Initial Environmental Assessment of the Canada-Indonesia Comprehensive Economic Partnership Agreement (CEPA)

Table of contents

• Executive summary
• 1. Background and study objectives
  • 1.1 Economic relationship between Canada and Indonesia
  • 1.2 Objectives of the proposed Comprehensive Economic Partnership Agreement
  • 1.3 Framework for environmental assessment of trade negotiations
• 2. Stakeholder consultations
  • 2.1 Consultations – What we heard
  • 2.2 Other consultations
• 3. Preliminary environmental impact assessment
  • 3.1 Preliminary economic modelling
  • 3.2 Preliminary environmental modelling
  • 3.3 Preliminary qualitative assessments
  • 3.4 Conclusion of the preliminary environmental assessment
• 4. Chapter-by-chapter review of enhancement and mitigation options
  • 4.1 Environment
  • 4.2 Goods and services
  • 4.3 Investment
  • 4.4 Government procurement
  • 4.5 Trade and Indigenous Peoples
• 5. Existing environmental legislation, policies and actions
  • 5.1 Canada's environmental sustainability strategy and framework
  • 5.2 Key pieces of federal environmental legislation in Canada
  • 5.3 Canada's federal sustainable development strategy and Canada's climate plans
  • 5.4 Sector-specific laws, policies and action
• 6. Conclusion and next steps
• Annexes
  • Annex A - Overview of the CEPA's objectives
  • Annex B - Background on the environmental modelling methodology
• Bibliography

Executive summary

Since 2001, the Government of Canada has conducted environmental assessments of its international trade negotiations, in line with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals. This approach has allowed for the identification of potential environmental impacts of a trade agreement and the identification of ways to mitigate possible negative impacts, either through the course of negotiations or through domestic measures. The purpose of these assessments is to fully integrate environmental considerations into the negotiating process, contribute to informed decision-making, and improve overall policy coherence.

On June 20, 2021, Canada and Indonesia announced that they would begin negotiations on a Comprehensive Economic Partnership Agreement (CEPA). Both countries recognized the potential for a CEPA to support long-term job creation and economic growth, reduce costs for businesses and consumers, and increase bilateral trade and investment. In line with the Government's commitment to advance an inclusive approach to trade - which recognizes that trade policies need to respond and contribute more meaningfully to overall economic, social and environmental policy priorities - the Government of Canada committed to conduct an expanded impact assessment on the negotiations to include environmental, labour, and gender impacts.

This report presents the Initial Environmental Assessment (IEA) of a possible Canada-Indonesia CEPA. Its purpose is to identify potential impacts on the environment within and outside Canada that may result from a CEPA, assess the significance of these impacts, and identify possible enhancement or mitigation options that may be addressed in the negotiations. The IEA uses Computable General Equilibrium (CGE) economic modelling and environmental data to estimate the potential effects of a Canada-Indonesia CEPA on the Canadian environment. These effects are assessed by first determining how the economies of Canada, Indonesia, and the rest of the world could change as a result of the proposed CEPA, with changes to economic output and consumption behaviour. Then, the impact on the environment is determined by how the new composition of the economies could change greenhouse gas (GHG) emissions and the emission of air pollutants.

The modelling reveals that a CEPA with Indonesia is expected to lead to minimal increases in GHG emissions (0.096 Mt CO2e by 2040) and air pollutant emissions  by 2040^{Footnote 1}. For both Canada and Indonesia, most of the expected increases in GHG emissions and air pollution are projected to come from the energy sectors, transportation sectors, and sectors that stand to benefit most from tariff liberalization such as electronic products, chemical products, and machinery and equipment. For Indonesia, most of the increases in GHG emissions are projected to come from increased demand for electricity, petroleum and coal products as the Indonesian economy is expected to grow due to a CEPA. Other sectors that could benefit from tariff liberalization, such as textiles, apparel and other manufacturing products are expected to account for the remainder of the increase in GHG emissions. For both Canada and Indonesia, the sectors that are projected to contribute the most to the increase in air pollutants resulting from a CEPA include the transportation and energy sectors.

Recognizing that the modelling approach to environmental impacts is limited in scope and does not capture effects that may not be directly related to changes in output and consumption levels, the study also conducts a qualitative assessment to expand on these environmental indicators and identify other environmental impacts that may result from increased commercial and investment flows between Canada and Indonesia. The qualitative assessment observes the possible environmental concerns and benefits of: GHG emissions, air pollution, deforestation, biodiversity loss, water quantity and quality, marine litter and plastic waste, and managing harmful chemicals.

Based on the results of the model analysis of impacts and the broader review of environmental linkages, the IEA concludes that a Canada-Indonesia CEPA's impacts on the environment are expected to be negligible. Rather, the potential impacts are expected to be limited in extent and scope, and are concentrated in the energy and transportation sectors. Further, the overview of the Government of Canada's existing environmental legislative framework, including statutes, regulations, policies and actions for the prevention and management of environmental risks, suggests that Canada is well positioned to mitigate any potential domestic environmental impacts of an agreement, including through future improvements in the environmental performance of Canadian economic sectors. The CEPA also offers an opportunity to enhance positive impacts or mitigate negative effects from trade through the pursuit of specific outcomes in the agreement. In particular, the chapter-by-chapter review points to several areas for environmental collaboration and risk mitigation, including through environmental provisions, expanded market access for environmentally-friendly products, services and technologies, mechanisms to increase sectoral, technological and institutional cooperation between Canada and Indonesia in key areas, and various investment and government procurement-related provisions.

1. Background and study objectives

In negotiating a CEPA with Indonesia, the Government's objective will be to create new opportunities and meaningful benefits for Canadian business, workers and families, through the elimination of tariffs and a wide variety of non-tariff barriers. In doing so, the Government will seek to ensure that the benefits and opportunities of trade with Indonesia are widely shared, including with traditionally underrepresented groups, such as women and women-owned businesses, Indigenous peoples and Indigenous-owned businesses, and small and medium-sized enterprises (SMEs). In addition to seeking new commercial opportunities, negotiations will seek to uphold labour rights and standards, ensure that environmental protection is upheld, and prevent parties from lowering environmental standards to promote trade or attract investment, while recognizing that trade policies need to respond and contribute more meaningfully to overall economic, social and environmental policy priorities.

1.1 Economic relationship between Canada and Indonesia

Indonesia is the world's fourth-most populous country with a population of over 275 million and is Southeast Asia's largest economy. With two thirds of its population of working age and a growing middle class, Indonesia is a rapidly emerging country with significant growth potential, including a strong and increasing demand for cereals, wood pulp, and fertilizers. Thus, it is no surprise that Indonesia is Canada's largest export market among the Association of Southeast Asian Nations (ASEAN) countries. In 2019, Canada exported $2.3 billion^{Footnote 2} in goods and services to Indonesia and imported $1.8 billion in goods and services.  Indonesia is also the second-largest destination for Canadian direct investment in Southeast Asia, with a total stock of $3.9 billion in 2019.^{Footnote 3} There have been consistent levels of investment into Indonesia for the last 20 years.

Canada and Indonesia have enjoyed strong diplomatic relations for over 70 years. The two countries have worked together in many areas, including trade and investment, advancements in human rights, poverty reduction and decentralization of governance.

The proposed CEPA between Canada and Indonesia is intended to benefit businesses through the elimination of tariffs, the liberalization of services and foreign direct investment (FDI), and improved access to public procurement markets. These measures could lead to an array of gains for economic agents in both countries, such as providing a wider selection of products to consumers, lower prices, job growth and enhanced access to South East Asian supply chains.

1.2 Objectives of the proposed Comprehensive Economic Partnership Agreement

Free trade agreements such as a possible Canada-Indonesia CEPA are binding treaties between countries that open markets for businesses by eliminating or reducing a variety of tariff and non-tariff barriers; establish the terms of market access in areas such as services, investment and government procurement; and set out rules for fair and transparent treatment. 

The proposed CEPA aims to address areas beyond the traditional focus of, for example, liberalization of trade in goods and services, investment and government procurement, to also include provisions such as those related to sustainable development, trade and gender, small and medium-sized enterprises (SMEs), and trade and Indigenous peoples. For a detailed description of the objectives of each proposed CEPA negotiating area, please refer to Annex A.

1.3 Framework for environmental assessment of trade negotiations

In 2001, pursuant to the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, the Framework for the Environmental Assessment (EA) of Trade Agreements (the "Framework"), was developed by Global Affairs Canada to evaluate the environmental impacts of Canada's trade policy initiatives.

In 2021, the Framework was renewed to take into account progress on methodologies in conducting EAs and provide updated guidance to trade negotiators to support the continued application of the Directive to future trade negotiations. Based on the principles of flexibility, timeliness, transparency and accountability, evidence-based, and continuous improvement, the objectives of the new Framework are to: 

• Assess the environmental risks and opportunities that a potential trade agreement may create within and beyond Canada;
• Assist Canadian negotiators to take into account environmental considerations during the negotiating process, with a view to mitigate risks and enhance benefits and mainstream relevant environmental provisions across the agreement;
• Support the identification of possible additional domestic measures to further mitigate risk and enhance benefits;
• Report to Canadians on how environmental factors are being considered over the course of trade negotiations; and
• Utilize governance structures expected to be established following entry into force of the final agreement to assess and monitor environmental risks identified in the EAs and leverage cooperation activities as well as stakeholder engagement to support mitigation strategies identified during the negotiations.

To ensure that the new Framework is consistent with Canada's inclusive approach to trade, which seeks to ensure that Canada's trade policies more effectively support Canada's economic, social and environmental priorities, and also is consistent with and advances the Federal Sustainable Development Strategy (FSDS), the EA analysis has three complementary components: 

1. Quantitative and qualitative assessments
   • Quantitative assessment based on the GTAP-e economic model which allows for the comparison of the baseline scenario to the post-liberalization scenario after the agreement's implementation. 
   • Qualitative assessment and case studies to assess aspects such as impacts outside of Canada or in specific sectors in cases where quantitative data is limited.
2. Review of trade agreement provisions 
• Generally conducted on a chapter-by-chapter analysis, the review of trade policy aims to provide an opportunity for the trade negotiators to effectively address the findings of the quantitative and qualitative analysis in trade policy to mainstream environmental considerations across the agreement. 
3. Review of existing environmental legislation, policies, and actions in Canada 
   • The trade agreement is reviewed in the context of domestic laws, policies and actions to prevent and manage environmental risks in Canada as well as to identify opportunities for additional domestic policy responses. 

The EA of trade negotiations benefits from the active support and advice from the following five critical actors: (1) federal departments and agencies, (2) provincial and territorial governments, (3) Indigenous peoples, (4) the Environmental Assessment Advisory Group (EAAG), and (5) the general public. 

The Framework follows 4 phases of assessment:

1. Initial EA analysis and reporting: the EA process is initiated upon the launch of exploratory discussions and focuses on: (1) activating communication channels with all players of the analysis and (2) establishing the methodological approach and scope of the analysis.
2. Integration of environmental considerations: Consolidation of Phase 1 analysis through in-depth quantitative and qualitative measures and integration of environmental considerations into the preparation of Canadian positions. Informal consultations with environmental experts across the government are ongoing throughout negotiations. 
3. Final EA analysis and reporting: Final EA on the final agreement. 
4. Monitoring and ex-post reporting: Implementation phase with follow-up and monitoring which may include ex-post environmental studies, ongoing reporting on cooperation activities, and continuous improvement of the EA process through regular consultations and strategic reviews. 

