Draft

Climate Action Network

Rational Energy Program

Update and summary of key measures to the year 2010  
 
  Prepared by:

Louise Comeau
Director - Energy and Atmosphere
Sierra Club of Canada

 January 1998
 


Table of Contents

 
Executive summary

Highlights

Introduction

Proposed actions

Appendix A:
Macroeconomic analysis - Informetrica


Executive Summary

 To achieve its Kyoto commitment to reduce greenhouse gases by 6 per cent between 2008 to 2012, Canada must move now to improve energy efficiency and to expand the use of renewable energy in three key sectors: buildings, transportation and electricity generation. Measures in the electricity sector, in turn, reduce emissions in the industrial and upstream oil and gas sectors.

 Sierra Club is proposing a quick-start agenda for the 1998 budget and a longer-term plan to meet federal Liberal election promises to explore emissions trading and to develop a National Transportation Strategy.

 The quick-start agenda:

1.Establish a National Atmospheric Fund
2.Establish two task forces: one to design an emissions trading regime for large emitters of greenhouse gases, the other to develop Canada's National Transportation Strategy
3.Strengthen federal procurement of Green Power and energy efficient and advanced technology vehicles.

 The federal Government must move quickly to engage Canadians and to build confidence within the marketplace in our ability to reduce greenhouse gas emissions.

 Initial analysis of the Rational Energy Program showed that the measures with the greatest public profile, particularly in communities, and that generated the most jobs per dollar invested, were those focused on commercial, and to a lesser degree, residential retrofits.

 1.Establish a National Atmospheric Fund

 Sierra Club is proposing the establishment of a National Atmospheric Fund (see Attachment 1 for details on the proposal) which would be based on the self-sustaining endowment model used in Toronto to reduce its greenhouse gas emissions. The Toronto Atmospheric Fund has been instrumental in making Toronto the first city in the world to reduce its greenhouse gas emissions below 1990 levels.

 The Fund which would facilitate investment in energy efficiency retrofits in buildings in the residential, and small industrial and commercial and municipal sectors. The Fund would focus on providing resources for project development and facilitate financing. A portion of the Funds could be used to securitize loans against defaults to ensure access to financing for small building owners. The Fund could operate on a fee-for-service basis which would be paid for from energy savings, or from the interest earned through investments of the Fund.

On the residential side, the Fund would support the establishment of a National Green Communities Program. Green Communities projects are already operational in Ontario and to a large degree are self sustaining. Gas and electric utilities and financial institutions provide marketing and financial services in support of energy, waste and water retrofits in homes. Green Communities has identifed a key block to progress: consumer resistance to the up-front cost of an audit, approximately $150. Partners provide funds for up to $100 toward the audit, and the Atmospheric Fund would provide the final $50 per audit.

Finally, the National Atmospheric Fund could support development of district energy systems where projects are viable, but require up-front financing support to move forward. The Department of Finance has indicated a tax approach is not necessarily viable for district energy as projects are few and concentrated in larger cities.

 2.Establish task forces

Substantial emissions reductions can only be achieved through structural changes in the generation of electricity and in the design and use of the automobile. Provincial governments have well defined responsibilities in both these areas.

On the electricity front, the opening of markets to competition has the potential, if done right, to encourage the use of clean electricity. Unfortunately, most analysis predicts an increase in greenhouse gas emissions as competition will favour life extension of older coal-fired thermal power plants.

 While the federal Government cannot regulate provincial electricity markets, it could establish a national cap and trade system for greenhouse gas emissions that could contribute positively to greenhouse gas reductions from the electricity, and by extension the industrial and upstream oil and gas sectors. Repowering Alberta fossil fuel-fired thermal power plants to natural gas has been estimated to provide a 13.6 Mt reduction in greenhouse gas emissions by 2010 (Repowering Alberta: Canadian Energy Research Institute (CERI): 1996.). If Nova Scotia uses Sable Island natural gas, emissions could be cut more than 40 per cent, according to a 1997 study by CERI.

 Ontario Hydro's greenhouse gas emissions are on the rise due to problems with seven of its nuclear units. Emissions in 1996 were just over 18 Mt. The utility is relying heavily on four oil and coal-fired stations to generate electricity. A worst-case scenario could see these emissions rise to 30 Mt. Natural gas generates 49.68 tonnes of CO2 per terajoule, while coal generates 85.9 tonnes of CO2 per terajoule. Obviously, a switch to natural gas would reduce emissions in Ontario.

Federal/provincial negotiations aimed at developing a national action plan to reduce greenhouse gas emissions must include assessment of the appropriate structure of competitive electricity markets and include assessment of the potential of a national cap and trade program to reduce emissions.

 With respect to road transportation, the federal Government can raise fuel economy standards on vehicles and support research and development aimed at redesigning the vehicle. Provinces, and by extension, municipalities, have strong control over land use, public transit and transportation demand management.

 The federal Government must assess the viability of all transportation approaches and develop a strategy aimed at minimizing growth in demand and greenhouse gas emissions. Improved energy efficiency and increased reliance on low and no-emission vehicles also contributes to improvements in local air quality.

 The Task Forces are to advise the federal Government, not achieve a consensus. The work should be complete within one year for inclusion of initial steps in the 1999 budget. The aim must be full implementation no later than 2000. Membership would include provincial, industry and environment group representation.

 3.Strengthen procurement

 Expand the federal Government's commitment to Green Power procurement and to the procurement of energy efficient and advanced technology vehicles for all federal departments. Commit to issuing a challenge to all provincial and municipal governments to do the same thing. Announce that the federal Government will raise the issue of procurement with other levels of government when consultations begin. Make a commitment to purchasing a minimum of 10 per cent of federal electricity and transportation rquirements from renewable, efficient and advanced technologies.

 The longer-term plan

 The Rational Energy Program is a package of initiatives designed to reduce greenhouse gas emissions through improved energy efficiency in the transportation, building and industrial sectors and the increased use of renewable energy in the electricity sector. The analysis was completed in 1996 by Natural Resources Canada (NRCan) and Informetrica Limited for the Sierra Club of Canada and the Climate Action Network. This draft January 1998 update summarizes the most effective measures from the original study, and provides an updated strategy for implementing the initiatives.

Natural Resource Canada projects greenhouse gases will increase by 18.6 per cent by 2010 (105 Mt higher than 1990). A reduction of six per cent below 1990 levels represents a reduction of 138.84 Mt (using 564 Mt as the 1990 baseline). The following measures could provide the reductions required to meet the Kyoto targets. Initial calculations show potential for a minimum reduction in greenhouse gas emissions of just over 122 Mt if no economic instruments are used.

Emissions could be reduced a further 13.2 Mt if a gas tax of 8 cents per litre was imposed from now to 2010. Incremental increases of two cents per litre would generate up to $800 million per year.

Summary of key measures in the Rational Energy Program

  • Commercial building retrofit measures: commercial energy demand would drop by 216 PJ or 17.7% in 2010 relative to Natural Resource Canada's (NRCan) 1994 Update of Canada's Energy Outlook 1992 - 2020 Reference Case. The drop in secondary demand would lead to a 243 PJ reduction in primary demand by 2010 and a 15.5 Mt reduction in CO2 emissions compared to business as usual. Net cumulated dollar savings total $11.3 billion by 2010. Without these actions, NRCan's 1996 business-as-usual Update projects a 23 per cent increase in end-use energy demand for the commercial sector by 2020.

    Goals: Assume that by 2000, 9 per cent of the existing building stock is affected by the program. From 2001 to 2010, 24% more (33% cumulative) would be covered by the program. Assumes that buildings affected by the program will be retrofitted to levels associated with the National Energy Code for Buildings of the day (ie., to the energy intensity of the new stock of buildings). Energy performance contracting used to achieve cost effective efficiency potential in government owned and operated buildings. Assume 35 per cent savings per building and that 42 per cent of federal government owned buildings retrofitted by 2010 (This is FBS's own target). Provincial and municipal governments launch Energy Service Company (ESCO)-driven Municipal/Provincial Buildings Initiatives and retrofit 50 per cent of their buildings by 2005. It is assumed that by the year 2010, the expanded Innovators Program would affect 42% of the retail and hospitality sectors; and 60% of the private commercial sector (Energy Innovators own target). It is assumed that the expanded Innovators Program would achieve an average of 35% energy savings per retrofitted building.

  • Industrial initiatives lower industrial secondary energy demand by 195 PJ or 5.7% in 2010 relative to the Reference Case. The reductions in primary demand and CO2 emissions are 183 PJ and 12 Mt respectively. Net cumulative dollar savings are $4.8 billion by 2010. Without these actions, NRCan's 1996 Update projects a 38 per cent increase in industrial enegy demand between 1995 and 2020.

    Goals: Assume the three measures realize 25 per cent of cost effective potential by 2010. Assume average annual declines in energy intensity of 1.3 per cent between 1992 and 2010 as a result of the program (Forecast Working Group). Major industry declines: pulp and paper: 1.3%; iron and steel: 2.1%; chemicals: 1.3%; smelting and refining: 1.2%.

  • Transportation measures reduce energy use by 567 PJ in 2010, 301 PJ of which can be attributed to stronger fuel economy standards for vehicles (CAFE). Total transportation demand is 26% lower in 2010. The Green Transportation Strategy reduces carbon dioxide emissions by 49.7 Mt by 2010; 26 Mt comes from higher Corporate Average Fuel Economy Standards (CAFE) for vehicles. Net dollar savings of $4 billion for consumers by 2010. Without these actions, NRCan projects an increase in road energy use of 28 per cent between 1995 and 2020.

    Goals: Negotiations with U.S. results in mandatory increases beginning in 1999 to: 5 litres/100 km for automobiles by 2005; 7 l/100km for light trucks. Assume 8 cent/litre increase by 2010. Applies to diesel and to all sources currently charged fuel taxes. Inspection and maintenance: Assume: Toronto, Montreal, Vancouver, Calgary, Edmonton, Ottawa and Winnipeg implement. Vehicles affected by the program are comprised of those that are repaired after failing the test (about 15% of the stock) for a total of 40% of the stock of vehicles. Assume 10% potential fuel efficiency gain per vehicle. Fuel consumption falls 1.4% in Ontario, 1.5% in Quebec and 1.9% in British Columbia. Transportation Demand Management: full cost road pricing: Assume for Toronto, Vancouver, and Montreal by 2000; Calgary, Edmonton, Ottawa and Winnipeg by 2005. By 2010, could reduce transportation energy use by 23% in larger cities, 10% to 12% in medium-sized cities and 0% in small cities, resulting in a 6% reduction for Canada as a whole. Full cost parking and parking management Federal/provincial governments: Federal government amends Income Tax Act to make employer-provided transit passes a tax-free benefit; ends subsidized parking; tax those that provide free parking. Provincial governments: impose parking pricing through regional regulation (air quality regulations, special legislation); tie road improvement funding to requirements for local trip reduction plans incorporating parking pricing and other measures. Municipal governments: 20 per cent cities amend building code/local by-laws to reduce the number of car parking spaces required for each development; develop a parking strategy to increase fees for solo and long-term parkers and give preference to car and van poolers in public parking. Public transit: by 2010, this measure could reduce transportation energy use by 4% to 7% in the larger cities, 1% to 2% in the medium-sized cities and 0.4% in small cities, resulting in a 1.4% energy reduction by 2010. Assume 30 per cent of buses use alcohol fuels by 2005; efficiency standards increase 25%; 10 per cent of fleet zero emission by 2010. Fleet Procurement and Management Program: Program encourages bulk purchases of fuel efficient vehicles and management of fleets for optimum efficiency. The procurement of more efficient fleet vehicles, as represented by best in class type purchases, is projected to affect 1 per cent of the light duty vehicles stocks in 1997, 5% in 2000 and 44% in 2020 (fleet light duty vehicles are assumed to make up 17.6 per cent of car stocks and 40 per cent of light truck stocks). Twenty-five percent of purchases are ultra-efficient vehicles by 2000. Fuel efficiency for the ultra-efficient vehicle selected by assuming government's lead the market by purchasing five years ahead of the CAFE schedule. For example, if the CAFE standard as modelled above is 5l/100km by 2005, governments purchase 25% of vehicles at that standard in 2000; or, assume 5l/100 km by 2000; 4.6 l/100 km by 2005 and 3 l/100 km by 2010.

  • Electricity program measures result in efficiency improvements that reduce electricity load growth in 2010 by 54 per cent. NRCan is projecting an increase in electricity demand of almost 30 per cent by 2020. CANet's target was to reduce this load growth by half. The reduction in the electricity demand results in lower generation by utilities. Conversion requirements decrease by an additional 47 PJ in 2010 and CO2 by 12 Mt. Supply measures reduce conversion requirements by 107 PJ and CO2 emissions by 16 Mt.

