March 11, 1999
To:Works and Utilities Committee
From:Barry Gutteridge, Commissioner, Works and Emergency Services
Subject:Greenhouse Gas Emissions Reduction Trading
Purpose:
To seek authority to determine the feasibility of trading greenhouse gas emissions reduction
credits (ERC) that are attributable to actions taken by the City of Toronto to reduce its
corporate greenhouse gas emissions.
Funding Sources, Financial Implications and Impact Statement:
(1)This initiatives to be carried out within the recommended 1999 Budget.
(2)This program initiative has the potential to become a modest new source of revenue for
the City of Toronto.
Recommendations:
It is recommended that:
(1) the Commissioner of Works and Emergency Services be authorized to enter into
negotiations with interested buyers of Emissions Reduction Credits in order to determine if a
receptive market currently exists for the trading of selected greenhouse gas Emissions
Reduction Credits, and report to the Works and Utilities Committee on the subsequent actions
that the City should take with respect to this matter;
(2) the principles proposed by the International Council for Local Environmental Initiatives
(ICLEI) in its report to the City and the Toronto Atmospheric Fund (TAF) dated November
24, 1998, be used as a guide during negotiations pertaining to Recommendation No.1 above;
and
(3) the appropriate City officials be authorized and directed to take the necessary action to
give effect thereto.
Council Reference/Background/History:
City Council at its meeting held on April 16, 1998, adopted Clause 10 of Report No. 3 of The
Works and Utilities Committee, and in so doing authorized the engagement of the
International Council for Local Environmental Initiatives (ICLEI) to undertake the design of a
Pilot Project for Carbon Emissions Trading.
City Council at its meeting held on July 8, 1998 received for information, Clause 10 embodied
in Report No.6 of The Works and Utilities Committee entitled AStrategic Action Plan to
Reduce Carbon Dioxide (CO2) Emissions in the New City of Toronto@.
City Council at its meeting on December 16 and 17, 1998 adopted Clause 15 embodied in
Report No. 26 of The Strategic Policies and Priorities Committee entitled ASustainable
Energy, Greenspace/Nature and Water Actions@, and in so doing formally committed the new
City of Toronto to a carbon dioxide emission goal of 20% relative to 1990 levels by year
2005.
Comments and/or Discussion and/or Justification:
1.) Global Warming and its Climate Change Impact:
The "greenhouse effect" is a phenomenon where heat is absorbed by gases which occur
naturally in the earth's atmosphere. This trapped energy warms the land and oceans within a
relatively narrow temperature range supportive of life on our planet. The greenhouse effect
has become problematic because excessive amounts of heat, normally dissipated, are now
trapped by the presence of of greenhouse gases (principally; carbon dioxide, methane and
nitrous oxide) largely generated by human actions such as fossil fuel combustion and
deforestation. The resulting increase in average surface temperature is commonly referred to
as 'global warming'. Since the Industrial Revolution, increases in greenhouse gases have
contributed 0.5E Celsius to mean global warming. Scientific evidence indicates that the
average global temperature may increase by approximately 1.0E Celsius to 3.5E Celsius by the
year 2100 as a result of increasing concentrations of greenhouse gases. Climate change
induced by global warming to the extent described above would have significant adverse
impacts on the environment and on humanity.
2.) The Kyoto Protocol:
The United Nations Conference of the Parties of the Framework Convention on Climate
Change, at its third meeting held in Kyoto, Japan on December 12, 1997, gave final approval
to the Kyoto Protocol. The Kyoto Protocol proposes legally binding targets and timetables for
greenhouse gas emission reductions for participating nations. The Protocol will come into
effect when 55 national governments ratify the agreement. The Canadian government has yet
to ratify the agreement. Of interest to the City is that the Protocol establishes the basis for an
international greenhouse gas trading system, one that would allow buyers and sellers to trade
Greenhouse Gas Emissions Reduction Credits.
3.) How the trading of Greenhouse Gas Emissions Reduction Credits works:
Greenhouse gas emissions reduction credits are traded when a purchaser, typically a large
emitter of CO2 is in need of Emissions Reduction Credits to meet a corporate target or cap on
emissions and a transaction is made with a seller of emissions.
Purchasers with more costly emission reduction measures normally seek to buy emission
credits from a seller with lower cost emission reduction measures. It makes no difference
where a particular tonne of greenhouse gas is emitted in terms of the impact on global
warming.