2. Stakeholder consultations

In conducting consultations on trade agreements, the Government engages a number of stakeholders and partners, including the public, provincial and territorial governments, Indigenous peoples, Canadian businesses, and civil society organizations, all of which help inform Canada's approach. With respect to the initial EA, the Government also consults with the non-governmental Environmental Assessment Advisory Group (EAAG). The EAAG is made up of persons drawn from the business sector, academia, and non-governmental organizations, and provides advice in its own capacity on the EA undertaken by GAC. At the conclusion of each assessment phase (i.e. Initial, Draft, and Final), EAs are shared with provincial and territorial representatives and the EAAG for feedback before being released for public comment.

Within the Government of Canada, contributions to the environmental assessment comes from a number of federal government departments. This approach facilitates informed policy development and decision-making throughout the negotiations.

This section presents the comments and input that were received from the public, provincial and territorial governments and the EAAG throughout public consultations on a potential Canada-Indonesia CEPA and as a part of the preliminary environmental assessment.

2.1 Consultations – What we heard

Under Global Affairs Canada's revised Environmental Assessment Framework, there is a new commitment to report on the feedback received during public consultations regarding environmental considerations. A Notice of Intent to conduct impact assessments, including an initial environmental assessment on a possible Canada-Indonesia CEPA was published on January 9, 2021, and invited interested parties to submit their views by February 23^rd. This process intended to seek the views of all interested Canadians on the potential impacts and opportunities that a Canada-Indonesia CEPA may have with respect to the environment. Although the consultation process has formally closed, the Government will continue to accept submissions.

The Government did not receive any submissions in direct response to the Notice of Intent, however, it did receive valuable input from Canadians related to the environment as part of its broader consultations on a possible Canada-Indonesia CEPA. Out of the total 83 submissions received through this process, 17 submissions mentioned environmental issues. A summary of the feedback received has been published online.

The majority of environmental concerns highlighted by stakeholders focussed on issues related to possible increases in deforestation in Indonesia and carbon emissions. Stakeholders indicated concern with Indonesia's environmental regulations, including the capacity to detect and enforce violations, particularly with respect to sustainable natural resource management. Stakeholders underscored Indonesian sectors that contribute to environmental degradation due to apparel manufacturing, tourism, and palm oil production. Some stakeholders expressed concern that liberalizing trade with Indonesia could result in carbon leakage and a loss in competitiveness for certain Canadian industries due to regulatory incongruity.

Many stakeholders identified commercial opportunities for Canadian companies, particularly as Indonesia is dedicating portions of its post-COVID-19 stimulus funding to sustainable growth. Submissions highlighted opportunities for the clean technology sectors such as renewable energy and waste-management technology, in particular, if ongoing regulatory challenges in the Indonesian market are resolved and improvements are made to its business development environment. Furthermore, certain stakeholders suggested that Canada leverage its low-carbon emission advantage, particularly in sectors such as metals and fertilizer. Stakeholders stressed that the government should maintain a consistent science-based approach to negotiating mutually supportive, robust environment provisions. Stakeholders also indicated that a CEPA could be an opportunity for Canada to work with Indonesia on responsible business conduct (RBC) and environmental policy, share best practices for green growth, and eliminate or reduce barriers for environmental goods and services, and collaborate on waste management, management of harmful chemicals, and international sustainable certification systems.

The Government of Canada received a high-level of engagement from provinces and territories on a possible Canada-Indonesia CEPA throughout the general consultations, including six written submissions that touched on environmental considerations. Provinces indicated that a Canada-Indonesia CEPA should include strong provisions that ensure that trade and environmental protection are mutually supportive and comparable to Canada's existing FTA commitments. Submissions from provinces supported the inclusion in a CEPA of environmental provisions for environmental protection, including those that promote sustainable practices in forestry management, address climate change and conservation of biodiversity, while cautioning against the creation of unnecessary barriers to trade.  

2.2 Other consultations

2.2.1 Interdepartmental consultations

Many federal government departments were involved in drafting and reviewing the IEA of a potential Canada-Indonesia CEPA, including Global Affairs Canada; Environment and Climate Change Canada; Employment and Social Development Canada; Natural Resources Canada; Canadian Heritage; Finance Canada; Agriculture and Agri-Food Canada; Canada Border Services Agency; Transport Canada; Fisheries and Oceans Canada; the Public Health Agency of Canada; Health Canada; and Immigration, Refugees and Citizenship Canada.

2.2.2 Environmental Assessment Advisory Group

Members of the EAAG were also engaged in the drafting of the IEA. Given the variety of expertise and approaches represented on the EAAG, the comments received from the group during the initial research phase and drafting phase contributed to the final version of this document. In particular, EAAG members' feedback on the IEA indicated a need to refine the analysis of both countries' government programs for the environment and to elaborate on certain areas of the environmental and clean technology sector.

3. Preliminary environmental impact assessment

The purpose of the IEA is to identify potential impacts on the environment within and outside Canada that may result from a CEPA between Canada and Indonesia and to assess the significance of these impacts. The IEA first uses an integrated trade and environmental model and environmental data to estimate the expected changes to GHG emissions and the emissions of air pollutants as a result of estimated changes in consumption and production under a Canada-Indonesia CEPA.

Recognizing that this modelling approach does not capture other effects that may not be related to changes in output and consumption levels, the analysis also includes the review of other environmental impacts that may result from increased commercial and investment flows between Canada and Indonesia countries (Preliminary Qualitative Assessment). The Government of Canada has further refined its approach to focus on the environmental impact within and outside Canada. Such implications are important to consider in order to provide the level of information and analysis required to contribute to informed decision-making throughout trade negotiations.

3.1 Preliminary economic modelling

Results on the potential economic and trade impact of a Canada-Indonesia CEPA were based on simulations using a dynamic CGE model of global trade. The simulation compares a baseline scenario (prior to implementation of the agreement) to a post-liberalization scenario (following the full implementation of the agreement, by year 2040). The net effect of the agreement is quantified as the difference between the baseline and post-liberalization scenario expressed in terms of changes in GDP, exports and imports.

3.1.1 Limitations of the economic modelling

While the economic modelling analysis is a useful estimation tool, all economic models, by definition, represent a simplification of reality and rely on numerous assumptions. One of these is that the agreement would achieve complete elimination of all agricultural and non-agricultural tariffs between Canada and Indonesia, with no exception made for "sensitive products." Further, the model can reflect only the expansion of trade in products already traded bilaterally (known as the intensive margin of trade).  Although the CGE model cannot predict the creation of new trade (or the trade of new products) resulting from a Canada-Indonesia CEPA (known as the extensive margin of trade), the Government has published an expanded economic impact assessment which includes an extensive margin analysis, which aims to enrich the CGE-based analysis by making qualified predictions on possible new trade opportunities resulting from an agreement. However, this extensive margin analysis is independent of the IEA and the resulting export opportunities identified are not factored into the environmental modelling analysis.

3.1.2 Expected impacts on GDP and trade

According to the CGE modelling analysis, the proposed CEPA could boost Canada's real GDP by $328 million (0.012%) by 2040, with the majority of GDP gains coming from increased household consumption and investment. Indonesia could see an increase in GDP by $1.4 billion (0.037%) by 2040.

This analysis projects that Canada's imports from Indonesia could increase by $1.1 billion (47%), primarily driven by imports of apparel and leather products. The increased imports of apparel ($693.9 million) and leather products ($290.4 million) from Indonesia would be offset by reduced imports of the same types of products from other countries such as China, Cambodia and Vietnam. This would limit the impact of the potential agreement on employment in Canada's domestic apparel and leather products industries.

Our projections suggest that Canadian exports to Indonesia could increase by $447 million (7.9%) by 2040, based on the assumption of full trade liberalization, compared to a baseline scenario without liberalization, with the benefits spread over a wide variety of industries, such as food products, chemical products, metal products, computer and electronic products, machinery and equipment and business services.

3.2 Preliminary environmental modelling

Based on estimated changes in GDP and trade presented in section 3.1.2, the preliminary environmental assessment estimates the quantitative environmental impacts of a possible agreement. The analysis also includes a qualitative review of other environmental linkages that may affect the environments within and outside Canada.  

3.2.1 Updates to the environmental modelling

The Government of Canada has expanded its existing modelling capacity to incorporate energy-environment-trade linkages within the existing modelling framework (see Annex B for a more detailed explanation of the model). In addition to the typical analysis of GHG emissions, an air pollution database has been integrated into the model to account for possible changes in air quality resulting from a potential agreement.

The new model incorporates carbon emissions from the combustion of fossil fuels and accounts for changes in emissions from fuel substitution. It also incorporates air pollutant data linked with economic activity. For both emissions and air quality, each flow is associated with four possible drivers: output by industries, land and capital used by industries, intermediate input use by industries, and household consumption.

GHG emissions related to energy use include carbon dioxide (CO2) and the non-CO2 greenhouse gases nitrous oxide (N2O), methane (CH4) and fluorinated greenhouse gases (FGAS), which include hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride and nitrogen trifluoride. These data are presented in megatonnes (Mt) of carbon dioxide equivalent (Mt CO2e).  

Emissions related to air quality includes nine substances: black carbon (BC), carbon monoxide (CO), ammonia (NH3), non-methane volatile organic compounds (NMVOC), nitrogen oxides (NOX), organic carbon (OC), particulate matter 10 (PM10), fine particulate matter (PM2.5) and sulfur dioxide (SO2). This data is presented in gigagrams (Gg).

The base emissions and air quality data for all countries in the world were initially benchmarked to 2014. The data has since been updated to 2019 accounting for changes in economic growth and changes in trade patterns since 2014.

For the purpose of this analysis, complete elimination of all agricultural and non-agricultural tariffs between Canada and Indonesia is assumed, with no exception made for "sensitive products"—notwithstanding that trade and investment liberalization initiatives often contain provisions that exempt certain sectors from liberalization or restrict the applicable extent of liberalization.

3.2.2 Limitations of the environmental modelling

Calculations of changes in GHG emissions and air pollution are based on projected GDP and trade impacts, as measured by the economic simulation. Consequently, they inherit the same limitations as the economic modelling.

In addition, there are cautionary notes specific to the interpretation of environmental modelling results. Notably, projected changes in GHG emissions and air pollution reflect the impacts based on these indicators only, and do not address environmental health effects or capture the breadth of environmental issues that could occur as a result of CEPA. Likewise, this analysis does not take into account any independent events or actions, such as natural disasters, that may adversely affect the environment. This analysis also does not take into account possible technological advances that could reduce emissions of either or both countries in the future. In general, advances in technology are expected to reduce emissions associated with increased economic activity. As a result, it is possible that the figures reported in this analysis overstate the possible impact in the future. Further, this analysis does not reflect future changes to climate or environment-related policies designed to reduce the production of GHG and air pollutant emissions locally and globally.

Furthermore, although the expanded environmental assessment methodology improves upon the previous Environmental Impact Framework, solving some of the prior limitations, it has also moved away from gauging certain environmental variables. For example, the expanded methodology does not take into account key variables such as change in energy usage and water usage. Although the expanded methodology does not take into consideration the change in energy usage by terajoules (TJ), it does include a robust assessment module that uses energy usage as an intermediate input when assessing change in GHG emissions. However, since the expanded methodology does not take into account water usage, the assessment of a possible Canada-Indonesia CEPA's impact on water usage will be further considered in the "Other Linkages" section.

Finally, the projected air pollutant results from the environmental module reflect changes in air pollutants in association with changes in trade and production patterns as a result of a potential CEPA; however, it does not have a mechanism to address capital investment enhancement to mitigate air pollutants. Global Affairs Canada is working to further improve the capacity of this model to more accurately project the association between change in production as a result of a Canada-Indonesia CEPA and the change in air pollutant emissions in Canada and Indonesia.