    Goals: Assume 50 per cent of projected load growth between 1995 and 2010 is met by efficiency improvements (including internal supply side); assume this has no net cost. As a result of bringing on increased non-utility generation assume 1/4 of projected load growth comes from comes from high-efficiency gas industrial cogeneration at cost effective market prices (baseline: 92 PJ; CANet; 82 PJ - ie. no net cost). Also assume that 3/4 of the gas involved is already being burned. Assume last 1/4 of renewables (baseline: 20 PJ; CANet; 60 PJ for a total of 80PJ), the mix between small hydro, wind and wood waste cogeneration - the wood should be treated as no net CO2.

  • Non-energy reductions aimed at reducing methane emissions from landfills, upstream oil and gas emissions and preventing releases of HFCs contribute 14.42 in reductions.

Impact of Rational Energy Program measures

Sector  PJ in 2010 Reductions in MT of CO2 equivalent in 2010
Residential 54 1.7
Commercial 216 15.5
Industrial 195 12.3
Electricity 154 28.3
Transportation:
Fuel economy standards
301 26
Transportation strategy
266 23.7
Gasoline tax
163.7 13.2
Subtotal 120.7

Non-energy reductions - Mt - C02 equivalent

 

Sector 2000 2005 2010
Landfill methane -3 -3 -3
PFCs -7.75 -7.85 -7.92
HFCs -1.3 -2.5 -3.5
Sub total -21.67 -24.15 -14.42
Total -76.88 -129.88 135.12


Introduction

 This update has been developed with the following points in mind:

1.The federal Government has made it abundantly clear that economic instruments such as a carbon tax is not acceptable. The excise tax on gasoline is included here for two reasons: it is not a carbon charge, and it has the potential to reduce greenhouse gas emissions while generating revenues that more than cover program costs.

2.The original Rational Energy Program failed to significantly reduce emissions growth in the industrial sector.

3.Increased competition in the electricity sector has the potential to significantly increase greenhouse gas emissions if market pressures favour life extension of coal-fired power plants. Nuclear breakdowns in Ontario also are increasing the use of fossil-fuel fired power plants relative to the business as usual reference case, and Nova Scotia and New Brunswick may reduce electricity-related emissions relative to the base case because of access to Sable Island natural gas.

 The increased use of high-efficiency natural gas cogeneration, district energy systems, natural gas, renewable energy and energy efficiency all will contribute to significant emissions reductions in the upstream oil and gas sector, the industrial sector, and the utility sector. The original Rational Energy Program had assumed significant changes in the electricity sector where 50 per cent of load growth came from energy efficiency improvements, 25 per cent of load growth came from increased use of high-efficiency cogeneration and the remaining 25 per cent from the increased use of renewable energy: biomass, small scale hydro and wind.

 These goals could be achieved through a combination of regulatory changes at the provincial level and a national cap and trade program imposed by the federal Government. It is Sierra Club's view that these initiatives could achieve the additional reductions in greenhouse gas emissions required to achieve the 6 per cent reduction goal. The initiatives would compensate for the weakness in the reductions in the industrial sector in the original Rational Energy Program analysis.

 Sierra Club of Canada recommends analysis of the cap and trade option with a timeline for design completion set for the year 2000.

 Set milestones

 It is critically important that milestones be set for achieving the six per cent reduction target.

 By the year 2000, all key federal elements of the program should be in place, including the design of a national cap and trade program, a National Transportation Strategy, a National Atmospheric Fund, and a federal research, development and commercialization strategy for new and advanced technologies. By 2000, a federal/provincial agreement should also be negotiated outlining commitments at the provincial and municipal levels and partnership arrangements on initiatives in the building, electricity, land use and transportation sectors.

 The goals as outlined in the Highlights section clearly show the scale of effort required to achieve reductions. These goals are indicative obviously, but clearly provide guidance with respect to milestones Canada should set for meeting the Kyoto target.

 No time for delay:

 It is absolutely critical that action be taken now to prepare Canada for the new millenium. A calculation by Carl Sonnen of Informetrica shows that each period of delay increases the pace of change required to meet the Kyoto target. According to Sonnen: "the approximate 13 per cent increase in emissions over 1991 - 1997 accounts for 80 percent of what has to be accomplished after 1997 with the new target.

Required average annual percentage reductions in emissions intensity assuming reference economic growth of 2.3 per cent per year:

Action starts in 1998:
1990 levels by 2010 3.3%
6 per cent below 1990 levels by 2012 3.5%
2012 targets with delays:
one-year delay: 3.8%
two-year delay: 4.1%
five-year delay: 5.4%
ten-year delay: 11.0%


What will emissions reductions cost?

 Preliminary cost estimates were provided to Sierra Club by NRCan in the original analysis of the Rational Energy Program. As the initial package included significant revenue generation through a gasoline tax and carbon charge, Sierra Club believed it had developed a revenue neutral package that would achieve reductions while not increasing government expenditures.

 To the degree that a program is aimed at non-government energy consumers, the initiatives outlined here do represent costs to government. In these cases, financial savings from the energy investments flow to the business and consumer sectors. The federal Government has several non taxation revenue options:

1.It can carry the burden of these program costs to generate the larger societal benefits. A portion of projected federal Government revenue surpluses could be allocated to greenhouse gas reductions. The expenditures could be rationalized not only for climate protection, but for air quality improvements, particularly acid rain, smog and particulate. The reductions will bring lower health care costs, and increase economic competitiveness and innovation.

2.It can seek alternative sources of revenue to compensate for the program costs. Options include using revenue from sale of the federal Government share in Hibernia to finance programs and the National Atmospheric Fund. Approximately $500 million could be available from the sale of the Hibernia share.

3.Reduce tax incentives to the oil sands and use the revenue gains to finance greenhouse gas reduction programs. The department of finance estimates the net present value of the total tax expenditure for $15 billion in oil sands investment to be between $75 million and $600 million.

4.Consider the auctioning of permits under a cap and trade program, rather than distribute permits free to industry based on historical consumption.

Federal Government program costs (NRCan): $1994 million (discounted at 7%):

2000 2010
Residential retrofit: 155.5 228.3
Commercial retrofit: 54.5 165.1
Industrial: 96.1 385.3
Transportation:
Transportation demand: 1,257.2 3,332.8
CAFE: 8.2 18.2
Total: 1,571.5 4,129.7
Gasoline Tax revenue 5,912 14,966

 Informetrica analysis of the original Rational Energy Program included revenues from both the gas tax and carbon charge. Expenditures were for the whole program, but are not far off what the revised package would require.

 According to Informetrica:

 Total Government Program Expenditures in millions of $1994 to 2010 discounted at 7 per cent are:

95-00 01-05 06-10 95-10 2010
Average Levels
Program expenditures 1,047.69 3,217.78 4,881.32 2,923.86 5,427.44
Revenues 3,865.23 19,694.45 35,667.81 18,750.17 41,146.65

 It is important to note that these costs to government generate the following net savings:

Cumulative net savings $1994 million (discounted 7%)

2000 2010
Commercial retrofit 2,381.1 11,319.7
Industrial 722.8 4,787.3
Transportation
Demand management +4,945.7 7,846.3
CAFE +2,269.7 3,960
Motor fuel tax

(savings from fuel use reductions)

2,317 11,895
Total savings: +1,794.5 39,808.3

 It can be seen that benefits accrue by 2010 emphasizing the need to begin programs now for full implementation after 2000. A cumulative investment of just over $4 billion by the federal Government to 2010 generates more than $39 billion in energy savings to the economy. Finally, it should also be noted that the expenditures outlined here related to the building retrofit programs could be reduced significantly using the National Atmospheric Fund model, particularly if it employs fee for service.


Proposed actions

The following summarizes the original assumptions made for these initiatives in the 1996 Rational Energy Program. It is essential that the original assumptions be included here, because the Natural Resources and Informetrica analysis which follows is based on these details. Readers should consider the details here as directional only, with results as indicative. Updates on initiatives are being developed and will be included in the final draft of this update.

 1.Commercial/institutional buildings

 NOTE: The National Atmospheric Fund would be designed to achieve emissions reductions in the commercial/institutional building sector. While the goals in terms of retrofit penetration serve as an important guide, strategies outlined here would not necessarily be those used by the Fund.

The commercial sector accounted for 13 per cent of total secondary energy demand in 1995. End uses in the commercial sector include space heating and cooling, water heating, appliances and lighting. Space heating is the largest single component of commercial energy use. In 1995, the commercial/institutional sector was responsible for 5.0 per cent of Canada's energy-related carbon dioxide emissions.

 a)National Commercial Retrofit Program

 This group consists of the following:

  • Retrofit Standards for Commercial Buildings
  • Commercial Retrofit Financing Program
  • National Builder Training Program
  • Expanded Federal Buildings Initiative
  • Expanded Energy Innovators Initiative

 1:Retrofit standards for commercial buildings

  Development of a set of minimum energy efficiency standards for buildings that undergo energy retrofits. The standards would be developed in co-operation with provinces, territories, utilities, other stakeholders and the federal government. For provinces and territories, adoption of the standards will be encouraged as a mandatory requirement. For other jurisdictions, a voluntary approach is used.

Assume that by the year 2000, 13% of the 1995 existing building stock is affected by the program. From 2001 to 2010 22% (35% cumulative) would be covered. Finally, 21% more (56% cumulative) would be covered by 2020. Assumes that the buildings affected by the program will be retrofitted to levels associated with the National Energy Code of the day (ie., to the energy intensity of the new stock of buildings).

  Implementation. Departmental responsibility: Natural Resources Canada. The Department must aggressively encourage provincial governments to work with the National Research Centre to develop guidelines for extending Energy Code standards to retrofits. The guidelines should be complete in time for the next round of Building Code amendments scheduled for the year 2000.

2:Commercial retrofit financing program

  Assume a Energy Efficiency Warranty Program is in place by 1996 and operated by the Canadian Association of Energy Service Companies. The Warranty Program is a capital pool financed with a 6 per cent fee on all projects. The pool reduces risk to lenders and ensures lower borrowing costs for energy service companies. Assume that by 2000, 9 per cent of the existing building stock is affected by the program. From 2001 to 2010, 24% more (33% cumulative) would be covered by the program. Assumes that buildings affected by the program will be retrofitted to levels associated with the National Energy Code for Buildings of the day (ie., to the energy intensity of the new stock of buildings).

  Implementation. Departmental responsibility: Natural Resources

3: National builder training program

Assume building trade associations (architects, engineering, electrical, plumbing, sheetmetal, etc) include training in installation and servicing of efficiency and renewable technologies by 1996 as part of their apprenticeship and certification programs.

Implementation. Departmental responsibility: Natural Resources already pursuing improved training.

4: Expand the Federal Buildings Initiative

  Energy performance contracting used to achieve cost effective efficiency potential in government owned and operated buildings. Assume 35 per cent savings per building (rather than 15-20 per cent assumed by NRCan) and that 42 per cent of federal government owned buildings retrofitted by 2010 (goals in Forecasting Working Group report). Program administered by Public Works.

  Implementation. Departmental responsibility: Natural Resources, already under way within federal buildings; initiative announced to pursue efficiency retrofits in municipalities.

The federal program is expected to generate $17 million in annual energy savings (based on $120 million in private sector investments). The savings can be considered to offset government program costs in this area, or be used to cover Green Power procurement costs.

5: Expand Energy Innovators Initiative

  This voluntary measure is designed to mobilize corporations, institutions, and municipalities across Canada to undertake energy efficiency measures in their facilities.

Provincial and municipal governments launch Energy Service Company (ESCO)-driven Municipal/Provincial Buildings Initiatives and retrofit 50 per cent of their buildings by 2005. Assume 35% saving per building (rather than 15 - 20 per cent assumed by NRCan).

  It is assumed that by the year 2010, the expanded Innovators Program would affect 42% of the retail and hospitality sectors; and 60% of the private commercial sector (goals in FWG report). It is assumed that the expanded Innovators Program would achieve an average of 35% energy savings per retrofitted building.

Implementation. Departmental responsibility: Natural Resources, already under way.

  The federal Government announced in December 1997 details on how it will spend $60 million over three years in commercial buildings. $10 million a year will be allocated to supporting energy efficient design in new buildings, $4 million to a Renewable Energy Deployment Program for renewable energy systems for space and water heating and cooling. The Energy Innovators programhas been expanded.

Natural Resource Canada analsysis: Commercial programs

 As a result of the above Rational Energy Program retrofit measures, commercial energy demand is down by 216 PJ or 17.7% in 2010. The drop in secondary demand leads to a 243 PJ reduction in primary demand by 2010 and a 15 Mt reduction in CO2 emissions.

 Table 3.4

 NET CUMULATIVE COSTS
$1994 Million (Discounted at 7%)

Commercial Sector
National Commercial Retrofit Program

2000 2010
Cumulative Govt. Costs 54.5 165.1
Cumulative Private Investment 632.3 2714.2
Cumulative Energy Savings 3067.9 14199
Cumulative Net Costs -2381.1 -11319.7
Cumulative Secondary Energy Saving (PJ) 319.8 2130.7
Net Cost / Secondary Energy Saving ($1994/GJ) -7.4 -5.3

2.Residential buildings

 National Energy Efficiency Renovation Program:

  • National Green Communities
  • Community urban forestry
  • Home energy retrofit financing programs
  • Low-income energy efficiency retrofit program
  • Renovation/retrofit training program
  • Retrofit building standards
  • National home energy rating system

The residential sector represents slightly more than 20 per cent of end-use demand and generated 8 per cent of greenhouse gas emissions in 1995.