Typical buyers will be organizations such as oil & gas companies, electric generation utilities
and industrial process users who consume large amounts of fossil fuels. Typical sellers may be
forestry companies, municipal governments and other organizations that have lower cost
measures for greenhouse gas reductions available to them such as energy efficiency &
conservation, sequestration and fuel switching.
The economic value of emissions reduction credits become real when emissions limits are
established for both buyers and sellers. Potential buyers with long planning and production
cycles are interested in negotiating and entering into agreements for the trading of Emissions
Reduction Credits in anticipation of the introduction of mandatory limits of emissions being
instituted by the Canadian Federal Government.
Emissions trading is used as a tool to achieve further reduction in emissions and to realize a
more cost
efficient implementation of mandatory emission limits. Experience shows that this practice
not only brings down the mandatory compliance costs but can provide incentives for polluters
to achieve reductions in emissions earlier than they are actually required to do so by
regulation.
In our local context, revenues from emission trading could become a source of funding for
City and community projects that will further contribute to the City=s 20% emission reduction
target. Furthermore these additional emissions reductions could be credited to any
commitment made under the Kyoto Protocol.
4.) ICLEI's Report:
ICLEI=s report on the @Design of a Carbon Emissions Pilot Trade for Toronto@, dated
November 24, 1998, was jointly commissioned in 1998 by City Council and the Toronto
Atmospheric Fund. In summary, it is being recommended that the following policy guidelines
which are based on ICLEI=s findings, conclusions and recommended principles, be used to
ensure the most favourable environmental outcome for the City in any future trading
transaction.
5.) Policy Guidelines:
(a) Greenhouse gas emissions trades should not erode the City=s CO2 emission reduction
credit base to the extent that the City=s ability to reach its goals is compromised.
(b) Legal ownership of the emissions reduction credits must be clearly settled.
(c)The trading of greenhouse gas emissions should not compromise the City=s goals of
improving the local environment, particularly air quality.
(d) Procedural and administrative functions of executing emissions trades should be
undertaken by the City's Energy Efficiency Office.
(e) The requested report from the Commissioner of Works and Emergency Services to the
Works and Utilities Committee should address a maximum of three potential purchases of
Emissions Reduction Credits.
(f) The City's potential trading revenues should be considered for deposit into a fund which
is guided by a re-investment strategy in support of further emission reductions.
(g)Primary candidate projects to receive funds from the sale of Emissions Reduction Credits
should include planning, feasibility or engineering projects and/or community projects that
support increased participation and/or technical penetration rates that may result in further
CO2 reductions, and measuring, monitoring and verification projects that support the City=s
efforts to maintain an ongoing inventory of emissions.
(h)Where appropriate, the City should enter into direct negotiations with potential buyers
who have an interest in trading.
(i) In the event that the City's corporate and/or the community's concerns are not satisfied
during the negotiations for emissions trading, the Commissioner of Works and Emergency
Services will report back to Council on options for any future action and/or involvement in
emissions trading.
6.) PERT - Pilot Emissions Reduction Trading Project:
The City should also register with Canada's Voluntary Challenge Registry (VCR) and the
Pilot Emissions Reduction Trading Project (PERT). PERT is an industry-led,
multi-stakeholder initiative formed to evaluate the potential environmental and economic
benefits of open-market emission reduction trading in Ontario.
PERT is the forum in which Ontario protocols and rules for trading are being developed and
many of the measures that reduce greenhouse gas emissions also reduce air pollutants. The
PERT model offers the promise of an integrated system for qualifying and brokering measures
that create Emissions Reduction Credits for both air pollutants and greenhouse gases. ICLEI
has advised the City that AFew purchasers will consider a pilot trade with Toronto unless
these potential Emissions Reduction Credits are duly scrutinized by a group such as PERT@.
It is noteworthy that the policy guidelines recommended above are congruent with PERT's
guiding principles for emissions trading which are:
(1) "Emissions reduction credits will be real, surplus, retrospectively quantifiable and
verifiable."
(2) "Trades of emissions reduction credits will be reviewed to ensure their environmental
benefit."
(3) "All actions taken by all parties in PERT will comply with the letter and intent of all
laws and regulations."