3.2.3 Impacts on GHG emissions and air pollutants

a. Changes in GHG emissions

Based on the assumption of full tariff liberalization, it is estimated that a potential agreement would have a negligible impact on GHG emissions in both Canada and Indonesia. This result is expected as the trade agreement is expected to have a modest impact on the economies of Canada and Indonesia.

Table 1: Projected Change in Greenhouse Gas Emissions in Canada by 2040, resulting from the potential agreement, Mt CO2e

Data: Office of the Chief Economist
Source: Office of the Chief Economist

In Canada, GHG emissions would be expected to increase by 0.096 Mt CO2e by 2040 as a result of increased economic activity resulting from the potential agreement, representing an increase of less than 0.01% compared to the base level of GHG emissions for Canada projected to be 1,092 Mt CO2e in 2040. This baseline is based on current activity and absent any environment or climate-related policies intended to reduce GHG emissions.^{Footnote 4} Roughly two-thirds of the increased emissions are expected to come from CO2 directly.

Table 2: Change in Greenhouse Gas Emissions in Indonesia by 2040, resulting from the potential agreement, Mt CO2e

Data: Office of the Chief Economist
Source: Office of the Chief Economist

In Indonesia, GHG could increase by 0.99 Mt CO2e by 2040, or 0.04%, compared to the projected base emissions of 2,451 Mt CO2e in 2040. Approximately 81% of this increase would be due to direct CO2 emissions, while the majority of the remainder would stem from increased methane emissions.

Table 3: Change in Greenhouse Gas Emissions by Source by 2040, resulting from the potential agreement, Mt CO2e

Data: Office of the Chief Economist
Source: Office of the Chief Economist

For both Canada and Indonesia, increased production resulting from the potential free trade agreement would account for the majority of the increase in GHG emissions. The increase in production would account for as much as 87.8% of the increased GHG emissions in Canada's case and 84.4% in Indonesia's case.

Table 4: Change in Carbon Dioxide Emissions vs. Non-CO2 Emissions by Source by 2040, resulting from the potential agreement, Mt CO2e

Change in CO2 Emissions

Change in Non-CO2 Emissions

Data: Office of the Chief Economist
Source: Office of the Chief Economist

This split between production and consumption holds when considering carbon dioxide emissions only, as can be seen in Table 4. However, non-CO2 emissions are driven almost entirely by changes in production and not consumption. It should be noted that the analysis presented in this study captures not only changes in GHG emissions in the sectors directly affected by the CEPA, but also changes in GHG emissions resulting from the expansion of economic activities in production and consumption resulting from the CEPA. Overall, as demonstrated in table 4, the majority of CO2 and non-CO2 emissions are generated by the production within these sectors rather than the consumption (i.e., the end use) of these products.

Table 5: Top 10 Sectors in Canada Contributing to Change in Greenhouse Gas Emissions by 2040, resulting from the potential agreement, Mt CO2e

Data: Office of the Chief Economist
Source: Office of the Chief Economist

When it comes to the sectors that would contribute the most to the increase in GHG emissions resulting from a potential free trade agreement, in Canada, there are three sectors that make up almost half of the expected increase: land and pipeline transport; petroleum and coal products; and computer, electronic and optical products.^{Footnote 5} As can be seen in Table 5, the sectors that are expected to contribute the most to increased GHG emissions in Canada would be energy sectors as well as sectors that are expected to benefit the most from a trade agreement with Indonesia. These sectors include electronic products, chemical products, machinery and equipment and cereal grains. Together, the top 10 sectors account for 81% of the expected increase in GHG emissions in Canada.

Table 6: Top 10 Sectors in Indonesia Contributing to Change in Greenhouse Gas Emissions by 2040, resulting from the potential agreement, Mt CO2e

Data: Office of the Chief Economist
Source: Office of the Chief Economist

In Indonesia, almost 60% of the expected increase in GHG emissions would be due to electricity, petroleum and coal products. Other sectors that would contribute to the increase in GHG emissions would be water and land and pipeline transport industries, in addition to industries that would be expected to benefit the most from tariff liberalization. These industries include mineral products, textiles and apparel, other manufacturing, and some services sectors. The top 10 sectors account for 96% of the increase in GHG emissions in Indonesia.

b. Change in Air Pollutant Emissions

It is expected that the proposed agreement would have a minimal impact on air quality in both Canada and Indonesia.

Table 7: Change in Air Pollutant Emissions in Canada by 2040, resulting from the potential agreement, Gg

Data: Office of the Chief Economist
Source: Office of the Chief Economist

In Canada, almost half of the air pollutant increase is expected to be from increased carbon monoxide emissions, while another approximately 40% would be explained by increases in emitted air pollutants, including from emitting nitrogen oxides (NOx), non-methane volatile organic compounds (MNVOCs) and sulfur dioxide (SO₂).

Table 8: Change in Air Pollutant Emissions in Indonesia by 2040, resulting from the potential agreement, Gg

Data: Office of the Chief Economist
Source: Office of the Chief Economist

In Indonesia, over 70% of the air pollutant emissions increase is expected to be due to increased carbon monoxide emissions, with an additional 10% resulting from non-methane volatile organic compounds.

Table 9: Top 10 Sectors in Canada Contributing to Change in Air Pollutant Emissions by 2040, resulting from the potential agreement, Gg

Data: Office of the Chief Economist
Source: Office of the Chief Economist

In terms of the sectors that would contribute the most to the anticipated increase in air pollutant emissions resulting from a potential free trade agreement in Canada, almost 70% of the increase would be explained by increased activity in land transport, petroleum and coal products, and water transport. In addition to the energy and transportation sectors, other sectors that would contribute the most to increased air pollutants in Canada are expected to be ferrous metals, cereal grains, chemical products, raw milk, machinery and equipment, and vegetables, fruits and nuts. Together, the top 10 sectors account for 92.6% of the expected increase in air pollutants.

Table 10: Top 10 Sectors in Indonesia Contributing to Change in Air Pollutants by 2040, resulting from the potential agreement, Gg

Data: Office of the Chief Economist
Source: Office of the Chief Economist

In Indonesia, almost 60% of the increase in air pollutants would be derived from the petroleum and coal products sector alone. An additional 10.5% of the increase in air pollutants in Indonesia would be from increased land and pipeline transport activity. Other sectors that would be expected to contribute to increases in air pollutants would be some sectors that are expected to benefit from the potential agreement including other manufacturing, textiles and apparel, mineral products and some services sectors. In total, the top 10 sectors would account for 98.7% of the expected increase in air pollutants in Indonesia.

c. Modelling Conclusions

Based on the above results, which included modelling the effect of removing trade barriers between Canada and Indonesia, and enhancing economic cooperation between the two countries is desirable; a potential CEPA would generate economic benefits for both economies while having a minimal effect on the environment for both parties.

Although the expected change in GHG emissions in both Canada and Indonesia are insignificant in absolute terms, it is evident that Indonesia is expected to experience a disproportionately higher change in GHG emissions and air pollution relative to Canada. This analysis projects that Indonesia's change in GHG emissions (0.99 Mt) would be approximately ten times higher than that of Canada (0.096Mt), notwithstanding Indonesia's projected increase in exports ($1.1B) is only 2.5 times higher than that of Canada ($446.5M). Indonesia is projected to emit four times more GHG emissions than Canada per dollar increase in exports as a result of a Canada-Indonesia CEPA.

Similarly, Indonesia is expected to experience a disproportionately higher change in air pollutant emissions relative to Canada. This analysis projected that Indonesia's change in air pollutants (83.3 Gg) would be approximately forty-seven times higher than that of Canada (1.77 Gg). Indonesia's emissions of air pollutants are projected to be almost 19 times higher than Canada's per dollar increase in exports as a result of a Canada-Indonesia CEPA. Given that air quality in Canada is generally better than that of Indonesia, these emissions could be expected to add to the burden of exposure already being experienced in the country. The impact to Canada's air quality is likely to be significantly less, particularly considering Canada's significant land mass and lower population density in comparison to Indonesia.

While significant in relative terms, projected increases in GHG emissions and air pollution are limited in absolute terms and expected to be spread over a long period of time (by year 2040). This report will seek to identify some of the possible measures than can be achieved through negotiations, or exist domestically, that could potentially mitigate this outcome.

3.3 Preliminary qualitative assessments

The potential environmental impacts of a CEPA between Canada and Indonesia extend beyond those captured by the environmental indicators above. In order to capture a broad view, it is necessary to expand the analysis beyond the economic and environmental modelling, to scan other potential environmental impacts that may result from increased commercial and investment flows between Canada and Indonesia.

This section is intended to provide an overview of some of the additional risks and benefits that are not captured in the previous modelling. This analysis provides more qualitative analysis of the possible effects of GHG emissions and air pollutants by observing the linkages of a possible CEPA and climate change and transboundary air pollution. Beyond expanding on these environmental indicators, the qualitative assessment extends to other areas of possible environmental concerns and benefits, including deforestation, biodiversity loss, water quantity and quality, marine litter and plastic waste, and managing harmful chemicals.

3.3.1 Greenhouse gas emissions

As illustrated in the quantitative analysis above, an increase in international trade as a result of a CEPA between Canada and Indonesia is likely to be associated with growth in production and consumption of goods and services and an increase in foreign direct investment abroad that are associated with or contribute directly to changes (both increases or decreases) of GHG emissions.

An increase of trade and investment could also contribute to higher activity in the international shipping industry, which accounts for a significant amount of global GHG emissions. According to the United Nations Conference on Trade and Development (UNCTAD), 90% of the world's merchandise trade travels by sea, which represented 10.7 billion tonnes of goods moved in 2018. Taking into account the geographical location of Canada and Indonesia, the additional trade flows generated by a CEPA are likely to translate into more intensive use of maritime transportation.

Although the domestic fossil fuel industry is likely to continue production (particularly the Canadian Oil Sands), Canada is on track to exceed its previous Paris Agreement GHG emissions reduction target of 30% below 2005 levels by 2030 and has committed to an enhanced 2030 reduction target of 40-45% below 2005 levels. Canada's economy has grown more rapidly than its GHG emissions, with emissions intensity declining by 36% since 1990 and 20% since 2005. This decline can be attributed to the decrease in carbon emissions by electricity and heavy industry, and declining emissions intensities from oil and gas operations, which have offset the increases in absolute emissions from the oil and gas and transportation sectors. Similarly, technological and operational efficiency improvements have resulted in a reduction in oil sands emissions intensity of 36% from 2000 to 2018^{Footnote 6}. In addition, oil sands producers recycle about 75% of water used in oil sands mining and 86% of the water used for in-situ production. The impact of a Canada-Indonesia CEPA on Canada's heavy industry emissions is expected to be minimal. Increased international trade would also generate revenue that could lead to funding to deploy decarbonisation technologies and support innovations to further mitigate carbon emissions in Canada.

Furthermore, the Government of Canada actively maintains mitigation measures, particularly for the agriculture and agri-food sector, such as funding to support the implementation of on-farm actions in the form of Beneficial Management Practices (BMPs). Many mining companies have made bold Environmental, Social, Governance (ESG) commitments including reduction in GHG emissions. Increased sales will provide increased revenue that could facilitate the adoption of new technologies and processes to reduce GHGs, especially in the agricultural and agri-food sector where Agriculture and Agri-Food Canada (AAFC), Environment and Climate Change Canada (ECCC), Natural Resources Canada (NRCan) and provincial governments are already working with farmers and processors to reduce their emissions.

3.3.2 Air pollution

As illustrated in the quantitative analysis, an expected increase in air pollutant emissions within certain industries could be attributed to an increase in international trade resulting from a CEPA between Canada and Indonesia. Anthropogenic sources of transboundary air pollution include emissions from transportation, energy production and use, heavy industry, and from the burning of forests for agricultural needs. Transboundary air pollution is an ongoing concern as the world's factories and agro-forestry projects grow and cluster in manufacturing and resource-intensive regions, including in both Canada and Indonesia. The quantitative analysis reveals that although the majority of Canada and Indonesia's increases in air pollutant emissions as a result of a CEPA is expected to come from some of these sectors, their impact will be minimal.