    1.Green Communities


Assumes that energy efficiency upgrades of the space and water heating components of existing houses (single detached and attached) is complemented by development of a home energy rating system (recently announced by NRCan) and a renovation/retrofit training program (see below). Assumes that 0.5% of all existing houses are affected in the first year and then number of affected houses linearly grows to 1.5% by the year 2000 and then remains constant at 1.5% through 2010. Assumes envelope of houses affected by program will be improved by 10% and assumes 10% reduction in the water heating load of affected houses.

 

Implementation. Departmental responsibility: Natural Resources co-ordinates with provincial residential retrofit programs.

 

2.Community urban forestry

 

Assumes minimum of 3,000 trees planted for energy conservation purposes around homes, buildings and heat islands. Using U.S. estimates, the annual amount of carbon saved per tree from cooling energy savings can be 88 pounds per tree per year. This estimate is the product of energy savings per tree (220 kilowatt hours) and the number of pounds of carbon saved per kilowatt hours (.44 pounds).

 

Implementation: Departmental responsibility: Tree Canada

 

3:Home energy retrofit financing program

 

Private sector financing directed to energy retrofits in existing houses. These financing packages would offer favourable terms to induce take-up of measures, including discounted interest rates, more flexible repayment terms, and favourable debt to income ratios. These financing packages could also be offered directly from private sector financial institutions or through energy service companies. On-bill financing by utilities is a preferred option (but unlikely during this period of market restructuring).
Assumes that 0.5% of all existing houses are affected in first year (1995) and then affected houses linearly grows to 2.5% by the year 2000 and then remains constant at 2.5% through 2010. Fifty per cent of houses will be affected by water heating upgrades.

 

The envelope of houses affected by the program will be improved by 15%; assumes a 10% reduction in the water heating load of affected houses.

 

Implementation. Departmental responsibility: Finance and Natural Resources. CMHC. The Canadian Association of Energy Service Companies has indicated that a CMHC sponsored energy-efficiency mortgage program would provide enough of a signal to energy service companies that they would begin offering retrofit packages to the residential market. Currently energy service companies are focused on commercial buildings where the greatest returns are.

    4:National low-income energy efficiency retrofit program

This assumption is extremely difficult to model without knowing the exact makeup of all social housing across Canada, by province, and how much of that governments subsidize energy costs.
Houses covered under the Residential Rehabilitation Assistance Program (RHAP) will be subjected to incremental comprehensive retrofit activities as part of the rehabilitation. Market impact: 11,000 participants per year based on existing RHAP forecast; and breakdown of affected houses by vintage is: pre-1945 - 36%; 1945 to 1960 - 55% and 1961 to 1977 - 9%. Energy savings: The envelope of houses affected by the program will be improved by 12 per cent and the water heating efficiency of affected houses will be improved by 10 per cent.
Implementation. Departmental responsibility: Canada Mortgage and Housing. Amend criteria to make energy efficiency retrofits part of the Residential Rehabilitation Program. RHAP is a program focused on upgrading below standard homes owned by low-income families. The program was recently restructured so that only safety upgrades qualify for the grant portion of the program. Any improvements to energy efficiency - insulation, furnace upgrades, etc., now must be paid for by loans. Low-income people are very loan adverse and the RRAP program should ensure the highest level of energy efficiency in any upgrade. Such a move lowers operating costs for low-income people, as well as creating jobs.
5: Renovation/retrofit training program

 

Building trade associations (architects, engineering, electrical, plumbing, sheetmetal, etc) include training in installation and servicing of efficiency and renewable technologies by 1996 as part of their apprenticeship and certification programs.

 

Co-ordinated the National Energy Conservation Association. R-2000 education programs focus on lawyers, bankers and real estate agents.

 

Implementation. Departmental responsibility: Natural Resources.

 

6: Retrofit Building Standards

 

This is a regulatory measure where, as part of the building permit application, affected areas of the home must be brought up to minimum energy efficiency standards equivalent to levels associated with current building practices. Provinces apply national building code standards to residential retrofits starting in 1995. Assume 33% of annual renovations are eligible for retrofit activity, 67 per cent will participate. Assumes that the envelope of houses affected by the program will be improved by 10 per cent of the difference between existing levels and those associated with current building practices.

 

Implementation. Departmental responsibility: Natural Resources Canada. The Department must aggressively encourage provincial governments to work with the National Research Council to develop guidelines for extending Energy Code standards to retrofits. The guidelines should be complete in time for the next round of Building Code amendments scheduled for the year 2000.

    7:National Home Energy Rating System - existing homes

 

Voluntary program beginning in 1996, but is required to qualify for energy efficient retrofit loans.

 

Implementation. Departmental responsibility: Natural Resources Canada .

 

The federal Government announced an Energuide for Houses labelling program in December 1997; $3 million over three years has been allocated.

Natural Resource Canada analysis: Residential programs

 The above programs reduce residential demand by 54 PJ or 3.7% in 2010. In terms of primary energy demand, this translates into a reduction of 37 PJ, considerably less than the impact of 54 PJ on secondary demand. As a consequence, the CO2 reduction is only 1.7 megatonnes (Mt) in 2010.

  Table 3.2

NET CUMULATIVE COSTS
$1994 Million (Discounted at 7%)

Residential Sector
National Energy Efficiency Renovation Program

2000 2010
Cumulative Govt. Costs 155.5 228.3
Cumulative Private Investment 781.6 2118.5
Cumulative Energy Savings 323.6 1887
Cumulative Net Costs 613.5 459.8
Cumulative Secondary Energy Saving (PJ) 51.1 434.3
Net Cost / Secondary Energy Saving ($1994/GJ) 12 1.1

Sierra Club is recommending that a National Green Communities program be launched which would be supported by the National Atmospheric Fund. In comparison to other initiatives, the costs for the residential program are high and the emissions reductions are small. The recommendation is included because a residential retrofit program is critically important in educating Canadians about energy efficiency and the importance of climate protection. Education in the home will extend to the workplace. It is also the view of Sierra Club that NRCan's assumptions for the residential sector are too aggressive. That is improvements will not be as high as originally projected. As a result, initiatives in this sector are likely to achieve greater reductions than outlined here.

 Finally, a Green Communities initiative provides the federal Government with an important vehicle for gaining profile in communities across Canada.

 

3.Industrial program

 The industrial sector is the largest energy using sector accounting for 43 per cent of total end-use demand in 1995, generating 20 per cent of national greenhouse gas emissions.

 Energy Efficient Industry Initiative

- Industrial efficiency indicators
- Benchmarking/best practices
- Industrial Energy Innovators program
- Tax incentives for energy efficient industrial process investments
- Electric Drivepower Challenge

1: Industrial efficiency indicators

Natural Resources Canada will expand the current Canadian Industrial Program for Energy Conservation (CIPEC) and work towards developing an extended industry network, accelerating the development of a comprehensive data base of Canadian industrial energy use, indentifying energy efficiency improvement targets, and developing implementation plans to attain the established targets.

2: Promote benchmarking/best practices

Natural Resources Canada will work with industrial energy consumers to rank their energy use in major industrial processes against domestic and international results for similar processes. The information will be uswed to develop Energy Consumption Guides that will help companies perform a self-assessment. NOTE: was to be implemented in 1997: check with NRCan.

3: Industrial Energy Innovators Program

 

Natural Resources Canada will work with utilities, industry associations and major industrial energy users to assist Canadian companies in developing and implementing their energy efficiency improvement plans. This will be done through the formation of associations of plants that will facilitate technology transfer, the conduct of energy audits to identify opportunities, the negotiation of a commitment from industry and the recognition nationally and internationally of companies' accomplishments.

 

Assume the three measures realize 25 per cent of cost effective potential by 2010. Assume average annual declines in energy intensity of 1.3 per cent between 1992 and 2010 as a result of the program.
Major industry declines: pulp and paper: 1.3%; iron and steel: 2.1%; chemicals: 1.3%; smelting and refining: 1.2%.

 

Implementation. Departmental responsibility: Natural Resources, already under way.

 

Assume half of expense of the program costs taken on by gas and electric utilities (rather than by government).


4:Tax Incentives for energy efficient industrial investments

 

Under this economic instrument, the federal government will provide a special tax incentive for prescribed investments to increase energy efficiency in industrial processes. This incentive would take the form of a higher Capital Cost Allowance (than currently allowed under the Income Tax Act) or a reduction of sales tax.
Assume: Efficient technologies in all of the industrial sector are eligible to participate in the program. Capital costs of efficient technologies would be reduced by an average of 10 per cent in all industrial sub-sectors. The level of penetration of efficient technologies is then determined by the investment decision criteria of the ISTUM model. Program starts in 1997.
Measure leads to decline in energy intensity over the 1992-2010 period in: pulp and paper: 1.4%; iron and steel: 2.2%; chemicals: 1.3%; smelting and refining: 1.3%.

 

Implementation. Departmental responsibility: Finance.

5. Electric Drivepower Challenge

Natural Resource Canada's Reference Outlook's electricity intensity is assumed to decrease by 1 per cent annually between 1992 and 2010. This implies specific penetration rates and energy efficiency of electricity using equipment, including drives and motor driven equipment, which are available for the major sectors reviewed in detail for this anlaysis (pulp and paper, iron and steel, chemicals and smelting and refining).
Under this voluntary measure Natural Resources Canada, drivepower manufactuers, industrial energy users and electric utilities will work together to increase the market penetration of efficient industrial electric drivepower systems. The program will use a Showcase Demonstration competition in the context of a national marketing effort.

 

Since the objective of the measure is essentially aimed at the realization of financially attractive energy efficiency potential through the provision of information etc.. it was assumed that this measure could result in the realization of 25 per cent of the economicaly attractive energy efficiency potential identified for motor driven equipment.

 

NRCan currently has an information program aimed at improving electric drive efficiency: it is not enough.

Table 3.5

NET CUMULATIVE COSTS
$1994 Million (Discounted at 7%)

Industrial Sector
Energy Efficient Industry Initiative

2000 2010
Cumulative Govt. Costs 96.1 385.3
Cumulative Private Investment 165.1 575.4
Cumulative Energy Savings 984 5748
Cumulative Net Costs -722.8 -4787.3
Cumulative Secondary Energy Saving (PJ) 215 1661.5
Net Cost / Secondary Energy Saving ($1994/GJ) -3.4 -2.9

4.Electricity program

Electricity generated 17 per cent of Canada's greenhouse gas emissions in 1995. Over 80 per cent of Canada's electricity production is generated by hydro and nuclear power. Greenhouse gas emissions stem from: coal, 14 per cent; natural gas 3 per cent and oil, 1 per cent.

 Green power

- Electric and gas least cost planning
- Develop supporting government policies
- Sustainable ethanol initiative
- Stimulate renewable energy markets
- Develop renewable energy infrastructure
- Research and development

1:Gas and electric least cost planning

 

Electricity: Assume 50 per cent of projected load growth between 1995 and 2010 is met by efficiency improvements (including internal supply side); assume this has no net cost. As a result of bringing on increased non-utility generation assume 1/4 of projected load growth comes from comes from high-efficiency gas industrial cogeneration at cost effective market prices (baseline: 92 PJ; CANet; 82 PJ - ie. no net cost). Also assume that 3/4 of the gas involved is already being burned. Assume last 1/4 of renewables (baseline: 20 PJ; CANet; 60 PJ for a total of 80PJ), the mix between small hydro, wind and wood waste cogeneration - the wood should be treated as no net CO2.
Distribution of renewables:
PEI:4 PJ; 8 MW of biomass; 35 MW of wind
NS:2 PJ; 32 MW biomass; 35 MW hydro; 128 MW wind
ONT:30.6 PJ; 400 MW biomass; 433 MW hydro; 1650 MW wind
AB:22.8 PJ; 450 MW biomass; 1850 MW wind
SK:5.7 PJ; 115 MW biomass; 460 MW wind

 

Gas:Assume 4 per cent energy efficiency savings; assume gas IRP all provinces where gas is used. Model to 2005 and 2010; assume no net cost to governments or utilities or customers. Also assume some fuel switching is induced as part of least cost plan.

 

2: Develop supporting government policies

 

Set a renewable energy target for Canada. The Rational Energy Plan assumes that cost effective renewable energies supply 25 per cent of projected electrical load growth by 2010 - this goal should become a national renewable energy target for Canada.
The federal Government announced a Renewable Energy Strategy in Oct. 1996. The strategy does not include a target. Funds of $9 million have been allocated for activities in research, development and commercialization. Tax changes under the Income Tax Act include: Canadian Renewable and Conservation Expense and relaxing Specified Energy Property Rules. There are no estimates of the impacts of these measures.

