Greenhouse Gas Emissions Forecasting: Learning from International Best Practices 1. Executive Summary This report responds to key concerns highlighted by the National Round Table on the Environment and the Economy (NRTEE) in its 2007 Response to its obligations under the Kyoto Protocol Implementation Act (2007 KPIA Response). Chief among those concerns were differing and inconsistent forecasting methods used among various federal departments to describe the greenhouse gas (GHG) emissions reductions accruing from a particular policy measure or initiative, leading to issues of additionality, free ridership, rebound effect, and policy interaction effects. The NRTEE emphasized the importance of transparency and clarity with respect to key assumptions and methods, and the consideration of important sensitivities and uncertainties when producing GHG emissions forecasts. It also emphasized the importance of consistency in approaches across different departments, programs, and measures, and the need to integrate the findings in a holistic framework. In light of these concerns, the NRTEE felt it could be useful for the federal government if international best practices could be identified and highlighted in the forecasting of emissions reductions resulting from government policies, from both a methodological and a governance perspective.

1. Executive Summary 2. Introduction 3. The Challenge of Forecasting 4. What are the Best Practices of GHG Emissions Reductions Forecasting? 5. Discussion 6. Conclusion Appendix A: List of Abbreviations and Acronyms Appendix B: Description of Additionality, Free-ridership, Rebound Effect, and Policy Interaction Effects Appendix C: Discussion of Top-down, Bottom-up, and Hybrid Approaches to Energy-Economy Modelling Appendix D: Glossary of Useful Modelling Terms Notice to Reader

In its 2008 Climate Change Plan for the Purposes of the Kyoto Protocol Implementation Act (2008 Government KPIA Plan), the government responded directly to the above concerns: "the advice of the (NRTEE) is a key factor in the government?s methods for estimating reductions."[1] In its 2008 KPIA Response, the NRTEE noted the significant improvements made by the federal government in addressing the issues mentioned above in the 2008 KPIA Plan, in particular the issues of transparency, additionality, and policy interaction effects. Moving forward, the NRTEE believes there is continual benefit in examining and highlighting how other countries approach similar challenges to those faced by the federal government in emissions forecasting.

Recognizing that forecasting GHG emissions reductions policies[2] is difficult and inherently uncertain, the challenges of forecasting, including modelling approaches, are probed. In this report, forecasting is defined as a depiction?an energy-economy model?of how a system will evolve in future both with and without policy intervention. The core of the report defines emissions forecasting best practices from methodological and governance perspectives. After a review of Canada?s approach to emissions forecasting, the report presents case studies to illustrate how two other industrialized countries?the United States and the United Kingdom?approach forecasting.

Considering the significant role the provinces and territories play in the 2008 KPIA Plan, an important element of this report is considering their role in emissions forecasting. Initial research, however, indicated that few provinces have developed comprehensive emissions forecasts (while the report notes that some provinces are in the process of developing forecasts, they are not required to by law as is the case with the federal government). This has been highlighted in the report as a key area of concern given that substantial emissions reductions are attributed to provincial policies and measures in federal forecasts despite the lack of detailed provincial forecasts. These issues are discussed in sections 4.3 (Canada?s Approach) and 5.1 (Lessons for Canada) of the report.

The report concludes with a broad discussion on findings from the case studies, along with detailed lessons for Canada, and specific conclusions on incorporating best practices in GHG emissions forecasting. It is important to note that the report?s key findings, listed below, do not imply that Canada does not currently follow some of these practices?these are broad, standard best practices that taken together, should result in improved forecasting methods and approaches in Canada.

Key findings and recommendations from the analysis contained in the report from a methodological perspective include the following:

• Hybrid energy-economy models are more effective in producing accurate GHG emissions forecasts as they integrate the strengths of both the traditional bottom-up and top-down approaches to modelling emissions forecasts;
  
• The use of a consistent baseline from year-to-year (including baseline data), assumptions, and conditions across the board is fundamental to ensure emissions forecasts can be accurately compared from year to year;
  
• The use of consistent and agreed definitions of terms and concepts, such as for free ridership and additionality, across government departments involved in forecasting would ensure greater transparency of emission forecasts and facilitate assessment of the forecasts? accuracy.
  
• There is need for an international perspective in the model so that it can respond appropriately to world events (since in most cases, Canada is a price taker for both commodities and energy, and a primary trader of goods and energy). Canada is acting in concert with other countries on climate policy and its forecasting approaches need to reflect this reality.

From a governance perspective:

• Use of an independent forecasting agency is preferable to provide more accurate and transparent emission forecasts for consideration by government policy makers, external analysts, and Parliamentarians and to facilitate ongoing audit and evaluation.
  
• Multi-source emissions forecasting from a group of individual government departments can be accurate, but works best both when centrally coordinated and with independent authority by the central coordinating department or agency to question other departmental forecasts.
  
• Regular independent reviews, audits and evaluations of government forecasts and forecasting methods by a third-party agency or process helps ensure accuracy of forecasts and that forecasting methodologies are up-to-date and robust.
  
• Forecasting must be sufficiently resourced and financed by governments to ensure data is up to date and most recent improvements in forecasting methodologies are incorporated for the benefit of policy makers taking decisions based on these forecasts.
  
• Regular, ongoing evaluation of past forecasts for accuracy and effectiveness is necessary to ensure continuous improvement of government forecasting methodologies and approaches.
  
• Ensure transparency and clarity with respect to key assumptions and methods.