While the environmental modelling presented in the previous section captures emissions originating from Canadian-owned and Indonesian-owned transportation service providers, it does not include emissions originating from intermediary foreign service providers. An increase of trade and investment could also contribute to higher activity in the international shipping industry, which is a significant source of pollution.  The transportation sector is also responsible for the emission of air pollutants such as carbon monoxide, nitrogen oxide, sulphur oxides, volatile organic compounds and particulate matter.

Any impact would be marginal in Canada due to the implementation of policies that seek to mitigate transboundary air pollution. In Canada, addressing air pollution is a shared responsibility among federal, provincial, territorial, and municipal governments. The federal government collaborates with provincial and territorial governments to implement Canada's Air Quality Management System (AQMS), which includes Canadian Ambient Air Quality Standards (CAAQS), industrial emissions requirements, provincial air zones and interprovincial airsheds, as well as reporting to Canadians. In addition, the federal government has put in place a number of regulatory and non-regulatory measures to address air pollutant emissions from industrial sources, as well as from transportation sources and consumer and commercial products.

Through its domestic actions to meet commitments under the Canada-U.S. Air Quality Agreement, Canada has made significant progress domestically to reduce emissions of sulphur dioxide (SO2) and nitrogen oxides (NOx), which cause acid rain and emissions of NOx and volatile organic compounds (VOCs) that form ground-level ozone, key components of smog.  All of these pollutants negatively affect human health. Canada's total SO2 emissions decreased by 69 percent between 1990 and 2017, and Canada's total NOx emissions decreased by 59 percent between 2000 and 2017 in the area covered by the Agreement.

3.3.3 Deforestation

Deforestation^{Footnote 7} is a significant environmental issue due to its linkages to loss of biodiversity, reduced soil and water quality, habitat degradation, and climate change. Deforestation is often a direct result of unsustainable industrial activity (i.e., logging, agriculture, mining, energy development and production, and infrastructure development), which can be associated with increases in international trade and investment.

Canada has one of the lowest deforestation rates in the world (0.02%). According to laws, regulations and policies in place across Canada, all areas harvested on public land must be reforested, either by replanting or through natural regeneration. About 94% of Canada's forests are on public land, predominantly provincial. The increase in trade and investment with Indonesia in specific products and sectors (e.g. mining) could contribute directly to deforestation. In the case that a CEPA leads to an increase in mining activity, any new mining projects would be subject to the Impact Assessment Act, which would require proper consideration of environmental risks, including deforestation. Provinces and territories also have their own legislative and regulatory frameworks for environmental assessments and approvals for projects under their constitutional jurisdiction.

Canada could potentially risk contributing to deforestation in Indonesia, due to a possible increase in consumption of imported palm oil and rubber products. From 2017 to 2019, Canada imported an annual average of CA$51.1M worth of palm oil from Indonesia. The production of palm oil in Indonesia is driven by global demand and from 2017-2019 Canada imports only accounted for 0.2% of Indonesia's total annual global exports of the product (2017-2019 average). Virtually all of Canada's palm oil imports from Indonesia are refined, which enter the country tariff-free. Canada currently applies a tariff of up to 6% on imports of crude palm oil from Indonesia, which Indonesia may seek to reduce or eliminate through negotiations of a CEPA. However, Canada does not generally import crude palm oil. Given that the existing tariff is already relatively low, its reduction or elimination is unlikely to alone significantly increase its importation of crude palm oil. Any increase of palm oil from Indonesia would likely be the result of import substitution from other major exporters such as Malaysia.   

A CEPA is not likely to have a significant effect on Indonesian palm oil production given that Canada is a minor importer of this commodity in terms of both its global share and absolute value of imports. However, during the negotiations Canada could seek opportunities to help de-link palm oil and other agricultural production from deforestation through strengthened policy dialogue and government-to-government collaboration.  Lastly, there is growing momentum in multilateral fora (such as the OECD, and the G7) toward deforestation free supply chains, which could lead to a further shift away from unsustainable palm oil production.

3.3.4 Biodiversity loss

Both Canada and Indonesia rely on the biodiversity of their ecosystems to maintain their access to domestic ecological goods and services (EG&S), on which their economies rely. Although Canada and Indonesia face different pressures, as is the case globally, similar factors contribute to biodiversity loss in both countries. These include habitat degradation and fragmentation, landscape and land-use changes, overexploitation, illegal fishing, illegal logging, illegal wildlife trade, pollution, climate change, and invasive alien species.

In Canada, responsibility for conserving biodiversity and ensuring the sustainable use of biological resources is shared between all levels of government. Although Canada has implemented a number of laws and policies to mitigate loss of biodiversity, populations of species at risk continue to decrease. Loss of biodiversity in Canada continues to be driven by the cascading effects of habitat loss, climate change, pollution, invasive alien species, and in some cases unsustainable natural resource management. As a result, Canada continues to monitor the harvesting and trade of, for example, fish and seafood in order to maintain biodiversity and sustainable harvest levels, and prevent the overexploitation of resources. However, according to the quantitative analysis presented in this study, these sectors are not expected to be affected by a Canada-Indonesia CEPA to a degree where there would be significant environmental impact in this area. 

The trade of wildlife is also a contributing factor to biodiversity loss. Canada is party to the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), which is a treaty protecting wild plants or animals from the threat of international trade. However, pressures on wild populations of species in other countries can lead to decimation, which, in turn, can lead to the poaching and illegal trade of Canadian species, such as turtles, black bear and eels.

3.3.5 Water quantity and quality

International trade and the expansion of industry can have negative effects on water quantity and water quality. Key drivers in the decrease of water quantity and quality include climate change, infrastructure development, agricultural land use, and water demand for commercial use. Additionally, toxic industrial waste can contaminate fresh water sources when dumped intentionally or accidentally.

Although Canada is a water-rich country with a supply far exceeding the population, its fresh water sources are not evenly distributed and there are regional water quantity and water quality issues. About 60% of fresh water in Canada flows to the north, away from the majority of the population. Because northern communities – both Indigenous and non-Indigenous – are often downstream, they are particularly affected by water issues. Flooding and drought can lead to negative economic impacts such as crop failure and damage to infrastructure (i.e., roads, bridges and buildings). Additionally, low water levels could impact Canadian seaways (i.e., Great Lakes-St. Lawrence system), which are integral to Canada's participation in international trade.

Increased trade could increase water pollution from sectors such as agriculture (e.g. harmful algal blooms), mining/heavy industry (e.g. waste rock, acidic drainage, leaching of minerals), and forestry (e.g. pulp and paper effluents released into rivers). However, the quantitative analysis above has projected that a CEPA would likely only have a modest impact in these sectors. Industry is a major water user, however, an increase in international trade is not expected to place greater pressure on Canada's fresh water supply. Additionally, international trade would generate revenue that could lead to the adoption of new technologies and innovations to address key fresh water issues, including those related to improving water quality, water use-efficiency, water recycling, and water monitoring.

The Government of Canada has committed to a new Canada Water Agency (CWA) to find the best ways to keep Canada's water safe, clean, and well managed. Throughout 2020 and 2021, the Government of Canada conducted initial discussions and engagement with provinces and territories, Indigenous peoples (ongoing), stakeholders, experts and the public, to inform the development of the CWA. The CWA would work with partners to safeguard freshwater resources for generations to come, including by supporting provinces, territories, and Indigenous partners, in developing and updating river basin and large watershed agreements.

3.3.6 Marine litter and plastic waste

Global plastic production has been increasing over the past several decades at a rate faster than that of any other material. The improper management of plastic waste has led to the contamination of shorelines, surface waters, sediment, soil, groundwater, and local animal life.

Canada has one of the largest coastlines in the world and is a significant consumer of plastic. In Canada, total sales of plastic are estimated at $35 billion (2017), with approximately 4,667kt introduced to the Canadian market in 2016. Plastics are used in a variety of industrial sectors, and demand for plastic products continues to grow. Every year Canadians throw away 3 million tonnes of plastic waste, and only 9% of this waste is recycled, meaning that the vast majority of plastics end up in landfills and 1% finds its way into Canada's natural environment, including as micro-plastics. To address this issue, Canada is implementing a comprehensive approach towards its vision of zero plastic waste by 2030. This includes the implementation of the Oceans Plastics Charter and Canada-Wide Strategy and Action Plan (Phase 1 and 2) on Zero Plastic Waste. According to the analysis presented in this study, an increase in Canada's imports of rubber and plastic products as a result of a Canada-Indonesia CEPA are expected to be limited. However, Canada's imports of textiles and apparel are expected to increase significantly, a sector, which accounts for approximately 6% (267kt) of end-use markets for plastic products in Canada^{Footnote 8}. With respect to other sectors that stand to benefit, none of these are expected to have a significant impact with respect to plastic waste.

3.3.7 Managing harmful chemicals

Global hazardous chemicals production and use are rapidly increasing, particularly in emerging economies. At the same time, supply chains for products are more globalized and increasingly complex. These represent sources of pollution and exposure to harmful chemicals – from environmental transport through the air, water and migratory species, and imported products from countries that may have less comprehensive or robust chemicals management regimes than that of Canada.

Despite strong domestic actions, Canada remains a recipient of harmful chemicals from international sources and imported products. According to the analysis presented in this study, a Canada-Indonesia CEPA is expected to have a limited effect on Canada's imports of chemical products. Furthermore, any risk to Canadians of exposure to harmful substances would be mitigated by Canada's existing robust laws, regulations, and practices in this area.

Chemicals management is a long-standing core function of the federal government. In Canada, chemicals are notably managed under the Canadian Environmental Protection Act, 1999, and other federal statutes such as the Fisheries Act, the Pest Control Products Act (PCPA), the Food and Drugs Act (FDA), the Hazardous Products Act (HPA), and the Canada Consumer Product Safety Act (CCPSA), and by the Canadian Nuclear Safety Commission (CNSC). Several provinces also have their own frameworks in place.  

Launched in 2006, Canada has a robust Chemicals Management Plan to assess and manage risks from harmful chemicals as defined in Schedule 1 of the Canadian Environmental Protection Act (e.g. persistent organic pollutants, heavy metals, air pollutants). Thousands of substances have been assessed to identify environmental or health risks, with action taken by Canada on over 500 toxic chemicals. More than 400 risk management measures are in place, such as regulations, pollution prevention plans, public health advice, and voluntary measures. 

3.3.8 Indonesia preliminary qualitative assessments

With respect to the environmental impacts of a CEPA for Indonesia from a qualitative perspective, relevant issues are identified below. Our preliminary analysis indicates that a Canada-Indonesia CEPA and the corresponding increase in overall trade activity is not expected to directly or indirectly contribute to the exacerbation of these issues in any significant way.  A CEPA would, however, present opportunities to positively contribute to previously existing or expected environmental issues in Indonesia

Greenhouse Gas Emissions: Overall, Indonesia's emissions remain on an upward trajectory. However, Indonesia has a plan to reduce its GHG emissions by at least 29% by 2030, with renewable energy representing 50% of total emission reduction targets from the energy sector and aims to increase the share of renewables in its total energy mix to 23% by 2025.^{Footnote 9} Indonesia has also introduced a new carbon trading policy to help achieve those objectives.^{Footnote 10} While Indonesia's energy policies contain elements that support the uptake of renewable energy, the general investment environment currently still favours large-scale, fossil-fuelled power. A CEPA could contribute to a reduction of the environmental footprint of those hard-to-abate sectors in Indonesia through increased trade and investment in clean technologies, such as carbon capture, utilization and storage (CCUS) technologies, and professional services, such as environmental consulting.