 

3: Off diesel program for remote communities

 

Federal government commits to increasing cost effective renewable (wind/biomass) in remote communities as part of an off-diesel program.
Implementation. Departmental responsibility: Natural Resources: This program is already under way through the PV for the North program. According a CANMET study of economic potential for photovoltaics in the NWT, "the cost of diesel in NWT communities range from $0.55/L to $1.30/L, not counting the cost of maintaining a required local infrastructure. This fuel cost translates to electricity production costs which range from $0.20 to $0.50/kWh in the communities and much more in remote areas. In many instances, subsidies are used to keep the cost of electricity at a reasonable level for users." The study says there is potential to supply 17,721 kW of electricity from PV and the best markets are in commercial communication systems, territorial parks and the diesel grid.
4: Government procurement

 

Federal, provincial and municipal governments and Voluntary Challenge companies commit to meeting 15% of their energy needs from renewable energy by 2005 (transportation - ethanol and electricity - wind, biomass, small hydro).
Current Green Power pilot offsets emissions from electricity in Environment Canada and Environment Canada buildings in Alberta: needs extensive expansion.

 

Implementation. Departmental responsibility: Public Works. In addition, all new buildings - residential or commercial - must exceed minimum building code requirements - C-2000 or R-2000. The department should also explore with Natural Resources the possibility of adopting the proposed S-2000 standard (solar). Change purchasing policies to ensure the purchase of recycled materials, energy efficient vehicles and equipment, particularly office equipment.

5: Sustainable ethanol initiative

 

Assume a 10 per cent renewable energy content; 100 per cent penetration by achieved by 2005.

 

Assume: a mix of grain and ligno-cellulose based ethanol provides a 10 per cent net reduction in CO2. Assume federal excise tax exemption nationally and provincial sales tax exemptions in Ontario, Manitoba and British Columbia until 2005.

 

Implementation: Departmental Responsibility: Natural Resources/Department of Finance: Make commercialization of lignocellulose biofuels a priority within CANMET and/or through the use of investment tax credits or carbon credits. The key to reducing lifecycle emissions of carbon dioxide from liquid fuels is to pursue feedstocks that require low inputs and can be converted to biofuel as efficiently as possible. Grasses like switchgrass, and woody plants like hemp show promise. It is absolutely essential that biofuels not be used in inefficient vehicles. Such a program would create unacceptable land use problems. The goal must be to use biofuels in highly efficient vehicles, preferably those with high fuel economy ratings and then, over time, those using fuel cells or hybrids.

 

A National Biomass Ethanol Program was announced in 1994 which provides access to $65 million in credit between 1999 and 2005 to build or expand ethanol plants in Canada. The line of credit is only available if government reduces or eliminates the excise tax exemption for ethanol in the future.

  6: Stimulate renewable energy markets

 

Assume that by 1998 CANMET allocates 25% of current funding to commercialization and demonstration of renewable energy ($124 million - of which $42.8 million comes from PERD - for a total of $31 million).

 

Implementation. Departmental Responsibility: Natural Resources. Stop cuts to CANMET's expenditures on energy efficiency and alternative energy. While these sectors will not be cut as much as the hydrocarbon sector by 1997-98 (57% cut versus 12 and 18% for efficiency and alternatives), the cuts come at a time when Canada needs more emphasis on sustainable energy options. In addition, only $12 million will be allocated to alternative energy in 1997-98, while efficiency will receive $20 million. The focus should be on ensuring long-term development of renewable energy supply - this is where more funding should be directed.

 

In addition, funding has been cut to commercialization. Many renewable energy technologies do not need more research, they need on the ground experience where the general public can develop confidence in their efficacy.

7: Develop renewable energy infrastructure

 

Assume that by 2000, safety and performance standards are developed and incorporated into provincial building and electrical codes (for 2000 amendments to the National Building Code).

 

Assume builder training programs developed under buildings initiatives include training in renewable energy systems for builders, electricians, building and electrical inspectors.

 

Implementation. Departmental responsibility: Natural Resources.

 

8: Research and Development

 

Policy statement. Assume by 1998, 50 per cent of all PERD funding ($83.7 million / 50% = $41.8 million) is allocated to research and development of renewable energy options, including fuel cells.

 

Implementation. Departmental responsibility: Natural Resources is already undertaking a review of the PERD allocations, although options are limited because $172 million of the $255 million going to AECL.

Natural Resource Canada's analysis: Electric Least Cost Planning Assumptions

 The efficiency improvements resulting from CANet's energy saving measures reduce load growth in 2010 by 54 per cent, slightly more than CANet's 50 per cent target. The reduction in the electricity demand results in lower generation by utilities. With respect to the assumption on renewables, there are some reliability concerns, related especially to generation from small hydro and wind. To address these concerns some additional capacity would be required. These requirements have not been included because it is not clear who should pay for this reserve capacity.

 As mentioned earlier, both the demand and supply measures affect the electric utility sector. As a result of imposing all the demand efficiency measures simultaneously, conversion requirements decrease by an additional 47 PJ in 2010 and CO2 by 12 Mt. The supply measures (i.e., the three elements above) reduce conversion requirements by 107 PJ and CO2 emissions by 16 Mt.

Achieving reductions in the industrial and electricity sectors: Establish a task force to design a national cap and trade program to reduce greenhouse gas emissions from large emitters, including the electricity, industrial and upstream oil and gas sectors.

 

5.Transportation program

 The transportation sector consumed 56 billion litres in 95 of which 82 per cent was used for road transportation contributing 27 per cent of Canada's 1995 greenhouse gas emissions.

 National Green Transportation Strategy

  • Corporate Average Fuel Economy Standards (CAFE)
  • National Urban Transportation Demand Management Program
  • Fleet procurement and management program
  • Increase motor fuel taxes
  • Adopt inspection and maintenance program

    1: Corporate Average Fuel Economy Standards

 

Negotiations with U.S. results in mandatory increases beginning in 1999 to: 5 litres/100 km for automobiles by 2005; 7 l/100km for light trucks.

 

Implementation: Departmental Responsibility: Natural Resources Canada (responsibility for CAFE standards should rest with Environment Canada, negotiations should begin to transfer responsibility for the Motor Vehicle Fuel Consumption Act): Launch negotiations with Canadian motor vehicle manufacturers aimed at raising fuel economy standards for cars to 5 litres/100 km for cars to 7 litres/1000 km for light trucks. The legislation is already in place to undertake this activity: the Liberals passed, but did not proclaim, the Motor Vehicle Fuel Consumption Act in 1981. Canada can unilaterally raise fuel economy standards should it choose to do so. The Canadian market represents 10 per cent of the North American market just as California does, and that state seems to have little difficulty taking unilateral action. An analysis by NRCan of the impact of the lower standards showed the potential to reduce carbon dioxide by 10 million tonnes by 2000 and by 26 million tonnes by 2010. The initiative could begin by launching negotiations with the U.S. on raising the standards (Canada currently voluntarily adopts the U.S. standard which hasn't increased since 1982). The unilateral option should always be on the table.

 

One way to drive motor vehicle manufacturers to improve fleet efficiency quickly is to include light utility vehicles in the same category as cars. At the moment, cars and light trucks are treated separately. It should come as no surprise that sport utility vehicles, considered light trucks, have replaced stationwagons.
If the two classes of vehicles are not merged into one category, raise fuel economy requirements for light duty vehicles.

2: National Urban Transportation Demand Management Program

 

Implementation. Departmental responsibility: Federal/provincial finance and transport departments. The goal is to have $1.5 billion a year invested in the Transportation Options Program. The Program operates on a matching grant basis; $3 billion from the federal government; $3 billion from provinces, municipalities. Federal contribution to the fund comes from the gasoline tax; provincial contribution comes from three sources: shift from road building subsidy budgets, full cost parking and road pricing for a total of $3 billion over four years (total $6 billion).
- Full cost road pricing
Assume for Toronto, Vancouver, and Montreal by 2000; Calgary, Edmonton, Ottawa and Winnipeg by 2005. By 2010, could reduce transportation energy use by 23% in larger cities, 10% to 12% in medium-sized cities and 0% in small cities, resulting in a 6% reduction for Canada as a whole.

 

Implementation. Departmental responsibility: Transport through Council of Transport Ministers in conjunction with 20 Per Cent Club.

- Full cost parking and parking management

Federal/provincial governments

-Federal government amends Income Tax Act to make employer-provided transit passes a tax-free benefit in 1995;

-ends subsidized parking in 1995; tax those that provide free parking
Implementation. Departmental responsibility: Finance/Public Works. All parking subsidies are eliminated for federal departments and Crown corporations.

Provincial governments

-impose parking pricing through regional regulation (air quality regulations, special legislation)

-tie road improvement funding to requirements for local trip reduction plans incorporating parking pricing and other measures.

  Implementation. Departmental responsibility: Council of Transport Ministers.

Municipal governments:-

20 per cent cities amend building code/local by-laws to reduce the number of car parking spaces required for each development by 1995

-develop a parking strategy to increase fees for solo and long-term parkers and give preference to car and van poolers in public parking.

Implementation. Departmental responsibility: Federation of Canadian municipalities in conjunction with 20 Per Cent Club secretariat.
- public transit
By 2010, this measure could reduce transportation energy use by 4% to 7% in the larger cities, 1% to 2% in the medium-sized cities and 0.4% in small cities, resulting in a 1.4% energy reduction by 2010.

 

Assume 30 per cent of buses use alcohol fuels by 2005; efficiency standards increase 25%; 10 per cent of fleet zero emission by 2010.

 

- development of climate friendly urban plans and mixed-use, higher density development

 

Implementation. Departmental responsibility: Environment Canada through 20 Per Cent Club Secretariat and provincial municipal affairs departments.

 

Fleet Procurement and Management Program

 

Program encourages bulk purchases of fuel efficient vehicles and management of fleets for optimum efficiency. The procurement of more efficient fleet vehicles, as represented by best in class type purchases, is projected to affect 1 per cent of the light duty vehicles stocks in 1997, 5% in 2000 and 44% in 2020 (fleet light duty vehicles are assumed to make up 17.6 per cent of car stocks and 40 per cent of light truck stocks).

 

Twenty-five percent of purchases are ultra-efficient vehicles by 2000. Fuel efficiency for the ultra-efficient vehicle selected by assuming government's lead the market by purchasing five years ahead of the CAFE schedule (CANet's CAFE schedule as per scenario five). For example, if the CAFE standard as modelled above is 5l/100km by 2005, governments purchase 25% of vehicles at that standard in 2000; or, assume 5l/100 km by 2000; 4.6 l/100 km by 2005 and 3 l/100 km by 2010.

 

The federal Government's FleetWise program encourages the use of efficient and alternative fueled vehicles. Projections: 21% reduction of CO2 from 1990 levels by 2000 and 33% by 2005.

 

3: Increase motor fuel taxes

 

Assume 2 cent/litre increase by 1998 budget. Further increases: 2 cent/litre in 2000, 2005 and 2010. Applies to diesel and to all sources currently charged fuel taxes. These increases on top of cost of living increases.

 

Implementation. Departmental responsibility: Finance.

4:Adopt a national inspection and maintenance program within urban areas

 

Assume as follows: Toronto, Montreal, Vancouver, Calgary, Edmonton, Ottawa and Winnipeg implement. Vehicles affected by the program are comprised of those that are repaired after failing the test (about 15% of the stock) for a total of 40% of the stock of vehicles. Assume 10% potential fuel efficiency gain per vehicle.
Fuel consumption falls 1.4% in Ontario, 1.5% in Quebec and 1.9% in British Columbia.

 

Implementation. Departmental responsibility: Environment Canada/provincial transport departments. Consider adding emission control testing to Motor Vehicle Safety Inspections. The program would cover both trucks and cars and would be required once a year (once a car or light utility vehicle is more than two years old; heavy use trucks, more often). The Safety/emissions certificate would be required to obtain vehicle permits. Departmental responsibility: Federal and provincial Public Works. Implement inspection and maintenance programs for all government fleets to ensure maximum efficiency. The same program could be offered to federal employees.

Natural Resource Canada analysis: Transportation Program

 As a whole, these measures reduce energy use by 567 PJ in 2010, 301 PJ of which can be attributed to CAFE standards. Total transportation demand is 26% lower in 2010 and total secondary demand is 10.7%. These reductions lead to a drop in CO2 emissions of 50 Mt by 2010.

 Motive Fuel Tax

 The CANet program assumes that the excise tax on gasoline is increased by 2 cents per litre in 1996 followed by another 2 cents in 2000, 2005 and 2010. Thus, the tax is 2010 is 8 cents per litre higher than the post budget rate. An equivalent tax is applied to diesel fuel. It should also be noted that the motive fuel tax increases are assumed to be harmonized with those of the U.S. The 8 cents tax increase leads to 164 PJ and 13 Mt reduction in energy demand and CO2 emissions respectively by 2010. A further reduction of 1 Mt occurs as a result of the application of the tax to motive fuels used in agriculture (see Residential section of Table 1).

