by Susan Shaw, P.Eng.
Attempts to set up effective systems for cross-border emission trading have been slow to bear fruit. A major reason for this is that emission trading proposals are often seen as environmental initiatives rather than trade initiatives. However, under NAFTA, the North American Free Trade Agreement, a tri-national environmental organization was set up that could help to overcome this problem: The Commission for Environmental Co-operation (CEC). With a mandate to pursue environmental co-operation as part of the shared three-country trade framework between Canada, Mexico and the United States, the organization is now tabling challenges to governments and stakeholders in all three countries to address the issue of harmonizing trade rules to facilitate trading of environmental attributes produced by the power industry. The net result should be additional revenue streams for cleaner and renewable energy sources, freer movement of environmentally-preferred power across borders, emission reductions and lower costs for consumers.
The first of a new series of consultations in this initiative took place on March 24, when the CEC’s Joint Public Advisory Committee (JPAC) met in Vancouver for a day-long conference under the title “North America’s Energy Market: Aligning Policies and Managing Carbon.” JPAC, which includes five citizen representatives appointed by each country, advises the CEC’s Council of environmental officials from the three countries on issues within the scope of NAFTA’s side agreement on environmental cooperation. Created in 1994, the CEC addresses regional environmental concerns, helps prevent potential trade and environmental conflicts and promotes the effective enforcement of environmental law. Typically, the work of the CEC ensures that the promotion of international trade is accomplished without compromising the environmental objectives of each country. In the case of greenhouse gases, however, the Commission’s work is leading instead of following – discussing how environmental objectives can be facilitated through appropriate trading.
Although the title of the March 24 session referred to the “Energy Market” generally, there was very little discussion of anything but electricity. Although energy forms the largest economic sector in North America, it is not as significant a sector for cross-border trade. Canada and the U.S. both have fragmented jurisdictions and policies, with provincial, state, regional (including cross-border regions) and federal organizations all playing rule-setting roles. For example, while over half of the States have a Renewable Portfolio Standard, they are individual standards, with variations from state to state in what qualifies as Renewable Energy. Other variations include Ontario’s Feed-in-Tariff, Alberta’s fully-functional carbon trading and B.C.’s carbon tax. The basic electricity market structure varies as well, from the open markets of New York and Alberta to the vertical integration of Manitoba, Quebec and B.C.
There are also limited trade abilities between the electricity markets, with technical limitations due to non-compatible grid operations and limited physical interconnections between markets. It was noted that some of the largest connections are north-south across the joint border, with, for example, the capacity to flow 3,300 MW south out of Ontario, but significant limitations for flowing electricity region-to-region within each country. Taken together, the inter-tie capacity between the U.S. and Canada was estimated to be 14,550 MW.
The government of Mexico is a strong force in its country’s electricity policy, with the federal government able to act nearly unilaterally in this sector. Despite a population in excess of 100 million, its market in 2006 was only 229 terawatt-hours, less than half of Canada’s 571 TWh and a fraction of the 4,065 TWh used that year in the U.S. As well, Mexico’s inter-tie capacity is quite limited, and more than half of its border with the U.S. is with Texas, where the Electric Reliability Council of Texas is perhaps best-known for its lack of connections with other U.S. electricity markets. It was noted, too, that Mexico has different security requirements and concerns with its electric system than the other two North American countries.
Beyond the fragmentation in policies, jurisdictions and connections, the generation capacity itself has differences. A full 70% of Canada ‘s capacity is hydro or nuclear and emits no carbon dioxide. The U.S., with 31% coal and 39% natural gas, is almost exactly the inverse. Mexico relies on fossil-fuelled, Rankine-cycle plants for 80% of its capacity. Mexico has an additional issue not faced by the other two countries. Mexico’s electricity consumption is expected to increase from 2,000 kWh/person/year in 2006 to 8,000 kWh/person/year in 2050, providing a standard of living like Europe’s of today, but quadrupling consumption prior to the consideration of population growth.
Given this diversity in the underlying markets, it is no surprise that facilitating carbon trading has proved difficult. Expert presentations at the JPAC session highlighted key issues to address in aligning rules for facilitating rational trade of power on an environmentally-level playing field.
Dr. Jan Hamrin, founder of the U.S. non-profit corporation Center for Resource Solutions, and CEO of HMW International, a consulting firm specializing in implementation of sustainable energy policies, spoke about the differences in incentives for renewable energy, noting that while systems for encouraging renewable energy overlap with carbon policy, the do not necessarily align with it. For example, Dr. Hamrin noted that special incentives are often provided for new and emerging technologies. She believes that there are fairly consistent definitions of these categories, but that differences arise in the incentives due to differing goals and local conditions in each jurisdiction. Examples of the specific goals driving renewable energy incentives might be security of supply or economics, in addition to environmental benefits. In the southeastern part of the U.S., it may make sense to incent biomass, as this part of the country is lacking in other renewable resources, and does not now have much capacity in biomass-based electric generation. This policy would make less sense in the U.S. northwest where this capacity is already present. Interestingly, her example used biomass, which is difficult to consider as anything but a mature technology that would not, based on the principle of support for emerging technology, merit incentives at all.