Air Pollution: Energy production, heavy industry as well as palm oil production upstream processes are among the main emitting industries in Indonesia. Regulation of air pollution remains complicated due to multiple sources of pollution, including land use, transportation, and industrial activity, which make it difficult to identify specific national sources and implement effective mitigation measures. Similar to GHG emissions, a CEPA could play a positive role in reducing the environmental footprint of certain sectors in Indonesia through increased trade and investment in clean technology products and environmental services that have been developed as part of Canada's efforts to reduce domestic air pollutant emissions.

Deforestation: Indonesia's deforestation rate is estimated at 1.8% per year and the palm oil industry is playing a significant role in this. Direct impacts include an increase in GHG emissions from forest fires as well as the destruction of key peatlands. A CEPA will allow Canada to engage further with Indonesia on this issue, as sustainable forest management provisions are part of Canada's model approach to the environment in its free trade agreements, as is expanded upon in Chapter 4.

Biodiversity Loss: Although Indonesia is a party to CITES, the trade of wildlife is still a contributing factor to biodiversity loss in Indonesia. Indonesia is home to a number of critically endangered species such as the orangutan and Sumatran tiger that are threatened by forest habitat loss. More broadly, the ASEAN region is also a source and consumer of the wildlife trade, including both legal and illegal trade. While biodiversity loss could be associated with an increase in trade if expanded production causes damage to natural ecosystems, a CEPA could also help mitigate these effects through dedicated environmental provisions as highlighted in section 4 of this document.

Water Quantity and Quality: Rapid population growth, an expanding manufacturing sector, insufficient infrastructure, and water privatization issues affect access to potable water and water pollution in Indonesia. A Canada-Indonesia CEPA, especially one that includes investment promotion and protection provisions and which liberalizes trade in services, could further incentivize Canadian environmental and environmentally-related services companies, such as wastewater treatment companies, to enter the Indonesian market and help contribute to the reduction of the environmental impacts related to water quantity and quality issues.

Marine Litter and Plastic Waste: Indonesia is the world's largest archipelagic nation with 70% of the population living in coastal areas and with an ocean economy that generates one quarter of Indonesia's GDP. However, recent estimates suggest that Indonesia faces roughly US$459 million in direct costs to its fishing/aquaculture, shipping, and tourism industries due to marine debris. Similar to the case of Canada, the analysis presented in this study suggests that Indonesia's increase in imports under a CEPA in sectors that would contribute to plastic waste are expected to be very limited. The Government of Canada is also investing in programs to address the global challenges associated with marine litter and plastic waste. For instance, to support the Oceans Plastics Charter adopted on June 9, 2018, Canada made a financial investment of $100 million to support developing countries, including investing $6 million in, and co-chairing, the World Economic Forum Global Plastic Action Partnership (GPAP), which supported the development of Indonesia's National Plastic Action Partnership (NPAP) that aim at achieving a 70% reduction in its marine plastic leakage by 2025.

Managing Harmful Chemicals: Indonesia is a significant producer of chemicals, and under the "Making Indonesia 4.0" initiative, the Government of Indonesia is seeking to grow its chemical industry as one of five priority sectors. This, combined with rapid urbanization in Indonesia, which will rely on construction chemicals (e.g. concrete, coatings), is expected to influence the global market for chemicals. A CEPA with Indonesia, which is expected to increase Canada's exports of chemicals to Indonesia by 4.8%, could present opportunities to Canadian companies active in environmental remediation and green chemicals to offer alternatives to mitigate impacts of the chemical sector in Indonesia.

3.4 Conclusion of the preliminary environmental assessment

As a scoping exercise, this IEA focused on identifying the likelihood of significant positive or negative effects of a Canada-Indonesia CEPA on the Canadian environment. According to the modelling analysis, a CEPA could boost Canada's real GDP by $328 million (0.012%) by 2040 while Indonesia could see a $1.4 billion (0.037%) increase in GDP within the same timeframe. Based on these economic projections, this analysis concluded that GHG emissions are expected to increase by 0.096 Mt CO2e by 2040 in Canada and by 0.99 Mt CO2e in Indonesia, compared to their respective projected baselines. Additionally, air pollutant emissions are expected to increase by 1.77 Gg by 2040 in Canada and by 83.31 Gg in Indonesia compared to their respective projected baselines. Based on these estimates it appears that the net impact of increased production and trade under a CEPA with Indonesia would represent minor increases in aggregate GHG emissions and air pollutants, coming mostly from the transportation sector, energy sector, and sectors that would benefit most from tariff liberalization.

Complementary to this analysis, the qualitative review of other environmental linkages aims to broaden the analysis of potential risks related to a CEPA with Indonesia. While this review does not identify any significant positive or negative impacts on the environment within or outside Canada from such an agreement, it did highlight general environmental concerns related to deforestation, biodiversity loss, water quantity and quality, marine litter and plastic waste, and managing harmful chemicals, which should be considered by the Government of Canada when negotiating a Canada-Indonesia CEPA.

Considering these limited risks, the next sections review the existing environmental legislative framework at the federal level in Canada (Chapter 4), as well as the enhancement and mitigation options that could be considered more specifically in the context of a Canada-Indonesia CEPA (Chapter 5).

4. Chapter-by-chapter review of enhancement and mitigation options

A Canada-Indonesia CEPA could also help to enhance positive impacts and/or mitigate environmental risks, as described in the following section. As the final analytical stage of the environmental impact assessment, this section identifies areas for environmental enhancement and risk mitigation that may be addressed in a potential Canada-Indonesia CEPA. This preliminary analysis aims to respond to the risks identified in section 3, as well as broader environmental considerations, in trade policy terms, with a view to inform ongoing negotiations. For more information on the purpose of each of the negotiating areas mentioned below, please see Annex A.

For the purposes of this report, the assessment has been broken down into five groups of related provisions:

• Environment
• Goods and Services
• Investment
• Government Procurement
• Trade and Indigenous Peoples

Negotiating areas not included in the above groupings are those that are not expected to significantly enhance or mitigate environmental impacts of the agreement.

4.1 Environment

Canada seeks to advance an ambitious, comprehensive and enforceable Environment provisions in all of its FTA negotiations. This includes obligations to ensure that high levels of environmental protection are maintained as trade and investment are liberalized, as well as commitments to address a range of global environmental issues. In addition, Canada includes environment-related provisions in other areas of its FTAs as appropriate, including in the preamble and in the broader initial provisions and general exceptions articles.

In the context of the Canada-Indonesia CEPA, there are opportunities to seek provisions to improve environmental governance and pursue cooperation between the parties and address environmental challenges, not only in relation to the risk areas identified in section 3 of this report but more broadly.

In particular, Canada could use the opportunity of a CEPA with Indonesia to advance four key objectives:

1. Strengthen environmental governance by pursuing core obligations to maintain high levels of environmental protection, including commitments to effectively enforce environmental laws, to not derogate from such laws to encourage trade or investment, and to promote transparency, accountability and public participation. In the context of a CEPA with Indonesia, commitments by parties to maintain high levels of environmental protection and improve their respective laws and policies may help mitigate the minor increases expected in GHG emissions and air pollutant emissions identified earlier in this report.
2. Support efforts to address a range of global environmental challenges in areas that affect Canada's environment, economy, and health. In addition to potentially helping address specific risk areas identified in section 3 related to GHG emissions, air quality, chemicals management and invasive alien species, environment provisions in a CEPA with Indonesia would provide an opportunity to enhance efforts related to areas such as illegal wildlife trade, resource efficient and circular economy, marine litter and plastic waste, and conservation of biodiversity. An agreement could also include a binding commitment on climate change, which would support broader climate change objectives and align with the 2019–2022 Federal Sustainable Development Strategy (FSDS) goal of promoting substantive climate change provisions in Canada's FTAs. Further, parties could use a CEPA to reaffirm their respective commitments to multilateral environment agreements, and other legal and voluntary and international commitments. Overall, these provisions would support each Party's respective national, bilateral and international commitments to strengthen environmental protection and help advance solutions to current and future global environmental challenges.
3. Promote mutually supportive trade and environment objectives through, for example, commitments to promote voluntary best practices of corporate social responsibility and responsible business conduct, voluntary measures to enhance environmental performance, and trade and investment in environmental goods and services. In particular, and subject to a willing partner, such provisions could encourage the promotion of trade in environmental goods and services, including those of particular relevance to the risk areas identified earlier in this report, and to broader climate change mitigation and adaptation goals. Overall, this could also contribute to sustainable growth and the creation of jobs, and would align with the 2019-2022 FSDS goal to grow Canada's clean technology industry and exports.
4. Support sustainable management of natural resources by pursuing provisions related to a resource-efficient and circular economy, and sustainable fisheries, agriculture and forest management. Given the importance of natural resources and their significant role in the Canadian and Indonesian economies, these provisions would reinforce the importance of sustainable resource management. These provisions may also help mitigate negative impacts, notably in relation to the agricultural practices highlighted earlier, as well as the generation of waste, illegal logging, overfishing of limited fish stocks, or illegal, unreported and unregulated (IUU) fishing.

In addition to the above objectives, Canada's approach to the environment provides an opportunity to build upon existing cooperation activities between Canada and Indonesia on broader environmental issues by establishing a framework for cooperation on matters of mutual interest. Key examples include:

• Since 2004, Canada has been collaborating with Indonesia through the International Model Forest Network (IMFN), a Canadian initiative focused on sustainable forest management and inclusive governance at a landscape scale.
• Canada's $2.65 billion climate finance commitment (running from 2015 to 2021) to support developing countries transition to low-carbon, climate-resilient economies. This includes over $70 million in initiatives benefiting Indonesia. Examples include: The Eastern Indonesia Renewable Energy Project funded through the Canadian Climate Fund for the Private Sector in Asia – Phase 2; the Integrated Disaster Management Project delivered through the Asian Development Bank and; the Sustainable Landscape Climate-Resilient Livelihoods Project delivered by the World Agroforestry Centre (more information available on other initiatives at https://climate-change.canada.ca/finance/). In June 2021, the Government of Canada announced the doubling of its previous climate finance commitment to CAD$5.3 billion over the next five fiscal years. Canada is also a significant contributor to the Green Climate Fund and Global Environment Facility, which also support initiatives underway in Indonesia.
• As a founding member of the Global Plastic Action Partnership, Canada remains actively involved in Indonesia's National Plastics Action Plan. Canada supports activities under Indonesia's Action Plan such as the launch of Indonesia's Financing Roadmap. Canada will provide technical assistance to help unlock financing opportunities as part of the Financing Task Force.
• Canada and Indonesia work closely through two regional fisheries management organizations (RFMOs): The Inter-American Tropical Tuna Commission (IATTC) and the Western and Central Pacific Fisheries Commission (WCPFC) with a view to using a science-based approach to the sustainable management of Pacific tuna species, in each of these convention areas. We are seeking to negotiate a CEPA with robust fisheries policy and management provisions that would seek to prevent biodiversity loss, and negative impacts on jointly managed fish stocks.
• Under the Forum for International Cooperation on Air Pollution, there are opportunities for Canada and Indonesia to take part in the international exchange of information and mutual learning on both the scientific/technical and policy levels of air pollution. The Forum is a repository for scientific/technical information on air quality and a convenor of countries and organizations with the goal of increased international cooperation on addressing air pollution. Canada intends to participate. While under the United Nations Economic Commission for Europe (UNECE), this forum is not limited to UNECE countries and as such, seeks to broaden cooperation on air pollution beyond the UNECE.  Several Asian countries, as well as Latin American countries, have expressed interest in participating.
• The Global Methane Initiative (GMI) is an international public-private partnership focused on reducing barriers to the recovery and use of methane as a valuable energy source. The GMI provides technical support to deploy methane-to-energy projects around the world that enable Partner Countries to launch methane recovery and use projects. Both Canada and Indonesia are active partner countries within the GMI.