Table 3.6

NET CUMULATIVE COSTS
$1994 Million (Discounted at 7%)

Transportation Sector
Green Strategy* (Excluding Ethanol)

2000 2010
Cumulative Govt. Costs 1257.2 3332.8
Cumulative Private Investment 6617.5 17912.9
Cumulative Energy Savings 2929 29092
Cumulative Net Costs 4945.7 -7846.3
Cumulative Secondary Energy Saving (PJ) 238.1 3736.5
Net Cost / Secondary Energy Saving ($1994/GJ) 20.8 -2.1

* Includes CAFE Standards

Table 3.7

NET CUMULATIVE COSTS
$1994 Million (Discounted at 7%)

Transportation Sector
CAFE Standards

2000 2010
Cumulative Govt. Costs 8.2 18.2
Cumulative Private Investment 2268 6438
Cumulative Energy Savings 6.5 10416
Cumulative Net Costs 2269.7 -3960
Cumulative Secondary Energy Saving (PJ) 0.6 1518.6
Net Cost / Secondary Energy Saving ($1994/GJ) 3783 -2.61

Achieving these reductions: Canada needs a National Transportation strategy. Establish a task force to develop the strategy. The task force would be advisory in nature and would have one year to report for implementation by 2000.

 6.Non Energy Sources of greenhouse gases

  Methane capture or emissions avoidance

  • Landfill methane capture
  • Methane upstream oil and gas and downstream capture

 

1: Landfill methane capture

 

Environment Canada, in collaboration with appropriate provincial government agencies and other stakeholders should co-ordinate the development of an Environmental Code of Practice for Solid Waste Landfill Gas Management. This Code would identify and share best engineering and operating practices and identify the economic implications of its implementation on the basis of typical case studies.
Environment Canada, in collaboration with other stakeholders such as utilities, developers and government agencies, should undertake an assessment of the technical and economic potential of using landfill gas. Environment Canada, in collaboration with appropriate provincial agencies, should promote the adoption of this Code by operators of municipal sold waste landfills. Based on the extent to which this Code is implemented, the Canadian Council of Ministers of Environment (CCME) in collaboration with the National Air Issues Mechanism, may investiage the need for a national reduction target for methane from landfills and the use of economic instruments or regulations to achieve the target.

 

It is estimated that in 1990 the amount of methane generated from landfill sites was 992,229 tonnes. Of this amount it is estimated that approximately 220,000 tonnes was captured and combusted. For the years 2000 and 2005 it is estimated that the baseline level for methane being generated will be 1,036,603 and 1,059,939 tonnes, respectively.

 

In collaboration with Environment Canada, the Climate Action Network, assumes a total of 51 landfill capture projects proceed (marginal cost of $10/tonne of CO2 equivalent. Thirty nine for electricity generation; five flaring; four heat recovery. Discount rate of 7 per cent; assumes 7.5 cents per kWh (bought by utilities from landfill operators) and each project is profitable. Costs $4.4 million a year.

 

Ontario proposed regulations in 1996 that would require collection of methane from sites with emissions of more than 2.5 Mt. Projections: capture of 3.2 Mt of methane over 40 year life of the landfills.

 

Implementation. Departmental responsibility: Environment Canada.

 

2: Methane upstream oil and gas and downstream capture

 

Upstream oil and gas operations account for almost one third of methane emissions in Canada. Natural gas reduction and processing account for one half of these emissions; oil production just over one third. CO2 emissions account for 2 per cent of the Canadian energy-related total. Distribution losses in the natural gas industry are estimated to amount to less than 1 per cent of Canada's methane emissions in 1990.
Assume 25% reduction in methane emissions by 2000.

 

Voluntary action by the upstream oil and gas sector is projected to reduce methane emisisons by 9 Mt of CO2-equivalent by 2000, 15 Mt by 2010 and 17 Mt by 2020 relative to the base case, essentially returning methane emissions to 1990 levels.

Implementation. Departmental responsibility: Natural Resources.

3: Methane reduction: downstream gas distribution sector

 

Assume 30% reduction to 2000 (Natural Gas STAR estimate).

 

Implementation. Departmental responsibility: Natural Resource.

4.Reduce emissions from aluminum smelters

 

Older aluminum smelters using horizontal stud Soderbertg (HSS) technology tend to emit 30 - 60 per cent more polyfluorocarbons (PFCs) than those using the newer "Prebake" anode technology (Unisearch, March 1994 and Bell, March 1994). While most Canadian smelters already use the new Prebake technology, there may be opportunities to develop low-emission PFC techniques for other facilities.

 

Environment Canada, in collaboration with L'Indsutrie de L'Aluminum, Environnement Quebec, and other appropriate stakeholders, will evaluate the technical and economic feasibility for new low-emission PFC technology for existing Canadian smelters. It will co-ordinate the development of an "Aluminum Challenge Program" aimed at securing voluntary agreements for emission reductions from specific smelters.

 

It is estimated that for 1990, the emission levels for CF4 and C2F6 were 1.4 kt and 144 tonnes respectively. For the year 2000, the base case emission levels for CF4 and C2F6 are expected to be 1.86 kt and 192 tonnes, respectively. For the year 2005, it is estimated that the base case emissions levels for CF4 and C2F6 will be 1.88 kt and 195 tonnes, respectively.

 

Assume a 40 per cent reduction in polyfluorocarbon emissions by 2000.

 

Implementation. Departmental responsibility: Environment Canada.
5.Control emissions of HFCs and other substitutes for ozone layer depletion substances

Environment Canada, in collaboration with industry, government, non-government organizations and other stakeholders are revising the Code of Practice for the Reduction of Chlorofluorocarbon Emissions from Refrigeration and Air Conditioning Systems (the Code) to also include HFCs and HCFCs.

Environment Canada, in collaboration with stakeholders, will continue training and information programs to control emissions of HFCs and HCFCs. Provinces will be encouraged to adopt the appropriate regulations to re-cover and re-use HFCs and HCFCs.
In 1990, the baseline levels of HFCs and HCFC were 0 and 6,740 tonnes respectively. In the year 2000, the baseline levels for HFC and HCFC are expected to be 2,966 and 9,154, respectively. For the year 2005, the baseline levels for HFC and HCFC are expected to be 5,794 and 7,815 respectively.

 

Assume provinces expand the Code of Practice for the Reduction of Cholorfluorocarbon Emissions from Refrigeration and Air Conditioning Systems to include hydrofluorocarbons (HFCs) and hydrochlorofluorocarbons (HCFCs) by the year 2000.
Implementation. Departmental responsibility: Environment Canada through Canadian Council of Ministers of the Environment.


Appendix A:

Impact of the Rational Energy Program on the Economy

Analysis by Informetrica Limited

NOTE: This analysis is based on the original Rational Energy Program, not the summary provided here. For comparison, the full program generated potential reductions of just over 173 Mt, while the summary provides just over 135 Mt. As the differences are not that extensive, the Informetrica work still provides important directional detail.

 This analysis includes one particularly important intiative not in the current summary: a carbon tax. The tax was small and added after all other initiatives were in place. As a result, emissions reductions were small: only 15 Mt, but revenue generation was large: cumulated $77 billion by 2010 - including gasoline tax, carbon tax and vehicle feebate revenues. The Rational Energy Program used the revenues to fund programs, reduce the Goods and Services Tax and to finance the Transportation Options program.

 The federal Government obviously remains resistant to the carbon tax option. An emissions trading regime is a good alternative in that it affects energy prices just as a carbon tax would do. There are two key differences between the two approaches: an emissions cap ensures a specific emissions level will be achieved, while a carbon tax provides more certainty on revenues; the other key difference is where revenues go: a carbon tax generates revenues for governments (depending on the level of recycling); a trading regime could generate windfall profits for industry if permits are distributed free rather than auctioned.

1.Study sponsor assumptions

 A.Initiative costs and financing

 Table 1 summarizes the assumed costs of the Rational Energy Program initiatives (see page 56). Also included in the input to this were discussions with NRCan, to ensure that technical detail for specific initiatives was correctly interpreted and consistent with the Department's understanding of the initiatives used in the development of their estimate of energy savings.

 In its details, the Rational Energy Program proposals are similar to Scenario Five (see Appendix 6) of the set of scenarios evaluated by Informetrica for the Forecast Working Group. At a cumulated $33 billion (1994 dollars over 1995 - 2010) initiatives that directly affect the spending of households, governments and business producers are modestly less than the spending of Scenario Five. The application of a strengthened motor fuel fax, and introduction of a carbon tax, however, produce a tax impact (with potential spending effects on households, business and governments) that are much larger than the tax effects included in Scenario Five. In the Rational Energy Program proposals, total tax, or revenue options cumulate to $77 billion over 1995 - 2010.

 Combining the direct dollar impacts of both spending-related initiatives and revenue actions (a cumulated $119 billion) produces a Rational Energy Program scenario that is more "robust" than Scenario Five by more than $50 billion over 1995 - 2010.

 This raises an important analytical issue that is not completely resolved in this analysis. Revenue actions are assumed to have direct energy conserving effects, but (as contrasted to initiative specific details), this does not cause households, businesses, or governments to invest in or otherwise spend funds to directly cause the energy savings. In this sense, the method applied leads to a downward bias in assumptions about the extent to which the Rational Energy Program proposals have resource-using direct impacts on the economy. On the other hand, the literature on instruments suggests that market-based instruments such as a motor-fuel and carbon tax would lead directly to a more "efficient" behaviour of adjustment by households, businesses and governments. To the degree this is true, the bias noted above is offset.

 
Table 1
Green House Gas Study Canet Assumptions, by Initiative (Millions of 1994 dollars)
Average Levels

Annual Levels

Total Govt Program Exp 408.88 672.96 700.27 582.46 701.34

Revenues 1863.36 6142.69 6954.29 4791.56 7409.93

Transfers 8.98 0.00 0.00 3.37 0.00

Total Household/Producer Exp 1505.41 3165.29 1613.00 2057.75 1546.72

Total Producer + Govt Program 1914.28 3838.25 2313.27 2640.21 2248.06

(% of Base Case GDP) Discounted at 7% 0.23 0.42 0.23 0.29 0.22

Total Govt Program Exp 334.62 392.16 291.79 339.22 254.20

Revenues 1472.91 3568.71 2893.13 2571.67 2685. 70

Transfers 8.73 0.00 0.00 3.27 0.00

Total Household/Producer Exp 1216.64 1834.39 672.11 1239.52 560.60

Total Producer + Govt Program 1551.25 2226.55 963.90 1578.73 814.80

Cumulated from 1995

Total Govt Program Exp 1204.36 4439.47 7914.36 4312.21 9319.39

Revenues 4523.43 29023.76 62539.45 30309.79 76665.01

Total Household/Producer Exp 4193.81 18127.76 29691.12 16516.08 32923.94

Total Producer + Govt Program 5398.17 22567.23 37605.48 20828.29 42243.33

Discounted at 7% Total Govt Program Exp 1047.69 3217.78 4881.32 2923.86 5427.44

Revenues 3865.23 19694.45 35667.81 18750.17 41146.65

Transfers 48.77 52.38 52.38 51.03 52.38

Total Household/Producer Exp 3551.19 12804.02 18572.91 11136.98 19832.30

Total Producer + Govt Program 4598.88 16021.80 23454.23 14060.84 25259.74

"Govt Program" denotes expenditures for government wages, purchases of goods, etc. Does not include transfers to business or persons, nor effects of revenue initiatives.
"Household/Producer" denotes expenditures undertaken by the private sector (households and business), as well as government expenditures that follow from effects on their operations.

In any event, these competing implications for the direct effects on behaviour are not resolved in this analysis. It does point to the need for further "micro" analysis of the direct effects of introducing conserving "signals" via specific action initiatives versus those following from generalized market-based instruments. It is our conclusion that this unresolved analytical issue leads in results to an underestimate of the direct resource-using impacts of the Scenario, and therefore, for example, to an underestimate of the short-term positive impacts on employment. We are unable to resolve the extent of this (net) bias, however, and note further, that it is confounded by assumptions we have made about offsetting reductions in other generalized indirect taxes (see below).

 As a general rule, initiatives that are specific to actions of households, businesses and governments, directly cause increased investment spending on structures, or machinery and equipment which is presumed to be energy savings. (In some instances, this alters the process of production as well.) In any event, we assume that this constitutes a direct reduction in financial savings of those who are undertaking the additional spending (compensated as below) by reduced spending for energy.

 For businesses, the net effect of these offsetting direct spending influences determines unit costs of production and ultimately industry price formation. Net direct influences on household savings are otherwise uncompensated. Governments are compensated for their additional current spending (largely to develop and administer the programs of the Scenario) through revenue actions of the Scenario. Their own additional investment in energy-savings equipment and structures is, as for households and business, largely compensated for by reduced current spending for energy inputs in the operation of the public sector.

 B.Energy Savings

 The energy savings that are assumed to be directly associated with the incremental costs outlined above are introduced as reduced current, annual spending on households, governments and businesses for energy produced by industries, electric power, natural gas, and refined petroleum and coal product industries. Reductions in the demand for the products of the latter industry impact demands for upstream producers of oil (and some coal). Reductions in demand for electric power are similarly translated back to reduced demands for coal and other primary energy inputs.

