US embassy cable - 05OTTAWA824

UNCLAS SECTION 01 OF 02 OTTAWA 000824 
 
SIPDIS 
 
STATE FOR OES, OES/EGC, EB/ESC/ISC, WHA/CAN 
 
USDOC FOR ITA/MAC -- OFFICE OF NAFTA 
 
DOE FOR INT'L AND POLICY, IE-141 (DEUTSCH) AND BPA (ATKINS) 
 
EPA FOR OFFICE OF THE ADMINISTRATOR, INTERNATIONAL AFFAIRS 
AND BRIAN MCLEAN 
 
E.O. 12958: N/A 
TAGS: SENV, ENRG, CA, Environment, Kyoto, Transportation 
SUBJECT:     CANADA'S AUTO SECTOR - 
      ON CLIMATE CHANGE POLICY'S FRONT LINE 
 
REF:  (A) OTTAWA 0822   (B) TORONTO 0430 
 
 
SUMMARY/INTRODUCTION 
-------------------- 
 
1.   WHILE THE GOC WORKS TO ENGAGE THE U.S. TOWARD FORMING A 
POST-KYOTO STRATEGY ON CLIMATE CHANGE, IT HAS YET TO 
IMPLEMENT A CREDIBLE PROGRAM FOR MEETING ITS KYOTO TARGETS 
BY 2012.  MEASURES AFFECTING GREENHOUSE GAS EMISSIONS FROM 
NEW MOTOR VEHICLES ARE MEANT TO BE A KEY FEATURE OF THIS 
PROGRAM, BUT A "VOLUNTARY" AGREEMENT WITH AUTOMAKERS HAS 
BEEN REPEATEDLY DELAYED.  FOR THE GOC, THE ALTERNATIVE COULD 
BE TO PASS MANDATORY REGULATIONS, PERHAPS IN LINE WITH THOSE 
PROPOSED BY CALIFORNIA. 
 
2.   ON A SLOWER TRACK, THE GOC IS ALSO CONSIDERING A 
"FEEBATE" SCHEME WHICH WOULD SUBSIDIZE THE SALE OF FUEL- 
EFFICIENT VEHICLE MODELS AND TAX "GAS GUZZLERS."  END 
SUMMARY/INTRODUCTION 
 
MARTIN'S BIGGEST ECONOMIC CHALLENGE 
----------------------------------- 
 
3.   FORMER PRIME MINISTER JEAN CHRETIEN'S 2002 COMMITMENT 
TO RATIFY THE KYOTO PROTOCOL IS NOW ONE OF THE BIGGEST 
ECONOMIC POLICY PROBLEMS FACING HIS SUCCESSOR, PAUL MARTIN. 
RECENT BUDGETS HAVE ALLOCATED LARGE FISCAL RESOURCES (SOME 
C$6 BILLION, OR US$5 BILLION, BY 2010) TOWARD REDUCING 
GREENHOUSE GAS EMISSIONS - FOR EXAMPLE, BY SUBSIDIZING 
BUILDING RETROFITS.  WHILE THIS WAS RELATIVELY EASY, GIVEN 
THE GOC'S STRONG BUDGET POSITION (AND THE RANGE OF POSSIBLE 
SPENDING THAT CAN POTENTIALLY BE COVERED), REPORTS NOW SAY 
THAT FEDERAL OFFICIALS ESTIMATE THAT THIS IS ONLY HALF THE 
COST REQUIRED TO REACH THE TARGETS, BECAUSE TIME HAS BECOME 
SO SHORT. 
 
4.   DECIDING WHAT MEASURES WILL BE IMPOSED ON VARIOUS 
INDUSTRIES HAS PROVEN FAR MORE DIFFICULT.  ONE MAJOR REASON 
IS CANADA'S PROFOUND DEGREE OF ECONOMIC INTEGRATION WITH THE 
UNITED STATES, AND ITS NEED TO MAINTAIN A COMPETITIVE 
BUSINESS ENVIRONMENT.  ANOTHER IS THE DEPTH OF INTER- 
PROVINCIAL DIVISIONS IN CANADA, WHICH MEANS THAT THE GOC'S 
RELATIVE TREATMENT OF DIFFERENT INDUSTRIES (E.G. OIL AND GAS 
VS. MANUFACTURING) HAS NATIONAL POLITICAL REPERCUSSIONS. 
 
"VOLUNTARY" DEAL ON AUTO STANDARDS DELAYED 
------------------------------------------ 
 
5.   TRANSPORTATION LED THE LIST OF "KEY AREAS FOR ACTION" 
IN THE 2002 CLIMATE CHANGE ACTION PLAN FOR CANADA (SEE 
WEBSITE CLIMATECHANGE.GC.CA).  THE PLAN CALLED FOR A 25 
PERCENT INCREASE IN VEHICLE FUEL EFFICIENCY BY 2010, PLUS 
ADDITIONAL STEPS TO ENCOURAGE CONSUMER DEMAND FOR MORE FUEL- 
EFFICIENT VEHICLES, THE USE OF ETHANOL AND BIODIESEL FUELS, 
AND USE OF PUBLIC TRANSPORTATION.  (ANOTHER "KEY AREA FOR 
ACTION" - A PLAN TO MANAGE "LARGE FINAL EMITTERS" (LFE'S) - 
IS ALSO CURRENTLY NEAR COMPLETION AND WILL BE REPORTED 
SEPTEL). 
 