A CEPA with Indonesia provides an opportunity to build upon these environmental cooperation activities and explore new cooperative avenues with Indonesia.

4.2 Goods and services

Provisions on goods and services include the following areas: National Treatment and Market Access for Goods (NTMA); Rules of Origin and Origin Procedures; Customs and Trade Facilitation; Sanitary and Phytosanitary Measures; Cross-Border Trade in Services and Temporary Entry; Financial Services; Electronic Commerce; Intellectual Property; and Biotechnology provisions. Provisions in these areas help Canadian traders, services providers and investors gain market access and help to ensure that the regulatory system in Indonesia is predictable and transparent. Please refer to Annex A for more details.

A CEPA with Indonesia provides an opportunity to enhance positive impacts and/or mitigate impacts of increased trade in goods and services as follows:

• NTMA: In the context of CEPA negotiations with Indonesia, there may be an opportunity to enhance positive impacts and mitigate negative impacts of free trade on the environment by supporting trade in environmental goods. For example, elimination of two-way tariffs on environmental goods could improve market access conditions and give environmental goods from Canada a competitive advantage in the Indonesian market. This could stimulate growth in Canada's environmental goods sector by providing new export opportunities. This approach supports the 2019-2022 FSDS and its long-term goal of growing Canada's clean technology industry, which includes a medium-term target of increasing the value of Canada's clean technology exports to $15.6 billion by 2025.
• Positive environmental effects and mitigation of transportation-related impacts may also be achieved through Electronic Commerce provisions, by supporting the adoption of more environmentally sustainable means of trading goods and services. Expansion of online commerce may help reduce environmental impacts, provided that businesses seek new avenues in which they can have a positive and sustainable impact on the environment, such as logistics efficiencies, delivery via electric vehicles, and use of recycled packaging materials.
• In the context of a Canada-Indonesia CEPA, there may be an opportunity to use Intellectual Property (IP) provisions to facilitate the exchange of information between parties regarding domestic IP policies aimed at supporting innovation and the commercialization of clean technologies. Moreover, and subject to a willing partner, provisions could indirectly encourage the replication of Canada's expedited examination process for patent applications in the clean technology sector. Further, certain Indigenous practices that may be protected by IP rights have been associated with environmental benefits. Traditional knowledge generally refers to any knowledge that is distinctively associated with the cultural heritage of Indigenous peoples, collectively owned, and transmitted from generation to generation. The protection of traditional knowledge may encompass long-held Indigenous knowledge of sustainable resource management.
• Cross-border trade in services: These provisions promote trade flows in higher-knowledge services sectors, including in sectors providing cross-border trade in services through digital means. They help support the growth of the environmental services sector by including provisions facilitating access to Indonesia and Canada's domestic markets to environmental services providers, thereby supporting the goal of the 2019-2022 FSDS to grow Canada's clean technology industry.
• Temporary entry for business persons: These provisions seek to facilitate the temporary movement of highly-skilled business persons in support of bilateral trade in goods, services and investment by negotiating provisions that serve to remove common barriers that can be encountered by business persons when seeking to work abroad, including economic needs tests and/or quotas. For Canada, this means the waiving of the Labour Market Impact Assessment (LMIA) for all business persons covered by a FTA.
• Financial Services: While financial institutions have a less direct impact on the environment than their industrial counterparts, they can affect the environment indirectly through their banking relationship with companies. Increasing the supply of financial services suppliers could increase the financing options available for companies. This could have a positive impact on sustainability efforts if financial institutions are building environmental risk assessments into their credit decisions. Certain commitments on financial services allow parties to adopt measures that treat financial service suppliers differently based on legitimate public welfare objectives, including environmental objectives. Furthermore, an agreement could establish a Financial Services Committee for financial regulators to cooperate and discuss regulatory policy issues such as promoting environmental considerations as a means of achieving sustainable economic growth and the long-term stability of the financial system.
• Sanitary and Phytosanitary (SPS) Measures: The inclusion of SPS provisions in a trade agreement aim to protect human, animal or plant life or health from risks arising from additives, contaminants, toxins, pests or diseases. In the context of a Canada-Indonesia CEPA, these provisions could help mitigate the risks posed by imports on Canada's agricultural and agri-food sector and contribute to strengthen environmental stewardship globally.
• Agricultural Biotechnology provisions: By enhancing transparency and predictability in trade between the parties, the inclusion of Agricultural Biotechnology provisions could contribute to increasing the adoption and trade of products of biotechnology, as well as reinforcing the role of biotechnology as an agricultural sustainability tool. The adoption of biotechnology could help broaden farmers' access to new tools to improve productivity, plant and animal health, as well as environmental sustainability. Furthermore, the use of products of biotechnology by farmers can enable a reduction in the use of pesticides and fertilizers, as well as GHG emissions, during the production process. In the context of a Canada-Indonesia CEPA, this could help mitigate risks highlighted in section 3 in relation to the agriculture and agri-food sector.

More generally, provisions in these areas could help improve trade processes and mechanisms through more predictable and transparent procedures as well as specific commitments to facilitate online trade in goods and services. This applies in particular to the Customs and Trade Facilitation and the Rules of Origin and Origin Procedures provisions, which could streamline customs processes and facilitate the movement of goods more efficiently. This would deliver commercial and environmental benefits by reducing delays to traders, while minimizing the environmental impacts relating to the movement of goods through transportation efficiencies, promoting a paperless environment, and other mitigating factors.

4.3 Investment

The purpose of investment provisions under a CEPA with Indonesia would be to help Canadian investors gain market access, protect them and their investments from discrimination and arbitrary treatment, and ensure that the regulatory system in Indonesia is predictable and transparent. Investment provisions will not impose any changes to the Canadian regulatory framework, which applies to all foreign investors as it applies to Canadian investors, including the Impact Assessment Act and provincial environmental assessment regulatory regimes. As such, although a CEPA may result in increased investments, these investments would need to meet the same standards of environmental protection as investments of domestic origin. Investment provisions could also contain a number of additional provisions to further address the risks noted in this study:

• Affirmation of the State's right to regulate to achieve legitimate policy objectives, including with regards to the environment;
• Clarification of the rules governing expropriation for a public purpose;
• A commitment by the parties not to derogate from their own measures relating to the environment to attract investments; and
• Flexibility to reserve existing laws and regulations such that they are not subject to specified obligations of the treaty, and to reserve sensitive sectors for future regulation.

4.4 Government procurement

Canada's objective on Government Procurement (GP) in trade negotiations is to ensure that covered procurements are conducted in a fair, open and transparent manner and that Canadian suppliers receive non-discriminatory treatment when bidding on such contracts.

While advancing this objective, Canada seeks to include GP provisions that reinforce the parties' ability to apply technical specifications to promote the conservation of natural resources or the protection of the environment in its GP activities.^{Footnote 11} Canada also seeks to include language that emphasizes the parties' flexibility to include environmental characteristics in the evaluation criteria set out in the notice of intended procurement or the tender documentation. The inclusion of such provisions is consistent with the Government's Policy on Green Procurement^{Footnote 12} and supports the 2019-2022 FSDS's goal of greening government. This includes short-term targets to:

• Include criteria that address carbon reduction, sustainable plastics and broader environmental benefits into GP for goods and services that have a high environmental impact; and
• Promote the procurement of sustainable plastic products and the reduction of associated plastic packaging waste, when procuring products that contain plastics.

Overall, these provisions will likely have an indirect but positive impact on the environment through the reinforcement of green GP practices and a potential increase in governmental spending on environmentally friendly goods and services.

However, since Canada's existing procurement market is generally open to foreign suppliers, the extent to which GP provisions in a potential trade agreement between Indonesia and Canada would have an impact on the environment is dependent on the value of the market access commitments provided by Indonesia.

4.5 Trade and Indigenous Peoples

As part of its inclusive approach to trade, Canada is advancing Trade and Indigenous Peoples provisions that seek to acknowledge the importance of enhancing the ability of Indigenous peoples and Indigenous businesses to benefit from the opportunities created by a CEPA with Indonesia. This also includes provisions with linkages to the environment, notably provisions that:

• Reaffirm a commitment to implement a number of important existing international instruments, such as the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP), the 1992 United Nations Framework Convention on Climate Change, the 2015 Paris Agreement, and the 1992 Convention on Biological Diversity;
• Recognize the important role of the environment in the economic, social and cultural well-being of Indigenous peoples, including the importance of the United Nations 2030 Agenda for Sustainable Development; and
• Recognize the importance of respecting, preserving, and maintaining the knowledge and practices of Indigenous peoples that contribute to the conservation of the environment.

Where it is possible to include provisions on Trade and Indigenous Peoples in an agreement, it is expected there would be an indirect, positive impact on the environment through cooperation activities between the parties. These activities would highlight the importance that the environment has on Indigenous peoples economic and cultural well-being and the role that Indigenous businesses play internationally in innovative and environmentally sustainable economic development.

5. Existing environmental legislation, policies and actions

Expected impacts identified by the environmental analysis should be considered in the context of Canada's existing statutes, regulations, policies and actions that help prevent and manage environmental risks in Canada. Canada's environmental legislative framework focuses on minimizing threats to Canadians and their environment from pollution; equipping Canadians to make informed decisions on weather, water and climate conditions; and conserving and restoring Canada's natural environment. This robust environmental framework positions Canada well to mitigate potential environmental effects from a Canada-Indonesia CEPA.

This section provides an overview of the Government of Canada's environmental legislative framework, both at the broad and sector-specific levels. While this overview focuses on the statutes, regulations, policies and actions implemented by the federal government, it is understood that provincial and territorial governments also have important roles and responsibilities in the prevention and management of environmental risks, including numerous environmental statutes and regulations. As a result of these roles, there is extensive cooperation taking place between federal, provincial and territorial governments in these areas.

5.1 Canada's environmental sustainability strategy and framework

The management of environmental issues is an area of shared jurisdiction among federal and provincial governments. The federal government collaborates with provinces, territories, Indigenous peoples and others to protect species and spaces, to develop and administer environmental standards, guidelines, regulations and risk management instruments to reduce releases and monitor levels of contaminants in air, water and soil, and to promote and enforce compliance with environmental laws and regulations.

Monitoring and reporting on changes in the environment on a regular basis is essential for assessing the impact of risks and the effectiveness of measures to prevent or minimize those risks, and is an important component of the scientific work supporting the implementation of Canada's environmental framework. The environmental standards set by these instruments will remain in place irrespective of changes in economic activity or international trade, including as a result of a Canada-Indonesia CEPA.

5.2 Key pieces of federal environmental legislation in Canada

The main federal statutes dealing with the protection of the environment are as follows:

1) Canadian Environmental Protection Act (CEPA)

• Aims at preventing pollution and protecting the environment and human health.
• Prevents and manages risks posed by toxic and other harmful substances. It also manages environmental and human health impacts of products of biotechnology, disposals at sea, vehicle, engine and equipment emissions, fuels, hazardous wastes, environmental emergencies and other sources of pollution.

2) Greenhouse Gas Pollution Pricing Act (GGPPA)

• Helps reduce Canada's GHG emissions by establishing a GHG emissions pollution pricing system with respect to fossil fuels and trade-exposed industrial facilities.

