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Canada targeting cuts in industry emissions

Ambitious plan will challenge some sectors

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Greenhouse gas emissions reduction will become a major part of the risk management initiatives of Canadian companies now that the federal government has released its plan to control the impact of climate change, environmental experts say.

Complying with the government's plan, which includes mandatory reductions for certain industries, will be a challenge due to lingering uncertainty over the regulations and the potential for conflict with provincial initiatives to regulate greenhouse gas emissions, experts say.

Canada's federal government recently released details of its strategy for reducing greenhouse gas emissions. "It's a new layer of quite substantial regulation that is going to require a corporate response," said Alister Campbell, president and chief executive officer of Zurich Canada in Toronto, a unit of Zurich Financial Services Group.

A key element of the strategy is mandatory emissions targets for energy companies and specified manufacturing industries. Regulated companies will be required to reduce their greenhouse gas emissions intensity—the amount of emissions per item produced—to 18% below 2006 levels by 2010, with 2% reductions required in subsequent years.

"If a company is in one of the regulated sectors facing greenhouse gas emissions targets, clearly it will have to develop a carbon risk management plan," said Mark Madras, a partner and head of the climate change group at Gowling Lafleur Henderson L.L.P. in Toronto.

Regulated industries would have several compliance options aside from making operational changes to achieve their targets. They could obtain compliance credits by contributing to a technology fund that would invest in emissions reduction technology or to a government-approved equivalent fund.

The federal government would also create an offset system to let nonregulated businesses earn carbon credits by voluntarily cutting emissions, which could then be sold to regulated businesses to help them reach their emissions targets.

"Companies outside regulated sectors can continue a business-as-usual scenario and do nothing, but they may have competitors that do something and that may place them at a disadvantage," Mr. Madras said.

The broad ambition of the framework will be the most challenging part of compliance, as it will require a substantial change in corporate behavior, Mr. Campbell said. "Very few companies have come to grips over what this framework is going to mean over time," he said. "Most people will be starting near zero."

Although the framework for greenhouse gas emissions reduction has been released, the actual regulations to put the plan into effect will not be published until this fall.

"While a lot has been published...what we don't have are some key definitions," said Justyna Laurie-Lean, vp of environment and health for the Mining Assn. of Canada in Ottawa. "Also, the compliance mechanisms are not clear."

A key area of uncertainty for Canadian companies is how to calculate their baseline emission and reduction levels, environmental experts say. "I think some companies are struggling with how that calculation works," said Shawn Denstedt, a Calgary-based partner and co-chair of the environmental group of Osler, Hoskin & Harcourt L.L.P.

Another challenge will be the interaction of federal regulatory efforts with those of provinces, such as Alberta, that have already undertaken efforts to control the impact of climate change. In 2007, the province enacted emission reductions for large industrial facilities.

Based on Supreme Court of Canada precedent, provincial and federal governments share jurisdiction on environmental matters, but Alberta has taken the position that it is the primary regulator of greenhouse gas reduction efforts. The province has vowed to work with the federal government to ensure its systems are aligned. Until that happens, companies may have to comply with multiple, possibly contradictory regulatory regimes, and "will have a lot of uncertainty until those issues are reconciled," Ms. Laurie-Lean said.

Quebec and Ontario, meanwhile, have expressed disappointment that the federal framework does not fully recognize the efforts made by companies that have already significantly reduced emissions in response to the requirements of the Kyoto Protocol.

Risk managers have been involved with environmental issues in the past, but generally focused on physical factors such as the potential for seepage and spills. The federal regulatory framework and the evolving nature of the climate change exposure, though, will spur increased risk management involvement in addressing the issue, observers say.

Risk managers for companies in the regulated industries or those participating in enterprise risk management are already involved in developing plans to address emissions issues, in conjunction with their company's environmental/ emissions experts, said George Boire, senior vp, environmental solutions for Marsh Canada Ltd.

"I don't think there are too many of our large risk manager clients that are going to be caught unaware of this," he said.

Mr. Boire has conducted seminars for risk managers to advise them on preparing for the implementation of emissions regulations. The key steps for risk managers are reviewing their potential exposures—including emission levels—and aiding in the development of a strategy to respond, such as emissions reduction or credit purchases, if their companies are in the regulated sectors.

"It's not an everyday discussion yet, but I believe it will be," Mr. Boire said.

Climate change issues have numerous implications for risk management programs beyond regulatory issues. For example, increased flooding caused by climate change could impact the physical risks at a company's operations.

"I think that's something that falls into the daily work of risk managers," said Urs Uhlmann, senior vp for Zurich Canada in Toronto. "If it doesn't, it should."