Harmonization or compatibility
Both Dr. Marlo Raynolds of the Pembina Institute and Dr. Robert Wright of the U.S. Department of Energy spoke about efforts to harmonize carbon policy across jurisdictions. Harmonization was the initial goal. With harmonization, an activity, regardless of jurisdiction, would have the same economic result. Generating a megawatt-hour of electricity with a run-of-the river hydro facility would create renewable energy credit valued the same in the U.S. or Canada, or a megawatt-hour generated by a simple-cycle gas turbine plant would attract the equivalent carbon tax across North America. Harmonization required very broad acceptance of the same definitions, goals and incentives, despite differences in underlying markets. However, it would have easily facilitated a common carbon market.
Sometime last year, a consensus appears to have emerged amongst the environmental community active in this sector that harmonization was not an effective goal. The delays in reaching consensus on harmonization were delaying any implementation at all. As a result, a consensus was reached on shifting the goal from harmonization to compatibility. Compatibility has different requirements than harmonization.
To achieve compatibility it is only necessary that most typical electricity sector activities are either incented or disincented by all parties. To illustrate, assume that two gas-fired plants are operating in different jurisdictions. In one jurisdiction, there is a carbon tax at a level that allows for fossil-fuel combustion, but only at high efficiency, or when electric prices are high. The other jurisdiction tries to achieve the same carbon emissions result by making an underground carbon storage facility available to the plant. These would not be considered compatible. Nor would a carbon tax in one place and a carbon intensity goal in another. If both jurisdictions imposed a carbon tax on the facilities, even if the parameters and costs were different, this could still be considered compatible.
Compatibility, while a lower standard than harmonization, would still see similar types of power plants built and operated in North America following price signals that may vary in size from place to place, but would be based on similar assumptions. This kind of compatibility would encourage cross-border trade, and is more likely to occur in a shorter time than harmonization.
Game changers
Dr. Raynolds noted that electric cars and fluctuations in natural gas reserves could be “game changers” that upset the current plans and developing policies.
The later part of the JPAC conference was dedicated to carbon capture and storage (“CCS”). Much of this focused on the capture and storage of CO2 emitted from power plants, but the presentation that generated the most comments and questions was given by Dr. Werner Kurz of Natural Resources Canada.
Dr. Kurz’s topic was Terrestrial Forest Carbon Sequestration in Canada. He addressed why bioenergy is considered to be carbon neutral. There are two reasons: One is an international environmental accounting convention allocates the carbon emissions at the time that the trees are removed from the forest. With the emissions deemed to occur at this point, combustion of the biomass cannot be said to create any further emissions. The second reason is that re-growth is assumed, which removes the emitted carbon from the atmosphere. Dr. Kurz noted that rate of re-growth and carbon uptake may vary from a single year for agricultural crops to many decades for northern forests.
In using a forest for carbon uptake and storage, the forest management is different depending on whether the intent is to maximize the uptake or the storage. A young, growing stand of trees provides the most uptake of carbon. A mature stand provides the most storage of carbon. Maximizing the benefits of forest sequestration would entail using harvested mature trees in a way that prevents their decomposition and uses them as a substitute for materials that are energy intensive to produce. Using forest products for construction, especially in place of concrete and steel, maximizes the carbon storage, reduces the emissions generated used in constructing the building and allows the land to go back into a carbon uptake mode. Dr. Kurz noted that forests can play an important role, but cannot provide the entire solution to carbon emissions. And forests do not respond well to short term carbon price signals.
Dr. Jose Miguel Gonzalez Santalo of the Instituto de Investigaciones Electricas noted that Mexico is counting on carbon capture and storage for 19% of the reductions required to limit global temperature increase to 2 degrees C. To not use CCS would increase the cost of meeting this goal by 70%. Even with its use, meeting this goal will increase the cost of electricity in Mexico by 40 to 80%, as fossil fuel for electric generation accounts for two-thirds of the CO2 emitted in that country. The remaining reductions are to come from increases in end-use efficiency (36%), increased use of renewables (21%), fuel switching (18%), and nuclear power (6%). Other speakers talked about a carbon tax in the range of $55 to $70 per ton as required to make CCS cost competitive.
Finally, Dr. Gonzalez Santalo has been active in the North American Carbon Atlas project. It is similar to CEC’s North American Environmental Atlas (available at www.cec.org/atlas), except that this atlas project focuses on the sources of carbon dioxide emissions and the geological formations that would allow underground sequestration.
It could be that with a little co-operation, joint bodies like the CEC’s JPAC may prompt North American governments and other players to achieve progress in certain key areas more quickly than they would have done on their own. For more information, see www.cec.org.
Susan Shaw, P.Eng. has been active in the Ontario electric markets for more than ten years. She is currently a Director of the Canadian District Energy Association, and the Chair of the Mayor’s Sustainable Energy Council in London, Ontario. Ms. Shaw can be reached at