3) Canadian Net-Zero Emissions Accountability Act

• Enshrines Canada's objective to achieve net-zero GHG emissions by 2050 and provides transparency and accountability in Canada's efforts to achieve this objective by:
  • Requiring the Minister of ECC to prepare, table and publish a GHG reduction target, emissions reduction plan, progress report, and assessment report for each milestone year leading to 2050 (2030, 2035, 2040, 2045)
  • Establishing the Net-Zero Advisory Body as a statutory body to provide advice to the Minister on ways to achieve net-zero emissions by 2050

4) Federal Sustainable Development Act

• Provides the legal framework for developing and implementing a Federal Sustainable Development Strategy (FSDS) that makes federal decision-making related to sustainable development more transparent and subject to accountability to Parliament.

5) Fisheries Act

• Addresses the protection of fish and fish habitats in both oceans and inland waterways.
• Prohibits the deposit of harmful substances into water frequented by fish, unless authorized through regulation.

6) Canada Water Act

• Provides the framework for collaboration among federal, provincial and territorial governments in matters related to the conservation, development and use of Canada's water resources.

7) Transportation of Dangerous Goods Act

• Promotes public safety in the transportation of dangerous goods.

8) Migratory Birds Convention Act, 1994

• Protects migratory birds, their nests and eggs anywhere they are found in Canada, including ocean waters.
• Prohibits the deposit of substances harmful to migratory birds in waters or areas frequented by them, unless authorized by other federal legislation or by the Minister for scientific purposes.
• Prohibits the purchase, sale, or possession of any migratory bird, including parts, nests or eggs, unless authorized by regulation. 

9) Nuclear Safety and Control Act

• Regulates the development, production and use of nuclear energy and the production, possession and use of nuclear substances, prescribed equipment and prescribed information in Canada.

10) Canada Shipping Act

• Deals principally with controlling the discharge of pollutants from shipping vessels.

11) Species at Risk Act (SARA)

• Designed to meet one of Canada's key commitments under the Convention on Biological Diversity (CBD).
• Its purposes are preventing wildlife species in Canada from becoming extirpated (no longer exist in the wild in Canada) or extinct, providing for the recovery of wildlife species that are extirpated, endangered, or threatened as a result of human activity, and managing species of special concern to prevent them from becoming endangered or threatened.
• Encourages the various governments in Canada to cooperate to protect wildlife species.
• Consultation and cooperation with Indigenous peoples are essential to the successful implementation of SARA.

12) Wild Animal and Plant Protection and Regulation of International and Interprovincial Trade Act (WAPPRIITA)

• Implements the Convention on International Trade in Endangered Species(CITES) by regulating trade in wild animals and plants.
• Prohibits the import, export and interprovincial transportation of designated species unless the specimens are accompanied by the appropriate documents (e.g.licences and permits).

13) Impact Assessment Act (IAA)

• The Act and its regulations establish the legislative basis for federal impact assessments.
• The impact assessment is a planning and decision-making tool used to assess positive and negative environmental, economic, health and social effects of proposed projects as well as impacts to Indigenous groups and rights of Indigenous peoples.
• Provinces and territories also have their own legislative and regulatory frameworks for environmental assessments and approvals for projects that fall under their constitutional jurisdiction.

5.3 Canada's federal sustainable development strategy and Canada's climate plans

The 2019–2022 Federal Sustainable Development Strategy (FSDS)^{Footnote 13} highlights the Government of Canada's environmental sustainability priorities, establishes goals supported by medium-term targets, and identifies short-term milestones and actions to achieve them. It is Canada's fourth whole-of-government strategy that brings the Government of Canada's sustainability activities together in one place.  It outlines what the Government is doing across 42 federal departments and agencies to promote clean growth, ensure healthy ecosystems, and build safe, secure and sustainable communities between 2019 and 2022. The FSDS also remains closely linked with government priorities, reflecting key initiatives such as efforts to implement the UN 2030 Agenda; Canada's climate plans; the Oceans Protection Plan; and work undertaken to address plastic waste and promote zero-emission vehicles. Indicators to track progress against the goals and targets in the FSDS are drawn largely from the Canadian Environmental Sustainability Indicators program, including progress on GHG emissions for Canada. The FSDS also tracks progress on the federal government's Mission Innovation pledge to double investments in clean energy, research, development and demonstration from 2015 levels of $387 million to $775 million by 2020, as well as reducing GHG emissions from government operations.

Among the 13 goals set out by the 2019-2022 FSDS, the following are of particular interest in the context of environmental impacts projected as a result of a potential Canada-Indonesia CEPA:

• Effective action on climate change, including taking a leading role in international agreements and initiatives on climate change and promoting substantive climate change provisions in Canada's free trade agreements;
• Greening government, including through green procurement initiatives;
• Clean growth, including supporting Canada's growing clean technology industry;
• Healthy coasts and oceans, including using legislation and regulations to protect coasts and oceans, notably by enhancing enforcement of pollution prevention provisions;
• Sustainable food, encouraging the adoption of sustainable agricultural practices and working with provinces and territories through the Canadian Agricultural Partnership.

The 2016 Pan-Canadian Framework on Clean Growth and Climate Change (PCF)^{Footnote 14} is the first Canada-wide climate plan and is the result of a joint commitment by federal, provincial and territorial governments, and in consultation with Indigenous peoples. In December of 2020, the Government of Canada introduced A Healthy Environment and a Healthy Economy^{Footnote 15} as Canada's strengthened climate plan. This federal plan aims to cut more pollution, to create more good jobs, and to support a healthier economy and environment. It includes 64 strengthened and new measures, through five pillars: make the place we live and gather more affordable by cutting energy waste; make clean, affordable transportation and power available in every community; continue to ensure pollution isn't free and households get more money back; build Canada's clean industrial advantage; and, embrace the power of nature to support healthier families and more resilient communities.

Among the key areas defined in these plans, those of specific relevance in the context of expected impacts from a Canada-Indonesia CEPA include plans to:

• Reduce emissions through complementary actions in:
  • Transportation, including fuel-switching and efficiency improvements in rail, aviation, marine, off-road sectors and light- and heavy-duty vehicles;
  • Industry, by building Canada's clean industrial advantage;
  • Forestry, agriculture and waste; and,
  • Government operations and procurement.
• Work with international partners to ensure that trade rules support climate policy;
• Invest in more efficient trade and transportation corridors, including hubs and ports; and
• Support innovation, commercialization and adoption of Canadian clean technologies.

The Government of Canada is investing heavily to meet these targets and has recognized the importance of mobilizing financial sector capital and ingenuity to help meet Canada's climate objectives. The current focus is to support building the critical financial sector infrastructure needed to increase the sustainable finance market in Canada. To obtain financial sector views on sustainable finance issues, the Government established the Sustainable Finance Action Council in May 2021, comprised of representatives from major Canadian banks, insurance companies, and pension funds.

5.4 Sector-specific laws, policies and action

Canada also leverages bilateral and multilateral engagement in key international fora to support wider global efforts to address climate change and manage environmental risks.  For example, the Canadian Net-Zero Emissions Accountability Act enshrines the 2030 GHG emissions target as being Canada's Nationally Determined Contribution (NDC) under the Paris Agreement. Canada submitted a new NDC in July 2021, committing to reduce GHG emissions by 40-45% below 2005 levels by 2030. Canada also provides climate finance to support developing countries' transition to low-carbon, climate-resilient economies. Canada is delivering $2.65 billion in climate financing to developing countries, between 2015-16 to 2020-21 and announced in June 2021 a doubling of its international climate finance commitment, to $5.3 billion over the next five years (2021-22 to 2025-26). 

Specific policies and regulations are also of relevance given the environmental risks identified in the initial environmental assessment of a possible Canada-Indonesia CEPA. At the sector level, these may help control the limited risks related to the manufacturing, transportation, agriculture and agri-food, and mining sectors, as identified in section 3.2.

• Manufacturing: The regulatory framework governing environmental impacts from manufacturing includes the CEPA and its regulations. A key aspect of CEPA is the prevention and management of risks posed by toxic and other harmful substances. For example, CEPA provides broad authorities to regulate activities involving toxic substances, including manufacturing and processing activities. Under CEPA, manufacturing facilities may also be required to disclose their emissions data regarding of selected pollutants through various programs such as the National Pollutant Release Inventory (NPRI) and ECCC's Greenhouse Gas Emissions Reporting Program. Pollutant emissions to water resulting from industrial manufacturing are also subject to the Fisheries Act, which prohibits the deposit of deleterious substances;
• Pulp and Paper: Emissions and effluents levels of the Canadian Pulp and Paper sector are subject to a number of regulations and monitoring activities, including the Pulp and Paper Effluent Regulations in the Fisheries Act, as well as ECCC's code of practice for the management of air emissions from pulp and paper facilities, which promotes best practices in the environmental performance of pulp and paper mills in Canada with respect to atmospheric emissions of sulphur dioxide (SO2) and total particulate matter (TPM);
• Transportation:  ECCC has implemented six vehicle and engine emission regulations to reduce air pollutants and GHG emissions from on- and off-road vehicles and engines under the CEPA. Transport Canada leads a suite of regulatory and voluntary measures to reduce GHG emissions from the aviation, marine and rail sectors, and also supports emission reductions from the on-road sector. With respect to the maritime transportation sector in particular, the Canada Shipping Act provides regulations to protect the marine environment coming from navigation and shipping activities;
• Invasive Alien Species (IAS): Implemented by a number of federal departments and agencies, as well as provinces and territories, the IAS Strategy directs national efforts to address the issues associated with invasive species entering or already in Canada. At the federal level, the government-wide IAS Strategy involves Agriculture and Agri-Food Canada, Fisheries and Oceans Canada, Environment and Climate Change Canada, Natural Resources Canada and the Canadian Food Inspection Agency;
• Large-scale projects, including in the mining sector: The Impact Assessment Act (IAA) and its regulations establish the legislative basis for the federal impact assessment process of projects. Whether Canadian or foreign, proponents of designated projects (as defined by the Physical Activities Regulation) may be required to conduct an impact assessment to determine if a project's adverse impacts are in the public interest. For the mining and processing sectors, air emissions and effluents are subject to a number of regulations and monitoring activities, including the Metal and Diamond Mining Effluent Regulations (Fisheries Act), as well as other federal instruments (e.g. Codes of Practice, Environmental Performance Agreements, Pollution Prevention Planning Notices). Provinces and territories also have their own legislative and regulatory frameworks for environmental assessments and approvals for projects that fall under their constitutional jurisdiction.

The Government of Canada's existing environmental legislative framework is well positioned to mitigate any environmental effects from a Canada-Indonesia CEPA. As new statutes, regulations, policies and actions are developed and implemented in the future, improvements in the environmental performance of Canadian economic sectors may further help mitigate environmental impacts of a trade agreement going forward.

6. Conclusion and next steps

As the fourth most populated country in the world, with an expanding middle class, and a forecasted real GDP growth rate of 4.7% in 2021 and 5.1% in 2022, Indonesia is a fast-growing and dynamic trading partner. A CEPA with Indonesia represents an avenue to increase our current CA$3.7 billion in bilateral trade by helping Canadians compete and succeed in global markets, which in turn will help strengthen the Canadian economy.

The environmental impact analysis uses economic modelling and environmental data to estimate the potential effects of a Canada-Indonesia CEPA on the Canadian environment. The modelling of impacts on Canada and Indonesia's environment reveals that increased trade with Indonesia could lead to minimal increases in GHG emissions and air pollutants. This report also explores broader environmental risks related to GHG emissions, transboundary air pollution, deforestation, biodiversity loss, water quality and quantity of maritime litter and plastic waste, and managing harmful chemicals. Overall, the analysis identifies that the negative environmental impacts of a Canada-Indonesia CEPA would be limited in extent and scope.

