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2. Emission reduction credit (ERC) trading
Leading businesses worldwide (13) have proposed and
promoted Emission Reduction Credit (ERC) trading as the least cost method of
reducing greenhouse gases while sustaining business economies. The Kyoto
Protocol includes ERC trading within countries and internationally as a
key flexible mechanism to allow for cost effective compliance with Kyoto
targets. (10)
The ERC trading approach emerging in Canada
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"Large emitters" like oil and gas, electricity, mining and chemical
production would have a limit (or cap). Companies within these sectors will be required to hold
permits for each unit of GHG emissions that they send to the atmosphere.
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Those companies which are able to cut their emissions at a relatively low
cost will have the financial incentive to make larger reductions and to
sell the surplus permits or credits to other companies who face higher
costs to reduce their own emissions.
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The companies which buy credits to
reduce their own emissions can save money by buying credits instead of
reducing their own emissions by as much.
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The Canadian trading system will
also allow those sectors not covered by a cap on emissions (Agriculture,
Forestry and Waste Management) to generate credits by reducing their
emissions and sell the
credits to those covered by the cap.
This approach allows large emitting companies to find the
most cost effective way to reduce emissions (either within the company or
by purchase of credits) in the short term. In the longer term the approach
will encourage companies to find new low emission technologies and methods
to use in their business so that
they do not have to keep buying credits. In this context the credit
trading is a “bridging mechanism” until new low emission technologies
become available and old technologies are phased out.
ERC trading can also be viewed as a “carrot” approach to
reducing emissions, whereby the Canadian government allows large emitting
companies flexibility to find ways to achieve the targeted reductions
instead of implementing a punitive carbon tax or other measure. To reduce
the uncertainties to large emitting companies the Canadian government has
also put a limit of 55 million tonnes per
year of emission reductions (CO2e)
on the capped sector at a ceiling price of $15 per tonne.
The downside of this approach is that the
rules and reporting for credit trading could become complex.
Such rules may encompass emitting company annual reporting
requirements, covenants or promises made by companies to reduce emissions,
enforcement of the covenants, audit rules of companies’ reported
reductions and emission reduction credit measurement and verification
requirements. The rules must be sufficiently detailed to discourage
cheating but at the same time the rules must not become costly and
punitive themselves.
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The large emitter group may not be the only ERC buyer. The
government of Canada has plans to purchase ERCs from domestic and
international sources to help meet its Kyoto emission reduction targets.
They may need to purchase between 10 and 70 million tonnes per year
depending on the success of other components of the national emission
reduction plan. |
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