 Reduced demand of households for energy products is direct, in that spending of households is defined for consumption of electric power, refined petroleum products including fuel for household heating and personal transportation, and coal products. Reduced spending of governments for energy inputs is introduced as reductions in annual spending for purchased goods and services of the federal, provincial and municipal governments, where the allocation of this reduction is targeted on relevant energy producers in proportion to their spending among these suppliers in the Base Case.

 Reduced demand of business for energy inputs is accomplished by changes to the technology that links the production of each industry to its material suppliers. These are targeted to relevant energy industries on the basis of NRCan estimates of impacts for reductions in demand, by industry, by energy commodity. In our framework, this reduces the demand for 40 industries, including all energy-intensive industries.

 Table 2 provides a representative view of the assumed energy savings introduced into the simulation. As this indicates there are significant, widespread savings across all sectors of consumption in the economy. After 15 years (2010), reductions from the Base Case levels widely range between 10 and 20 per cent, with in some instances, consumption being cut to half the levels otherwise anticipated. By that time, overall reductions in this Scenario exceed those of the earlier Scenario Five by about 7 percentage points. Most of this accelerated reduction occurs after the end of the 1990s.

Table 2 Green House Gas Study
Energy Savings, Industry, Households and Governments

(% Impact)

--------------------------------------------------------------------------
Canet 95-00 01-05 06-10 95-10 2010 ---------------------------------------------------------------------------
Average Levels

Oil and Gas, Upstream
Electric Power -0.63 -3.12 -5.94 -3.07 -7.04
Natural Gas -0.19 -2.59 -5.65 -2.65 -6.85
Petroleum Products -0.21 -2.34 -4.99 -2.37 -6.04
Pulp & Paper
Electric Power -3.62 -10.64 -14.36 -9.17 -15.82
Natural Gas -2.74 -8.94 -12.65 -7.78 -14.13
Petroleum Products -2.86 -9.01 -12.53 -7.80 -13.92
Primary Metal - Iron and Steel
Electric Power -3.02 -9.17 -13.16 -8.11 -14.76
Natural Gas -2.29 -7.74 -11.69 -6.93 -13.29
Petroleum Products -2.11 -7.33 -11.03 -6.53 -12.53
Smelting
Electric Power -2.14 -7.76 -12.05 -6.99 -13.60
Natural Gas -1.47 -6.66 -10.92 -6.05 -12.49
Petroleum Products -1.64 -6.60 -10.59 -5.98 -12.05
Cement & Clay Products
Electric Power -1.54 -6.95 -12.26 -6.58 -14.30
Natural Gas -1.00 -5.88 -11.02 -5.66 -13.02
Petroleum Products -1.13 -6.23 -11.32 -5.91 -13.28
Petroleum & Coal Refining
Electric Power -1.54 -6.95 -12.26 -6.58 -14.30
Natural Gas -1.00 -5.88 -11.02 -5.66 -13.02
Petroleum Products -1.13 -6.23 -11.32 -5.91 -13.28
Industrial Chemicals
Electric Power -3.74 -10.91 -14.85 -9.45 -16.40
Natural Gas -2.53 -8.55 -12.44 -7.51 -13.99
Petroleum Products -2.74 -8.48 -12.04 -7.44 -13.47
Other Manufacturing
Electric Power -1.54 -6.95 -12.26 -6.58 -14.30
Natural Gas -1.00 -5.88 -11.02 -5.66 -13.02
Petroleum Products -1.13 -6.23 -11.32 -5.91 -13.28
Electric Utilities
Natural Gas -3.21 9.75 -3.60 0.72 -1.50
Petroleum Products -9.56 -31.77 -34.53 -24.30 -39.10
Coal -6.26 -23.19 -35.42 -20.66 -40.42
Electric Power -0.56 -1.15 -1.14 -0.93 -1.13 ---------------------------------------------------------------------------
Table 2 (continued)
Green House Gas Study Ex Ante Energy Savings, Industry, Households and Governments (% Impact)
---------------------------------------------------------------------------
Canet 95-00 01-05 06-10 95-10 2010 ---------------------------------------------------------------------------
Average Levels

Truck Transportation
Petroleum Products -6.56 -18.17 -29.96 -17.50 -33.16
Retail Trade
Electric Power -2.20 -8.55 -15.08 -8.21 -17.56
Natural Gas -2.85 -10.40 -17.21 -9.70 -19.55
Petroleum Products -2.87 -10.24 -16.81 -9.53 -19.05
Governments Federal
Electric Power -2.20 -8.55 -15.08 -8.21 -17.56
Natural Gas -2.85 -10.40 -17.21 -9.70 -19.55
Petroleum Products -2.87 -10.24 -16.81 -9.53 -19.05
Households
Residential
Electric Power -1.00 -4.37 -8.24 -4.32 -9.75
Natural Gas -1.31 -5.98 -10.82 -5.74 -12.75
Petroleum Products -1.51 -5.13 -8.87 -4.94 -10.34
Personal Auto
Petroleum Products -7.06 -23.99 -45.09 -24.24 -51.34 ---------------------------------------------------------------------------

Changing Rational Energy Program costs into direct economic effects

 A.Initiative-specific economic costs

 For the most part, directs costs impacts are translated into incremental spending for investment by households, governments and businesses. In addition, governments, who are assumed to develop and enforce actions associated with the Scenario will be faced with additional spending for employees and associated overheads of purchased goods and services. Households are faced with significant additions in spending for repairs, the real value of energy-saving appliances, and urban transit.

 Information supplied to the study in terms of 1994 dollars, is converted to spending at the prices of 1986, the constant-dollar measure of "real" economic activity in the model being used for this analysis. Table 3 indicates, in 1986-dollar terms, the flow of spending over the 15 years of 1995 - 2010. Table 4 indicates the extent to which such assumed spending is proportionately large, or small for major sectors of the economy.

Table 3
Final Demand, Direct Impacts on Economy Millions of 1986 Dollars
---------------------------------------------------------------------------
Canet 95-00 01-05 06-10 95-10 2010
---------------------------------------------------------------------------
Average Impact Impact
Total, All Final Demand
Total, Levels 1974.8 3308.1 2466.9 2545.2 2367.84 (% of Base Case GDP) 0.3 0.5 0.3 0.4 0.28
Government
Current 178.7 393.6 413.2 319.1 412.86 Excluding CCA 153.3 302.0 289.4 242.3 288.81 Capital 171.4 389.9 275.4 272.2 278.51 Total 350.1 783.5 688.6 591.3 691.37
Households
Residential 491.6 849.0 852.7 716.1 853.00 Personal Consumption 1024.4 1575.7 1312.5 1286.7 1432.09 Total 1515.9 2424.7 2165.1 2002.8 2285.09
Business
Total 108.7 99.9 -386.9 -48.9 -608.63 Excluding Electric Power 400.1 934.2 898.3 722.7 922.47
---------------------------------------------------------------------------
As table 3 indicates, between the three sectors, spending effects overall are concentrated in that of households. Still the spending of governments is significant, allocated approximately half and half between additional capital spending (to yield reduced spending by governments for energy) and current spending for "program administration." The former is concentrated most heavily at the provincial level, while the latter (current spending) is concentrated approximately evenly between the federal and provincial governments.

 The small, or reduced investment spending for business masks important details. The overall result for business reflects an assumed notable reduction in spending of the electric power utilities (who are faced with diminished requirements for their product). For other industries, there are notable increases. These are concentrated in spending of the upstream oil and gas industry, iron and steel, petroleum refineries, industrial chemicals, pulp and paper, urban transit, transportation of natural gas, finance insurance and real estate, and commercial services. Most other industries also bear some cost, but as a proportion of total spending by businesses, they are small.

 It should be recognized that annual spending of households, businesses and governments is otherwise large, and under any reasonable definition of a Base Case, will be increasing from current levels over the next 15 years. Table 4 indicates the extent to which we can gauge whether such additional spending is proportionately large or not.

 Using a sustained one percentage point increase as a measure of "large", the spending indicated in Table 3 is notable for: federal wages and salaries, federal and provincial capital spending on buildings, federal highways and roads, investment of the iron and steel, urban transportation, warehousing and storage, gas distribution, and commercial service industries, home-owners spending on alterations and improvements of residences and current spending on new passenger vehicles (particularly in 2001-2005) and motor repairs, urban transit and appliances.

Table 4
Final Demand, Direct Impacts on Economy Millions of 1986 Dollars ---------------------------------------------------------------------------
Canet 95-00 01-05 06-10 95-10 2010 ---------------------------------------------------------------------------
Average % Impact % Impact
Total, All Final Demand
Total, Levels 0.3 0.5 0.3 0.4 0.29(% of Base Case GDP) 0.3 0.5 0.3 0.4 0.28a
Government Current 0.2 0.3 0.3 0.3 0.30 Excluding CCA 0.2 0.3 0.2 0.2 0.23 Capital 0.9 1.7 1.1 1.2 1.02 Total 0.3 0.5 0.4 0.4 0.42
Households Residential 1.4 2.1 1.8 1.8 1.72 Personal Consumption 0.3 0.4 0.3 0.3 0.32 Total 0.4 0.5 0.4 0.5 0.45
Business
Total 0.1 0.1 -0.2 0.0 -0.36 ---------------------------------------------------------------------------
(a) Level Impact

B.Tax impacts

 As was indicated in Table 1, motor fuel, carbon tax and other revenue actions are a major element of the Rational Energy Program. These have been introduced as changes to consumer and producer (energy-related) tax rates to produce the assumed flows of revenues indicated in Table 1. Additional revenues so generated are assumed to compensate governments for the additional current spending undertaken to develop and administer the initiatives of the program.

 This, however, leaves a large sum that, if not recycled, would directly reduce government deficits and debt. This, of course, is one of several mechanisms that could be used. While it would directly benefit government savings with the potential for reduced borrowing costs of governments, it directly reduces savings of households and businesses so that the potential to directly reduce general borrowing costs is problematic. In addition, as these tax increases are introduced over time, they directly add to the aggregate price level, and would almost certainly be perceived to be pro-inflationary with possible unfavourable impacts on "competitiveness."

 Alternatively, the excess funds could be returned to households or businesses as reduced direct taxes to compensate them for their added spending, but it should be noted, their general compensation is already provided for through reduced spending for energy (as an assumption). The same consideration, of course, applies to government for its added capital formation. And, in any event, this would leave the inflationary and unfavourable, general competitiveness shock to the economy still in place.

 Also, alternatively, additional funds could be used to fund specific public investments with widespread application for private use (e.g., urban transit), or possibly to reflect regressivity dimensions that follow from the application of indirect taxes. In the former instance, this could be used to reduce the price implications of increased transit fares to finance the capital, but the extent to which additional tax revenues would be applied to such forms of compensation would still leave large "excess" revenues to be disposed of, and as importantly, reduces the relative price signal that is presumably desired to encourage citizens to use even more energy-savings forms of transportation (walking, cycling, etc.). And, on the whole, inflation and competitiveness impacts would still be present.

 The noteworthy recycling of dollars for equity or regressivity considerations through reduced direct taxes or increased transfer to households targeted by income status represents an administrative difficulty since it may involve complex inter-governmental transfer considerations, and of course, continuing difficulties in determing who is qualified. Tax credit provisions would be one mechanism. And importantly, as would be true for a generalized direct personal tax reduction, this would still leave in place inflation and competitiveness impacts.

 Given these considerations, this study has assumed (as was true for most of the Scenarios analysed by Informetrica for the Forecasting Working Group), that a reduction in a general indirect tax would be made to compensate for aggregate inflation and competitiveness effects. In this instance, the Goods and Services Tax rate is progressively reduced from 7 per cent through the second half of the 1990s to a rate of 5.5 per cent in the year 2000 and thereafter. This directly offsets most of the revenue gains accruing to governments from increased Scenario-defined taxes, and neutralizes the impacts of those on aggregate costs of production and prices.

 It may be noted that payroll tax and other generalized (across industries) instruments could have been used for this purpose, and this does not constitute a recommendation that a reduction in the specific tax used for the study is under consideration. It should also be noted, of course, that relative prices of goods and services are increased in proportion to their energy content, a desired objective of the Scenario.

Summary of national economic effects

 A.Overview

 The four-panel graphics on the following page indicate some of the major consequences of the Rational Energy Program, given our assumptions about re-cycling tax revenues. Table 5 provides some quantitative measures of the effects, and more detail.

