Cablegate: Canada's Auto Sector -

This record is a partial extract of the original cable. The full text of the original cable is not available.

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
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

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