeated references to the sulphur dioxide market in the U.S., which, working for Ontario Hydro, I have followed quite closely for many years.
Environmental markets minimize government intervention, 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 our societal priorities.
The development and deployment of a wide range of low-carbon technologies is essential in achieving the deep cuts in emissions that are needed. Carbon pricing gives incentives to invest in new technologies to reduce carbon. Indeed, without it there is little reason to make such investment.
Just as an example, and a very powerful example, one of the key issues that was debated at the recent COP in Nairobi was that of carbon capture and storage, a very promising technology that Canadians, Europeans, and Americans are examining with a great amount of interest. It provides the scope and the future of running power plants and capturing the GHG. But let's be quite frank: without an incentive, there is little reason to invest in this technology. That was recognized by everybody we had discussions with in Nairobi.
Canada will remain an energy exporter for the foreseeable future. Fossil fuels will be a critical part of our economy and of the global economy for at least the next generation. The world cannot make an overnight transition to a non-carbon energy economy.
Given Canada's position, whatever targets the government will choose—long term, short term, meeting Kyoto, not meeting Kyoto—Canadian business must have access to the flexibility of an emission-trading system, coupled with domestic and international offsets. To do otherwise would put them at a disadvantage with global competitors that have access to these instruments, including less costly international offsets. They must be provided with the flexibility to choose “make or buy” options for reductions, protecting economically critical sectors.
Canada has significant opportunities for greenhouse gas sequestration in the agriculture, forestry, and energy sectors that have not yet been exploited. An effective emissions-trading system with strong provision for offsets would result in significant new opportunities throughout rural Canada, producing reductions well below current world market prices.
Canada must move to establish a regulatory greenhouse gas market with sufficient scarcity to allow a functional market to exist. Establishing a GHG market would deliver long-term regulatory certainty while Canadian companies build capacity and capture opportunities in the emerging North American greenhouse gas market. What is important for everybody to realize is that in the United States it is now considered a question of when, not if, a carbon constraint will be introduced at the federal level.
Currently, there is a global GHG market, whose pillars are sovereign demand under the Kyoto protocol and corporate demand under the EU emission-trading scheme and some smaller schemes. To meet this demand, countries can use units assigned under the Kyoto protocol, which they can trade among themselves. Due to the collapse of industrial activity in the 1990s in eastern Europe, a surplus of these units were created. This means of compliance has attracted criticism. It has been called “trading in hot air”.
Canada's government is free to use or not use the international emission-trading mechanism for complying with Kyoto. The form of compliance to be used is a purely political choice. Countries and companies under the EU ETS and the northeast U.S. scheme RGGI can purchase offsets produced in an internationally supervised system, a clean development mechanism, and joint implementation.
These units are produced project by project. They are third-party verified by accredited international verifiers such as DNV and SGS. They are, if anything, too strict in their environmental credentials. Frankly, we have been arguing with the CDM executive board that they seek perfection. It is not that they're loose. They want to be perfect. They want to make sure that every single credit that comes out is perfect.
IETA's concern is to ensure that business is able to use flexible mechanisms for corporate compliance, with GHG reduction policies that preserve competitiveness. However, it must be made clear that project-based reductions or offsets represent a real and permanent reduction in greenhouse gas emissions. Regardless of any targets Canada chooses to meet, it is essential that Canadian businesses have the choice to use these international markets.
Canadian participation in the market would not result in major price disruption, since the growth of supply has been strong. The annual study conducted by IETA and the World Bank indicates transactions of 220 million tonnes of credits at an average price of $12 Canadian per tonne.
While Canadian participation in the market would lead to countervailing upward pressure, a recent internal survey of IETA analysts indicates that the price effect would not likely be more than 10% to 15%. The current offsets available in the CDM pipeline are about 1.2 billion credits. We have to take that with a grain of salt, because there are always project risks. It would probably end up with about 800 million.
Under current scenarios, that would leave about 150 million CERs, after you meet European and Japanese demand. There are many assumptions that can be made to arrive at different numbers. But one thing is sure: over the last three months about $5 billion have been committed to the CDM market, most of it U.S. money coming out of New York and Chicago.
The pipeline will grow, with all the regulatory pains we saw in the CDM. We have been on the receiving end of that. This is a young market, one that still has many uncertainties, but one that's attracting a lot of interest. We will not know all it can deliver until we make demands on it.
IETA would represent a large number of companies, people who are not speaking from a theoretical point of view and who have had their hands dirty by working in the field and on projects, whether in South America or in China or in India. It is quite prepared and ready to work with this committee and the government to help shape the future of the Canadian program.
Thank you very much, Mr. Chair.