6.   TALKS BETWEEN THE GOC AND THE AUTO INDUSTRY ON NEW 
VEHICLE STANDARDS HAVE BEEN ONGOING SINCE 2002.  DURING 
2004, APPARENTLY INSPIRED BY LEGISLATION IN CALIFORNIA, THE 
GOC SHIFTED ITS TARGET FROM FUEL EFFICIENCY TO CARBON 
EMISSIONS.  WHILE IT IS NOT YET CLEAR WHETHER CALIFORNIA'S 
LAW WILL SURVIVE A LEGAL CHALLENGE IN THE U.S., GOC 
ENVIRONMENT MINISTER STEPHANE DION HAS STRENGTHENED HIS 
GOVERNMENT'S HAND IN THE TALKS WITH INDUSTRY BY HOLDING OUT 
THE THREAT OF SIMILAR MANDATORY RULES IN CANADA - WHICH, 
LIKE CALIFORNIA, REPRESENTS OVER 30 MILLION CONSUMERS - IF A 
VOLUNTARY DEAL FALLS THROUGH. 
 
NEW VEHICLE "FEEBATE" BEING STUDIED 
----------------------------------- 
 
7.   IN ITS 2005-06 BUDGET ANNOUNCED IN FEBRUARY, THE GOC 
ANNOUNCED PLANS TO CONSIDER INTRODUCING A "FEEBATE" SCHEME 
FOR NEW VEHICLE SALES.  THIS WOULD CONSIST OF REBATES FOR 
PURCHASERS OF THE MOST FUEL-EFFICIENT MODELS, AND ADDITIONAL 
TAXES ON "GAS GUZZLERS."  THE NATIONAL ROUNDTABLE ON 
ENVIRONMENT AND THE ECONOMY (NRTEE) WILL STUDY AND MAKE 
RECOMMENDATIONS ON THIS OPTION FOR POSSIBLE INTRODUCTION IN 
THE 2006-07 GOC BUDGET. 
8.    INDUSTRY REPRESENTATIVES SAID THEY WERE SURPRISED BY 
THE "FEEBATE" PROPOSAL.  THEY HAD BEEN HOPING INSTEAD FOR A 
SIGNIFICANT REBATE (PERHAPS C$2000) ON SALES OF HIGHLY FUEL- 
EFFICIENT "HYBRID" CARS, WHICH DID NOT MATERIALIZE. 
ONTARIO, CANADA'S LARGEST PROVINCE, RAN A "FEEBATE" PROGRAM 
DURING THE 1990'S WHICH WAS EVENTUALLY RESCINDED BECAUSE IT 
HAD BECOME LITTLE MORE THAN AN UNPOPULAR TAX ON NEW 
VEHICLES.  THE GOC PROPOSAL MERELY NOTES THAT ITS SCHEME 
"COULD BE REVENUE-NEUTRAL." 
 
9.   COMMENT:  IN THIS CONTEXT, THE "FEEBATE" IDEA RAISED 
ALARMS IN THE AUTO INDUSTRY, AS IT SUGGESTED THAT THE GOC 
MIGHT BE INCLINING SOMEWHAT MORE TOWARD PUNITIVE, TAX- 
RAISING MEASURES RATHER THAN REWARDING INNOVATION.  END 
COMMENT 
 
CONCLUSION/COMMENT 
------------------ 
 
10.  AN ANNOUNCEMENT OF A VOLUNTARY CARBON-EMISSIONS DEAL 
HAS BEEN CONSIDERED "IMMINENT" FOR MONTHS.  EVIDENTLY, 
ENVIRONMENT MINISTER DION HAS BEEN HOLDING UP THE INDUSTRY 
FOR ADDITIONAL CONCESSIONS.  DION IS A FIERCE NEGOTIATOR WHO 
WAS FIRST RECRUITED INTO GOVERNMENT TO BATTLE PROVINCIAL 
SEPARATISTS IN QUEBEC.  HIS STRENGTH IN THE TALKS SO FAR, 
FOLLOWING HIS SUCCESS IN SHIFTING THE TARGET FROM FUEL 
EFFICIENCY TO CARBON EMISSIONS, REFLECT A NEW IMPORTANCE FOR 
A CANADIAN ENVIRONMENT MINISTER IN POLICY AREAS WHICH WERE 
TRADITIONALLY RUN BY COUNTERPARTS IN NATURAL RESOURCES 
(ENERGY AND FUELS) AND INDUSTRY (AUTOS AND PRODUCT 
STANDARDS) - INDEED, A NEW IMPORTANCE FOR AN ENVIRONMENT 
MINISTER IN GOC ECONOMIC POLICYMAKING.  END COMMENT. 
 
DICKSON