Alberta’s natural gas shipments to the U.S. along with other Canadian exports will face trade sanctions because of Ottawa’s flawed strategy for implementing the Kyoto accord, says a key industry strategist.

The Alberta government and independent lawyers are also concerned about the risk of international trade challenges under Kyoto, especially without a carefully designed federal implementation plan.

Ottawa ratified the Kyoto Protocol last December, but the government has yet to release detailed rules on how the international treaty to reduce greenhouse gas emissions will be rolled out across Canada.

Based on Ottawa’s current approach, “we are in trouble every way you look, particularly in NAFTA (the North American Free Trade Agreement between Canada the U.S. and Mexico),” says Aldyen Donnelly, president of the Greenhouse Emissions Management Consortium (GEMCo).

“All of the (federal government’s) preferred implementation strategies make us more vulnerable to trade sanctions,” she says.

GEMCo members, which include ATCO Electric, EPCOR Utilities Inc. and TransCanada PipeLines Ltd. in Alberta, are pursuing voluntary and market-driven approaches to reducing greenhouse gases, apart from Kyoto.

The Alberta government’s climate-change policy experts are aware of the risk of trade challenges under Kyoto, especially given the absence of a detailed federal plan, says Alberta Environment spokesman Robert Moyles.

Premier Ralph Klein has said publicly that the government will defend Alberta’s interests against any part of Ottawa’s plan that intrudes on provincial jurisdiction. “Whether that involves potential negative trade impacts or anything else, the province is prepared to act,” Moyles says.

Pierre Alvarez, president of the Canadian Association of Petroleum Producers (CAPP), says the oil and gas industry is also concerned about potential trade issues and international competitiveness under Kyoto.

For now, CAPP is focused on “making sure the oil and gas industry doesn’t get treated any more onerously than any other sector” under whatever federal plan emerges, Alvarez says.

The industry is seeking a co-ordinated federal-provincial national approach, he says, adding that “the thought of reporting through 13 different regulators (Ottawa and each province) is just completely unappealing, inefficient and probably wouldn’t work.”

Peter Kirby, a lawyer with Fasken Martineau DuMoulin who specializes in trade law, says the lack of federal implementation rules for Kyoto creates a lot of unknowns about potential international trade challenges.

“Certainly there are lots of people out there that would have rights under (trade) agreements that may well be negatively affected and that may trigger claims,” he says.

Challenges would most likely come from multinational companies under NAFTA’s Chapter 11, Kirby says. This section enables foreign-owned companies to file a claim for compensation against a NAFTA country that discriminates against foreign firms and their investors.

If Ottawa, in allocating emission permits to various industrial sectors as part of its Kyoto plan, loads the burden of costs for reducing greenhouse gases on to one industry, such as the oil and gas sector, “arguably that would be discrimination” under Chapter 11, Kirby says.

“There almost certainly is a way to implement Kyoto without violating trade agreements,” he adds, “but we have to do it carefully.”

Donnelly, however, says Ottawa’s current planning ignores potential trade challenges under both NAFTA and the World Trade Organization that could severely disrupt Canadian exports of oil and natural gas, refined petroleum products, electricity, coal, steel, pulp and paper and other commodities.

The U.S. is certain to challenge under NAFTA if Canada tries to exclude multinational companies operating in Canada from claiming emission reductions made in the U.S. as part of their Kyoto obligations in Canada, she says.

But the U.S. is not part of the Kyoto accord, so Canada won’t be able to count these U.S.-based emission reductions as part of the country’s Kyoto quota, Donnelly says. Doing so could trigger trade challenges by the European Union, Japan and other countries that are part of Kyoto.

Multinational companies such as TransCanada PipeLines are already pushing to have U.S.-based emission reductions, as well as credits earned through emissions-trading programs with their customers in the U.S., counted toward their Kyoto obligations.

David Stanford, a lawyer at McCarthy Tetrault in Calgary, says the federal government could design its Kyoto plan in a way that “shrinks the target” for future trade challenges.

On the other hand, Stanford adds, “if they don’t factor that variable in, and design a system that is as flexible and equitable as it can possibly be, then that target will be as big as it can get.”

Donnelly says that even without Kyoto, trade challenges are possible from individual U.S. states that have enacted or are developing laws to reduce emissions.

At least 25 states, including major customers for Alberta’s natural gas exports such as New York and California, now have or soon will have such laws, she says. These pose serious implications not only for provinces such as Manitoba and New Brunswick whose revenue depends on electricity exports to the U.S, but for Alberta’s future plans to export power south.

Canadian companies that export electricity to U.S. states with emission-reduction laws will have to meet similar requirements. If they don’t, American power producers will claim that the imported electricity has an unfair competitive advantage and launch trade actions, Donnelly predicts.

If Kyoto is implemented, World Trade Organization (WTO) rules allow other treaty members such as Japan and the European Union to hit Canada hard with trade sanctions if this country fails to meet its Kyoto commitments, she says.

The EU and Friends of the Earth have already filed a joint request for a preliminary WTO ruling to decide which trade sanctions will apply under Kyoto. Environmental groups “see trade sanctions as a mechanism for ensuring that everybody performs” under the treaty, Donnelly says.

The best way to protect Canada would be to withdraw from Kyoto, which couldn’t happen under treaty rules until 2007, she says.

But Matthew Bramley, climate change director for the Alberta-based Pembina Institute for Appropriate Development, says he’s confident Ottawa can design a Kyoto implementation plan that negates the risk of trade challenges.

Ottawa and the provinces, in negotiating emission-reduction agreements with Canadian industrial sectors over the next two years, must be careful not to allocate to any one sector or company a large surplus of emission permits or emission-reduction credits, he says. This could be seen as a subsidy – akin to how American firms view Canada’s softwood lumber industry rules – and trigger sanctions.

But since Ottawa isn’t considering giving anybody a surplus of permits or credits, Bramley says, “I don’t really see it as a problem.”