 Table 5
Major Indicators, Canada ---------------------------------------------------------------------------
Canet 96-00 2000 01-05 06-10 2010
---------------------------------------------------------------------------
Average % Impact
Total Real Demand and Output 0.59 0.90 0.75 -0.69 -0.22
Final Domestic Demand 0.51 0.80 0.64 -0.60 0.06
Employment 0.77 1.18 1.29 0.04 0.54
Employment (000s) (a) 107.9 169.9 190.9 6.9 85.0
Unemployment Rate (%) (a)-0.6 -1.0 -0.9 0.0 -0.4
Labur Force 0.07 0.06 0.25 0.04 0.12
Business Capital Stock 0.26 0.33 0.43 -0.66 -0.70
Total Factor Productivity 0.12 0.16 -0.02 -0.28 0.07
All-Government Borrowing($Bns) (a)-1.4 -1.6 -0.5 6.0 4.2
Federal (SNA Basis)(a) -0.9 -1.9 2.2 5.8 6.8
Current Account Balance($Bns) (a) 0.1 0.4 0.7 4.0 1.6
Exchange Rate (cents US/$Can) (a) 0.0 0.0 0.0 0.0 0.0
Consumer Prices (Annual Change)-1.20 -2.07 -1.89 0.26 0.06
GDP Deflator (Annual Change) -1.09 -1.85 -1.52 0.82 0.59

Exchange Rate (centsUS/$Can) (a) 0.0 0.0 0.0 0.0 0.0
90-day Commercial Paper (%) (a) -0.3 -1.3 0.5 0.0 0.6
Real 90-day Rate (2) (a) 0.0 0.0 0.0 0.0 0.0
Corporate Long-term Bonds (a) -0.2 -0.5 0.1 0.2 0.1
Real Bond Yield (2) (a) 0.0 -0.2 0.2 -0.3 0.1
---------------------------------------------------------------------------
(a) Average Level Impact
Overall, real output of the economy is initially increased from otherwise expected levels, to the middle of the next decade. Following a short period, when activity is reduced below that of the Base Case, the economy returns, overall, to Base Case levels of activity by 2010. Far more important to note is that the size of the economy never exceeds, or falls below, the level of the Base Case by much more than one percentage point. Since the economy in 2010 can be expected to be 35 - 45 per cent larger than in 1994, variations from the Base Case of these magnitudes are close to minute (less than one-third of a year's growth at the most) in a 15-year period.

 Following largely from increased real output, employment is increased in the economy. Cumulated over 1995 - 2000, this adds more than 550,000 person years of employment. This is followed by a cumulated addition of about 1 million in 2001 - 2010. These employment effects, and a slight reduction in overall price levels, produces a higher real disposable income per household throughout the 15 years.

 Increases in employment also partly reflect a shift of production from relatively high output per employee industries (e.g., energy producers) towards others (service industries). Offsetting this reduction in overall output per employee is an improvement in output per unit of capital stock in the business sector. Reduced production in the capital-intensive energy sectors also reduces the overall size of producers' capital stock. Taking that sector as a whole, there is little change to Total Factor Productivity through the outlook. Given some small increase in the size of the labour force, we conclude that the Rational Energy Program would do little to alter the potential growth of the economy by shifting from a less-to-more labour intensive overall form of production.

 Taking all levels of government together, government borrowing is reduced through early in the next decade and increased thereafter. Given this profile of positive and then negative effects on government borrowing, if this is discounted at 7 per cent, cumulated effects on government debt stocks are positive (debt is reduced) through 2008. If discounted at 10 per cent, the debt reduction is extended to the year 2010. Variations from this result are reasonable, and dependent on timing of the changes to generalized tax offsets (the GST in this instance). What is important to note, is that even with initial reductions in the generalized tax rate, the results suggest positive effects on balances initially, affording some "room" for later manoeuvre.

B.Impacts on demand

 Table 6 reports the effects of the Rational Energy Program on the major aggregations representing demand within the economy. For consumption, government spending and business residential and non-residential investment, much of the impact reported is traceable directly to the "costs" reported in Table 3. Even so, as Table 6 indicates, at these major levels of aggregation for demand, the magnitude of the changes reported are modest in almost all cases, or less than the amount of variation that can be expected within any one year. Also, variations in personal savings rates, which are increasing throughout the impact period, could by itself, reasonably restore consumer spending to positive effects in the later years being reported.

 Changes to the economy from impacts in the foreign trade sector reflect reduced unit costs of production, and both aggregate and detailed industry prices through the first several years. Largely, this reflects induced effects of the scheduled GST rate price reductions in 1995 - 2000. Stable tax rates thereafter, tightening labour markets, and small variations in payroll taxes from early in the next decade through to 2010 produced a recovery in price levels over that time. Given these cost and price changes, net exports initially contribute to positive effects on total output, and are then a small drag on overall demand. Again, reasonable variations from the magnitudes and pattern of these effects are possible. The central point of note is the small magnitude of effects.

Table 6
Demand Indicators: Canada
---------------------------------------------------------------------------
Canet 96-00 2000 01-05 06-10 2010
---------------------------------------------------------------------------
Average % Impact
Gross Domestic Product at Market Prices (Bn$86):
Consumption Expenditure 0.39 0.89 0.76 -0.49 -0.08
Government Expenditure 0.20 0.26 0.15 -0.79 -0.75
Business Investment 1.17 1.08 0.79 -0.72 1.02
Residential 1.84 2.40 2.61 1.83 1.33
Nonresidential 1.27 1.14 -0.76 -2.58 1.47
Machinery & Equipment 0.76 0.36 0.55 -1.18 0.73
Memo:Investment Effort(%)(a) 0.2 0.1 0.1 0.0 0.3
Inventory Change (a) 0.2 0.3 -0.1 -0.1 0.7
Net Exports (a) 0.4 0.5 0.9 -0.6 -3.0
Exports (+) 0.30 0.44 0.27 -0.87 -0.84
Imports (-) 0.17 0.29 -0.03 -0.71 -0.07
Final Domestic Demand 0.51 0.80 0.64 -0.60 0.06
Gross Domestic Product 0.59 0.90 0.75 -0.69 -0.22
Nonresident Investment Income Receipts (+) 1.07 1.86 1.55 -0.69 -0.45
Payments (-) -0.06 -1.06 1.42 -0.41 -0.76
Gross National Product 0.64 1.03 0.72 -0.70 -0.20
---------------------------------------------------------------------------
(a) Average Level Impact
C.Government balances and other incomes

 The annual balances of governments overall are strengthened through 2003, and are subsequently adversely affected in these results. Initial improvements are dominated by the revenue-promoting impacts of a larger economy, reinforced in smaller degree, by reduced welfare and other transfer payments of provincial and municipal governments. (Federal payments for unemployment insurance are also reduced through increased employment, but contribution rates adjust to keep the UI fund balance unchanged over time. This effectively neutralizes the financial implications for the federal government of reduced UI payments).

Table 7
Public Sector Balances and Debt National Accounts Basis ($Billions, Nominal) ---------------------------------------------------------------------------
Canet 96-00 2000 01-05 06-10 2010
---------------------------------------------------------------------------
Average Impact
All-Government & CPP/QPP Annual Balance 1.4 1.6 0.5 -6.0 -4.2
Debt -4.0 -3.5 -14.0 11.2 24.7
Ratio to GDP -0.11 0.24 -0.81 0.74 1.57
Federal Annual Balance 0.9 1.9 -2.2 -5.8 -6.8
Debt -3.8 -5.7 -3.2 23.9 36.3
Ratio to GDP -0.18 -0.15 0.03 1.75 2.45
CPP/QPP Annual Balance 0.1 0.0 0.7 0.8 1.2
Assets 0.1 0.3 2.0 6.2 7.8
Ratio to GDP 0.03 0.06 0.20 0.47 0.54
Provincial, Local, Hospitals Annual Balance 0.4 -0.3 2.0 -1.0 1.4
Debt -0.1 2.5 -8.8 -6.5 -3.8
Ratio to GDP 0.09 0.45 -0.64 -0.54 -0.34
---------------------------------------------------------------------------

Increased deficits from early in the next decade are traceable largely to assumptions and reactions in the economy related to re-cycling of the carbon tax through a federal reduction in the GST rate. Implemented as an ex ante assumption, the GST rate reduction was targeted on offsetting the more than $75 billion in revenues brought in through changes in motor fuel and carbon taxes. But reduced demand for energy yields a lower energy-tax revenue result (+$27 billion cumulated over 1996 - 2010 for the federal government). Reductions in GST revenues cumulate to $64 billion over the same period. Consequently, government deficits are increased after 2003, on an ex post basis, and the debt-to-GDP ratios of governments rise. As implemented in our analysis, the effect is concentrated at the federal level. As well, this promotes positive effects on real output and employment during the next decade.

 One may reasonably suppose that if governments were able to perfectly forecast the effect of the Rational Energy Program on energy-based revenues that any offsetting financial initiatives designed to recycle the revenues could be adjusted accordingly. As noted above, this would "protect" government financial results, but at the expense of long-run real output and positive employment effects that we report. What should be recognized, however, is that early-period positive effects on the real economy and on government financial results should be positive, providing governments with time to plan for later effects.

 Our results suggest an increase in real disposable income per capita of about one per cent by the end of the 1990s, with this level of positive effect sustained over the following decade. This longer-term effect, however, is explained partly by the net stimulus to economic activity from the fiscal arrangements that are assumed to persist. Net national business income is initially weakened, but over the longer term is increased. Again, however, this is sensitive to the fiscal setting assumed to prevail.

 D.Industry effects

 Table 8 indicates the sectoral consequences of the impact. The principal finding is that apart from energy producers, there are no large implications for production in the economy.

 Increased "costs" in the form of additional consumer spending for more energy-efficient appliances and vehicles, and business and government spending for new structures and equipment are reflected in relatively strong positive effects for producers of durable and investment goods industries, and their supplying primary sector, and transportation service industries. Positive income consequences for household incomes are also reflected in these industries, but notably in increased activity among the consumer-oriented service industries, especially the "hospitality" industries providing accommodation, restaurant and recreation services.

 Longer-term, the most notable effects are in the hospitality industries. This reflects the positive effects on household incomes, that in turn, are partly traceable to the fiscal impacts detailed above.

 Energy-intensive ("using") industries are largely unaffected by the Rational Energy Program. This follows from the detailed assumptions of the Program. That is, while producers bear an added cost of production from investment in energy-conserving equipment, their operating costs are effectively reduced by energy-savings consequences of the investment. Additionally, reductions in the GST rate reduces selling prices, although the benefits of this to most energy-intensive industries is small since the rate does not apply in any event to exports, to which most of these industries are highly sensitive.

 Energy-producing industries are adversely affected, generally by notable amounts. Although these industries are typically energy-intensive users as well and their competitive position in international trade is unaffected or even improved slightly, this result follows directly from the assumption that capacity that is "freed up" by reduced domestic demand for energy cannot be successfully applied to increased exports, or substitution of imports. The exception to this assumption, and the results, is the primary oil production where the burden of reduced domestic demand is assumed to be born principally by reduced imports of crude.

Table 8
Gross Domestic Product by Industry Millions of 1986 Constant Dollars ---------------------------------------------------------------------------
Canet 96-00 2000 01-05 06-10 2010
---------------------------------------------------------------------------
Average % Impact
Total-GDP 0.69 1.02 0.97 -0.44 0.16
RESOURCE-BASED GOODS 0.51 0.77 0.23 -1.48 -1.19
Food, beverage & tobacco 0.67 1.02 0.88 -0.66 0.08
Wood & paper 1.34 2.09 2.42 0.90 1.53
Energy -0.35 -0.54 -1.98 -4.12 -4.70
Oil & Gas Mining 0.15 0.12 0.24 0.20 0.20
Refineries -1.92 -2.21 -5.13 -10.52 -11.14
Electric Power Utilities-0.52 -0.85 -2.82 -6.67 -7.46
Gas Utilities -1.39 -2.56 -5.43 -10.10 -11.87
Chemicals&chemical 0.99 1.48 1.31 -0.21 0.54
Metallic minerals&products 1.21 1.73 1.57 -0.03 0.65
DURABLE AND INVESTMENT GOODS 1.10 1.28 0.89 -1.47 -0.34
Machinery&eqpt(nonelectric) 1.34 2.00 1.22 -1.33 -0.97
Transportation eqpt. 0.62 1.02 0.29 -0.43 -0.10
Electrical&electronic 1.45 1.57 1.59 -3.78 -2.33
Construction & related 1.17 1.19 0.81 -0.74 0.81
BUSINESS-RELATED SERVICES 0.86 1.29 1.63 0.22 0.99
Transportation services 1.30 1.91 2.26 0.92 1.62
Communications 1.12 2.29 2.12 0.95 1.86
Finance & insurance 0.46 0.33 1.29 0.07 0.78
General services to business 0.81 1.07 1.07 -0.94 -0.23
GOVERNMENT & SOCIAL SERVICES 0.13 0.18 0.26 -0.32 -0.13
Government services 0.08 0.14 0.10 -0.21 -0.14
Education 0.05 0.09 0.17 -0.07 0.06
Health & social services 0.25 0.30 0.51 -0.63 -0.25
CONSUMER GOODS AND SERVICES 0.86 1.40 1.48 0.26 0.92
Accommod.,restaurants&recr. 2.02 3.43 4.26 1.42 3.23
Wholesale and retail trade 1.03 1.70 1.57 0.10 0.85
Other consumer goods&srvcs 1.04 1.56 1.79 0.31 1.15
Imputed rent owner dwlngs 0.02 0.04 0.09 0.07 0.06
---------------------------------------------------------------------------

The public sector (accounting for a little less than one-fifth of long-term production) is largely unaffected by the Rational Energy Program. Longer-term small negative effects are traceable to increased deficits of governments. Changes to assumptions about the extent to which GST rate reductions offset energy-tax revenues, as outlined earlier, would alter this result.