(4) "Actions taken by parties in PERT will have no negative impact on the environment"
(5) "The Pilot will identify issues related to trading among emitters from different industries
and different jurisdictions over time."
(6) "Issues will be resolved, as much as possible, through a consensus-based
multi-stakeholder process."
7.) Quantifying Emissions Reduction Credits:
The actual quantity of Emissions Reduction Credits which the City will negotiate for trading
purposes will be defined in the context of the guidelines noted above, and will be dependent
upon the available margin of excess greenhouse gas emissions as illustrated in Figure #1
(attached).
Figure #1 illustrates that the City will have eligible historic Emissions Reduction Credits of
approximately 477,000 tonnes from past projects from 1994 to 1998 and potential future
Emissions Reduction Credits of approximately 991,000 tonnes for the period from 1999 to
2005. PERT protocols are used to define eligible Emissions Reduction Credits and it should
be noted that PERT does not recognize historic emissions prior to 1994. Also 10% of eligible
Emissions Reduction Credits must be "retired" or not traded.
In this initial and exploratory stage of greenhouse gas emissions trading, it is recommend that
a conservative estimate be taken with respect to the actual quantity of Emissions Reduction
Credits which the City negotiates for trade. Specifically, Emissions Reduction Credits should
be limited to a maximum of 50% of the net excess projected. This action would ensure that in
the event that future greenhouse gas emissions reductions become problematic, excess
greenhouse gas emission reductions would continue to be available and therefore not result in
a net erosion of the City=s greenhouse gas emission reduction base. Consequently, the actual
amount of Emissions Reduction Credits that would be deemed eligible for trading would be
238,500 tonnes (50% of 477,000) of historic credits, and future Emissions Reduction Credits
to be traded would be limited to 495,500 tonnes out of the available 991,000 tonnes noted
above.
The City may realize additional financial benefits from its greenhouse gas reduction policies
and programs by selling greenhouse gas Emissions Reduction Credits into the emerging
greenhouse gas trading market. As a result of the former City of Toronto's and Metro's early
commitments to greenhouse gas emissions reduction targets, Toronto is well positioned to tap
into a potentially significant new revenue stream for the financing of local environmental
improvement projects.
ICLEI's reports that "At a possible range of $0.50 to $3 ($US) per tonne of eCO2, Toronto's
historic Emissions Reduction Credits available for 1994-1999 may be worth in the range of
$240,000 to $1,440,000 in $US. Toronto's historic and new potential Emissions Reduction
Credits available 2000-2005 may be worth in the range of $418,000 -to- $2,508,000 in $US".
ICLEI's revenue estimates fall within the range of the City's "most likely" scenario for
greenhouse gas emissions reduction. The revenue realized will depend on the actual quantity
of greenhouse gas emissions credits traded.
ICLEI's quantification of the potential quantity of Emissions Reduction Credits available for
trading is based on a limited initial screening of eligible greenhouse gas emissions reduction
projects. Further assessments beyond the scope of ICLEI's report will identify the potential of
other eligible greenhouse gas emissions reduction projects.
Conclusions:
Based on the report submitted by ICLEI, the City has the opportunity to extend, enhance, and
make more effective, its efforts to reduce greenhouse gas emissions through the trading of
excess Emissions Reduction Credits which is supported by a re-investment strategy.
It is first necessary to determine the practicability of the proposals documented in the ICLEI
report by entering into negotiations with the interested purchasers of greenhouse gas emission
credits to assume a "learn by doing position". Only then will the City be in a position to
determine the nature and scope of any trading that the City should enter into and the
environmental and economic benefits that will result from trading.
It is therefore recommended that the Commissioner of Works and Emergency Services be
authorized to enter into negotiations with interested buyers of emissions credits, based on the
principles documented in the ICLEI report, in order to determine if a receptive market
currently exists for the trading of the City's greenhouse gas emission credits, and report to the
Works and Utilities Committee on the subsequent actions that the City should take with
respect to this matter.
Contact Name and Telephone Number:
John Warren, Director, Environmental Services
Technical Services Division
Works and Emergency Services
Phone: (416) 397-4625
Fax: (416) 392-6279
E-mail AJohn_Warren@metrodesk.metrotor.on.ca@
Tom Denes
Executive Director
Technical Services Division
Barry H. Gutteridge
Commissioner
Works and Emergency Services