 The employment consequences of these sectoral changes are detailed in Table 9. Results are largely a reflection of the output results reported in Table 8. Accordingly, reservations about the extent of positive effects after the 1990s are a reflection of the uncertain fiscal setting. Of some interest, however, is the fact that job losses in the energy-producing sectors are comparatively small, reflecting the capital-intensive nature of production in these industries. Thus to the extent that negative effects on output are concentrated in these industries, the overall employment effect will tend to be muted.
Table 9
Employment, Establishment Basis (Thousands of Person-Years) ---------------------------------------------------------------------------
Canet 96-00 2000 01-05 06-10 2010
---------------------------------------------------------------------------
Average Impact
Total - Employment 107.9 169.9 190.9 6.9 85.0
Resource-Based Goods 11.3 16.3 17.3 -13.7 -7.8
Food, beverage & tobacco 5.0 7.3 7.8 -6.4 -2.5
Wood & paper 1.7 2.6 3.9 0.9 0.4
Energy -0.6 -1.0 -3.1 -7.8 -8.3
Chemicals&chemical prdcts 1.5 2.0 2.6 -0.5 0.4
Metallic minerals & products 3.8 5.5 6.0 0.2 2.3
Durable&Investment Snsitv 17.7 18.5 14.9 -14.1 14.8
Machinery and eqpt.(nonelec) 0.8 1.2 1.4 -0.9 -0.8
Transportation eqpt. 2.3 3.2 2.5 -1.6 1.2
Electrical & electronic 1.9 1.9 1.7 -4.6 -2.4
Construction & related indus 12.7 12.2 9.3 -7.1 16.9
Business-Related Services 27.7 41.0 46.4 5.8 16.2
Transportation services 15.3 22.6 23.1 13.4 13.7
Communications 3.2 5.3 6.6 1.3 3.6
Finance & insurance 1.1 1.5 3.7 0.4 -0.5
General services to business 8.2 11.7 13.1 -9.2 -0.6

Consumer Goods & Services 48.5 90.6 107.3 41.6 69.5
Accommod., restaurants&recr. 25.8 46.5 57.2 9.7 37.1
Wholesale and retail trade 15.9 34.3 36.2 31.0 26.4
Other consumer goods&srvcs 6.8 9.8 13.8 0.9 5.9
Government & Social Srvcs 2.6 3.4 5.0 -12.8 -7.8
Government services 0.3 0.4 -0.4 -4.1 -3.9
Education 0.3 0.6 1.0 -1.3 -0.3
Health & social services 1.9 2.5 4.4 -7.4 -3.6
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Summary of provincial economic effects

 For the Canadian economy as a whole, and compared to performance expected in the Base Case economy, total real production (measured by GDP at Factor Cost) is increased from 1996 forward. The peak positive effect of 1.5 per cent is reached in 2002. Reduced positive effects on demand from household, business and government spending related to the output of energy yield negative effects on total output, with this being most pronounced (-1.2 per cent) in 2006. Following that period, increasing fiscal stimulus returns to the size of the total economy to Base Case levels by 2010. Table 10 summarizes the allocation of these all-Canadian effects among provinces.

Table 10
Provincial Major Indicators Gross Domestic Product ($86 Mn)
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Canet 96-00 2000 01-05 06-10 2010
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Average % Impact
Canada 0.7 1.0 1.0 -0.4 0.2
Newfoundland 0.4 0.6 0.6 -0.1 0.4
Prince Edward Island 0.6 0.9 1.0 0.0 0.6
Nova Scotia 0.4 0.7 0.6 -0.9 -0.4
New Brunswick 0.5 0.7 0.6 -0.9 -0.4
Quebec 0.8 1.2 1.3 0.0 0.7
Ontario 0.8 1.1 1.1 -0.6 0.1
Manitoba 0.6 1.0 1.1 -0.3 0.2
Saskatchewan 0.6 1.1 0.5 -1.1 -0.7
Alberta 0.4 0.7 0.1 -1.1 -0.8
British Columbia 0.8 1.1 1.3 0.2 0.8
Territories 0.5 0.9 0.6 -0.2 0.2
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As the table reports, the basic pattern of effects over time is generally applicable to each of the provinces. Small distinctions reflect the varying sensitivity of industrial sectors to the impact, and varying weights of each industry in the total activity of each province. Impacts in two of the provinces are notably distinct, however.

 The extent of the positive effects in early years is larger than for the economy as a whole, and there is no reduction in overall activity during the mid-part of the next decade in Quebec and British Columbia. Although each of the provinces is affected by general positive effects of additional investment, negative effects of reduced energy demand and output, and the positive effects of fiscal stimulus in later years, the down sizing of energy production in energy utilities in Quebec and British Columbia is insignificant because of the dominant role of hydroelectric energy production in their electric power systems. Further, in both provinces, electric power exports (which are assumed to be unaffected by the initiative), are a relatively large source of demand for provincial production of power. And for British Columbia, production of coal, which in other provinces is notably reduced, is unaffected because of the export orientation of the province's industry. The largely neutral effect in Prince Edward Island reflects the large weight of public services, which are little changed by the Rational Energy Program, and of agriculture, which benefits from improved real disposable incomes, in the province.

 The impact in Alberta also deserves special notice. In this province, reduced refinery, electric power, natural gas distribution and other energy industries are notably affected negatively, as in other provinces. Given the weight of these industries in the province, there are overall adverse effects on production. But production of crude oil is little changed in the province given our assumption that reduced Canadian demand for crude oil is achieved through reductions in imports. Given the large weight of this industry in the province, adverse impacts that might otherwise be expected for the province are muted.

 As has been reported above, except for several years at the mid-point of the next decade, aggregate real output is increased. Further, through reduced production of the capital-intensive energy industries, there is an overall shift in the economy from capital to labour-intensive production. Accordingly, impacts on employment are generally positive over the 15 years of the impact period, including the period in the next decade when output is reduced.

 Table 11 reports employment effects for each of the provinces, and estimates of the effect on each province's unemployment rate. As this details, the general national pattern of effects is common to each of the provinces, with absolute levels of employment impact sensitive to the relative size of the province's employment base and, with some modest variations among the provinces, proportionately equal effects.

 What should be noted is that employment effects in the middle of the next decade are negligible for the country as a whole, and for each of the provinces. This result, however, is conditional in substantial degree to the extent which governments would be prepared to continue a GST rate reduction (or other form of recycling energy-tax revenues) at amounts that more than compensated for the energy tax revenues received.

Table 11
Provincial Major Indicators Employment ('000s) ---------------------------------------------------------------------------
Canet 96-00 2000 01-05 06-10 2010
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Average Impact
Canada 107.9 169.9 190.9 6.9 85.0
Newfoundland 1.5 2.3 2.1 -1.0 0.2
Prince Edward Island 0.5 0.7 0.8 0.0 0.3
Nova Scotia 2.6 4.3 4.6 -0.9 1.2
New Brunswick 2.5 3.7 4.0 -0.6 0.8
Quebec 28.0 42.2 49.9 2.7 23.8
Ontario 39.8 61.7 71.9 0.9 28.5
Manitoba 4.0 6.5 7.3 0.4 2.7
Saskatchewan 3.4 5.8 5.2 -1.3 0.7
Alberta 10.3 18.5 16.2 -0.4 8.7
British Columbia 15.3 24.2 28.9 7.0 18.0
Unemployment Rate (per cent)
Canada -0.6 -1.0 -0.9 0.0 -0.4
Newfoundland -0.5 -0.9 -0.6 0.3 0.0
Prince Edward Island -0.7 -1.1 -1.1 0.0 -0.4
Nova Scotia -0.4 -0.6 -0.6 0.2 -0.2
New Brunswick -0.5 -0.9 -0.7 0.1 -0.1
Quebec -0.6 -1.0 -0.9 0.0 -0.4
Ontario -0.6 -1.0 -1.0 0.0 -0.4
Manitoba -0.7 -1.1 -1.1 0.0 -0.4
Saskatchewan -0.7 -1.2 -0.9 0.3 0.0
Alberta -0.7 -1.2 -0.9 0.0 -0.4
British Columbia -0.7 -1.1 -1.1 -0.2 -0.6
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Principal findings and qualifications

 Over the course of the 15 years, the Rational Energy Program by itself cannot change the size of the Canadian economy or employment, or that of any province by as much as one-year's growth, given the circumstances assumed in this analysis. Indeed, under those circumstances, there is a reasonable chance that total output would be increased during the early years of any initiative. Positive effects in the longer term are more problematic, but negative effects, while possible would be proportionately small.

 With large reductions in domestic energy demand, reduced production, employment and incomes in the energy industries is possible. Among energy-intensive using industries, the effects on their domestic demand and foreign trade circumstances may (as in these results) be effectively neutral. Positive effects on household real incomes suggests positive impacts on production of (the generally labour-intensive) service industries. Impacts on production of the government and other "social" sectors should be largely neutral.

 Two conditions are central to these findings. First, taken together, the cost of actions taken to reduce the use of energy must be matched by a roughly equivalent reduction in spending for energy by households, governments, and businesses. If supposed economic savings (reduced annual spending for energy) do not match the economic costs of achieving those savings, long-term, overall consequences are likely to be negative if Canada pursues such actions unilaterally. Unit costs of production would be increased relative to our trading partners, promoting reduced exports and increased imports. Failure to achieve reduced household spending for energy would have to be financed through either reduced spending for other goods and services, or through reduced savings. In the former event, impacts would be concentrated on demand that is ultimately supplied in large measure by labour-intensive production. In the latter event, reduced household savings would represent an upward pressure on Canadian interest rates.

 Second, for the longer term, although effects from general reactions in the economy also play a role, recycling of added energy-tax revenues through additional spending or tax reductions (as is assumed in these impacts) would have to exceed the ex post receipt of energy taxes. In the event that governments operate the fiscal system such that impacts on government balances are neutral, it is likely that the overall size of the economy and employment would be reduced to levels that are modestly lower than in the Base Case. Private household and business incomes would reflect that circumstance. This would enhance the balance sheet of governments beyond those reported in this study, but adversely affect those of households and businesses. This reallocation of savings among governments, households and businesses arguably should have little effect on general interest rates.

 We note as well that the choice of how to recycle energy tax revenues is crucial. The use of such funds to compensate households and/or businesses through direct income-tax reductions, or use of the funds to finance the capital formation needed to achieve energy reductions would leave the general economy with a higher aggregate price level, and likely a loss of international "competitiveness". Targeted allocation of such funds to capital formation (e.g., for a transit system) would distort allocation of capital with the potential for long-term reductions in the growth potential of the economy.

 Since impacts that are directly traceable to Rational Energy Program initiatives by themselves would have relatively small implications for the general economy and most industrial sectors, it should be understood that the nature and magnitude of the effects are also conditioned by what otherwise is happening in the economy. Three considerations are important.

 First, general borrowing costs can have a significant influence on sector incomes over time. In this analysis, the Base Case assumes that general borrowing costs remain relatively high (matching those of the last decade) for an indefinitely long period of time. Accordingly, borrowing by households and businesses to finance their capital expenditures diminishes net income of these two spending groups over time. As well, such an interest rate setting exaggerates the fiscal consequences of directly overestimating the extent to which energy-related tax revenues should otherwise be compensated.

 Second, international energy prices affect the value of real energy savings. The income effects in this analysis are sensitive to the underlying Base Case view that "real" world oil prices are increasing by an average one per cent annually over 1996 - 2010. To the extent that energy price levels might otherwise be lower than is assumed, this exaggerates the financial savings of reduced energy demand. Higher international prices, conversely, would provide increased financial benefits.

 Third, during periods of increased overall demand on the economy, the extent to which there are unemployed real resources in the economy can play a role in the size of impacts. In a fully employed economy, for example, additions to demand would likely be reflected in inflationary effects to a larger extent than is reported in this analysis. It should be kept in mind, however, that this analysis examines effects over a 15-year period. Judging from the record of the last generation, it is reasonable to suppose that, on average, otherwise unemployed resources (especially of labour) will be available to the economy.

 Finally, we note that this analysis assumes initiatives of the kind proposed in the Rational Energy Program are undertaken by Canada unilaterally, and we have made no attempt to account for "externalities" of the initiative. Accounting for a global initiative, and "externality" implications would have problematic impacts. The two, however, are themselves interrelated since externality impacts for Canada are, in part, sensitive to the extent to which the initiative is undertaken by Canada alone, or in concert with other countries.

 Adjusting to the adjustment

 While the macroeconomic analysis by Informetrica Limited shows modest negative impacts from implementation of the Rational Energy Program, it should be acknowledged that certain sectors of the economy, particularly electricity and coal, would have to adjust to lower demand. To the degree that the Rational Energy Program contributes to reduced employment in specific sectors, the Climate Action Network believes that the transition to a sustainable energy economy must include support for retraining of any displaced workers.