In addition, the chapter-by-chapter review points to several areas for environmental collaboration and risk mitigation in the context of a CEPA, including through: environmental provisions; expanded market access for environmentally friendly products, services and technologies; mechanisms to increase sectoral, technological and institutional cooperation between Canada and Indonesia in key areas; and various Investment and Government Procurement-related provisions.

Further, the overview of the Government of Canada's existing environmental legislative framework, including statues, regulations, policies and actions for the prevention and management of environmental risks, suggests that Canada is well positioned to mitigate the potential environmental impacts of an agreement, including through improvements in the environmental performance of Canadian economic sectors going forward.

Given the limited expected environmental impacts of a Canada-Indonesia CEPA and pursuant to the Framework, the next phase of the EA process will be to conduct a Final EA. This Final EA will take into account the final negotiated outcomes to assess the scope and nature of environmental effects that could arise from the proposed Canada-Indonesia CEPA.  The Final EA will be published following the conclusion of negotiations.

Until then, the Government of Canada welcomes input and comments on this IEA. Any comments received will be used to inform subsequent environmental analysis of a Canada-Indonesia CEPA, as well as EAs of other trade negotiations more broadly. Suggestions for enhancement of mitigation measures regarding potential negative environmental impacts and augmentation of positive effects identified at this stage are also encouraged.

Comments and inputs can be sent until November 18, 2022 to:

E-mail: EAconsultationsEE@international.gc.ca
Mail: Environmental Assessment of the Canada-Indonesia CEPA Negotiations
Trade Agreements and North American Free Trade Agreement Secretariat (TCT)
Global Affairs Canada, John G. Diefenbaker Building

Annexes

Annex A - Overview of the CEPA's objectives

Market Access for Goods – The goal of National Treatment and Market Access (NTMA) obligations is to achieve increase and improved market access for exports of Canadian goods to FTA partner countries, by liberalization trade and creating a stable and predictable trading environment, to the net benefit of the economy. NTMA provisions establish clear and predictable rules for trade in goods, such as the general prohibition of most import and export restrictions. They also incorporate the national treatment obligation from the General Agreement on Tariffs and Trade, requiring parties to treat imported products no less favourably than like domestic products. Tariff elimination annexes and schedules set out each party's commitments regarding the elimination of tariffs.

Rules of Origin and Procedures Related to Origin

• Rules of Origin – The Rules of Origin provisions set out the general requirements under which a good may be considered originating in the territory of the parties to the Agreement and therefore eligible for preferential tariff treatment. Canada seeks to negotiate rules of origin provisions that are clear, as simple as possible, and leave little room for administrative discretion, thereby establishing a predictable rules-based environment for trade in goods intended to benefit Canadian importers, exporters, producers and consumers.
• Origin Procedures – The Origin Procedures provisions establish the procedures used to administer the rules of origin and set out obligations for importers, exporters and the customs authorities. The procedures clarify the processes and obligations required for importers and exporters to take advantage of the reduced or free rates of duty and provide the customs authorities with an applicable methodology to ensure that only qualifying goods receive preferential tariff treatment under the FTA.

Customs and Trade Facilitation –Customs and trade facilitation provisions seek to facilitate the movement of legitimate trade in goods across FTA Partner borders by establishing obligations that seek to simplify, standardize, and modernize trade-related customs procedures. With the World Trade Organization (WTO) Agreement on Trade Facilitation as the baseline, provisions in this area address various stages of the customs process and establishes commitments that will lead to greater predictability, consistency and transparency in customs matters.

Sanitary and Phytosanitary Measures – The Sanitary and Phytosanitary Measures provisions maintain each party's right to take measures necessary to protect against risks to food safety, animal or plant life or health, while ensuring that such measures are science-based, transparent and do not create unnecessary and unjustifiable sanitary and phytosanitary trade restrictions.

Technical Barriers to Trade –Technical Barriers to Trade (TBT) provisions build on the existing World Trade Organization (WTO) Technical Barriers to Trade Agreement in the areas including transparency, international standards, technical regulations, conformity assessment and a mechanism to address TBT issues. A TBT is a non-tariff barrier to trade - such as a technical regulation, standard or conformity assessment procedure - that sets out specific technical or other requirements for products to be exported to a certain country.

Good Regulatory Practices – The focus of Good Regulatory Practices provisions is to promote enhanced transparency and good regulatory practices, with a view to improving governance and predictability while taking into account the legitimate policy objectives of each country. Provisions include commitments on mechanisms to facilitate coordination between regulatory authorities; obligations involving the implementation of good regulatory practices; and obligations concerning cooperation with other parties and interested persons of other parties.

Intellectual Property – The inclusion of provisions related to intellectual property (IP) in a trade agreement aims to establish standards for the protection and enforcement of IP rights to which each Party's national laws must conform.

Cross-border Trade in Services – The Cross-Border Trade in Services provisions set out the rules regarding the treatment of service suppliers in partner countries.

Temporary Entry for Business Persons – These provisions seek to facilitate the temporary movement of highly-skilled business persons in support of bilateral trade in goods, services and investment by negotiating commitments that serve to remove common barriers that can be encountered by business persons when seeking to work abroad, including economic needs tests and/or quotas. For Canada, this means the waiving of the Labour Market Impact Assessment (LMIA) for all business persons covered by the agreement.

Telecommunications – The Telecommunications provisions enhance regulatory certainty for telecommunications service suppliers.

Electronic Commerce – The Electronic Commerce provisions help facilitate the use of e-commerce by consumers and businesses, in recognition of the growing digitalization of trade and its impact on the economy.

Financial Services –Financial Services provisions set out the rules for the treatment of financial institutions, their investors, and cross-border trade in financial services, while preserving flexibility to protect the integrity and stability of the financial system.

Investment – The Investment provisions protect investors from discriminatory or arbitrary treatment in their host country.

State-owned Enterprises – The State-Owned Enterprises provisions seek to ensure that private firms can fairly compete with enterprises owned or controlled by a government. Such provisions ensure that state-owned enterprises act in accordance with commercial considerations, except when performing a public mandate.

Competition Policy – Competition Policy provisions aim to promote open and competitive markets. It also aims to make sure that the benefits of freer trade are not offset by anti-competitive business activities or misleading or deceptive commercial activities.

Trade Remedies – The purpose of Trade Remedies provisions is to reaffirm WTO rights and obligations for anti-dumping, countervailing and global safeguard measures under the relevant WTO Agreements.

Dispute Resolution – The Dispute Resolution provisions describe transparent, effective and efficient dispute settlement mechanisms. State-to-state mechanisms help to resolve disputes between the FTA partners over the interpretation of the agreement or whether a measure of a Party is inconsistent with the agreement. Investor-state mechanisms provide recourse for companies that feel they were not treated as favourably as the host country's companies.

Government Procurement –Government Procurement (GP) provisions help ensure that suppliers of goods, services and construction services are treated in an open, transparent and non-discriminatory manner when competing for GP opportunities in FTA partner markets.

Environment – The Environment provisions ensure that parties effectively enforce their environmental laws and do not lower environmental standards to encourage trade or investment. It also includes commitments that support efforts to address a range of global environmental challenges, including related to climate change, air quality, water quantity and quality, conservation of biological diversity, illegal wildlife trade, sustainable fisheries, agriculture and forest management, marine litter and plastics waste and invasive alien species.

Labour – The Labour provisions commit parties to adopt and maintain in their domestic labour laws internationally recognized labour rights and principles. These provisions also require that the parties effectively enforce such labour laws.

Trade and Gender – The main objective of Trade and Gender provisions is to advance women's economic empowerment and gender equality. It does so by acknowledging the importance of incorporating a gender perspective into economic and trade issues to maximize the benefits of trade and seeking to remove barriers to participation. Provisions also facilitate cooperation activities and information sharing.

Trade and Indigenous Peoples –Trade and Indigenous Peoples provisions seek to enhance the ability of Indigenous peoples and businesses to benefit from the opportunities created by an FTA. They do so by seeking to remove barriers to participation, increasing engagement of Indigenous peoples in international trade and facilitating cooperation activities and information sharing.

Micro, Small and Medium-sized Enterprises – The Micro, Small and Medium-sized Enterprises provisions support the growth and development of micro, small and medium-sized enterprises by enhancing their ability to participate in and benefit from the opportunities created by an FTA, through removing barriers to participation, facilitating cooperation activities and information sharing.

Institutional Provisions

1. Preamble – The preamble serves as an introduction to the purpose of the Free Trade Agreement (FTA). The preamble reflects the intentions of the parties and the scope of the FTA.
2. Initial Provisions and General Definitions –Initial Provisions and General Definitions provisions explain how the FTA respects WTO commitments and how it links with existing agreements.  This section also includes definitions of terms used in more than one chapter.
3. Administration –Administrative Provisions establish the structure of the bodies that will be charged with the governance and the implementation of the FTA.
4. Exceptions and General Provisions –Exceptions and General Provisions include exceptions, such as for essential security, cultural industries and taxation, that would apply across the entire agreement.
5. Transparency, Anti-Corruption and CSR and RBC – The purpose of these provisions is to facilitate trade by reducing corruption and enhancing transparency. The area is divided into three sections: transparency, anti-corruption, CSR and RBC.
6. Final Provisions – This section includes provisions related to entry into force or accession to the agreement (i.e. elements linked to the Vienna Convention). 

Biotechnology Annex (The placement of the Annex is to be determined) – The objective of the Agricultural Biotechnology provisions is to encourage innovation and facilitate trade in products of agricultural biotechnology.

Annex B - Background on the environmental modelling methodology

Introduction

In previous quantitative environmental assessments, the Office of the Chief Economist's in-house dynamic computable general equilibrium (CGE) model has been used to estimate the potential impact of new trade agreements on economic output. The changes in Canadian economic output were then linked to emission intensity coefficient (percentage change in emission/percentage change in output) from Statistics Canada's Canadian System of Environment and Resources Accounts and Environment and Climate Change Canada's National GHG Inventory to track the environmental changes in Canada resulting from expanding trade and economic cooperation.

This approach has a few limitations:

• The impact on the environment is limited to changes in production only, ignoring the impact of consumer expenditures on the environment;
• It assesses the environmental impact only for Canada, and not the partner country or countries in a potential new free trade agreement;
• The data is limited to GHG emissions, energy use and water use; and finally,
• The existing model did not allow for investment in cleaner capital to reduce energy-driven emissions.

For this analysis, the dynamic CGE model that was originally based on the standard GTAP model (Hertel and Tsigas, 1997) has been updated to incorporate a new environmental assessment module that is based on the framework of GTAP-Energy, or GTAP-E (Burniaux and Truong, 2002).

The new environmental model attempts to address the issues discussed above in the following ways: 

1. Emissions related to consumer expenditures in addition to emissions from production have been integrated into the model.
2. Emissions data for 141 countries is available in the model so that the potential impact on emissions in partner countries is possible to analyze.
3. New emissions data on GHG emissions as well as air pollutant data has been added to the model.
4. The model structure has been updated to allow for substitution between energy and capital investment in cleaner technology to reduce emissions in the face of rising energy prices, the presence of carbon pricing policies and tightening environmental regulations.

The following sections discuss the data sources used in the new model, the treatment of energy substitution and the treatment of emissions.

Data sources

The GTAP-E database provides greenhouse gas (GHG) emissions related to energy use including carbon dioxide (CO2), nitrous oxide (N2O), methane (CH4) and fluorinated greenhouse gases (FGAS), which include hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride and nitrogen trifluoride.

Emissions related to air quality include nine substances: black carbon (BC), carbon monoxide (CO), ammonia (NH3), non-methane volatile organic compounds (NMVOC), nitrogen oxides (NOX), organic carbon (OC), particulate matter 10 (PM10), particulate matter 2.5 (PM2.5) and sulfur dioxide (SO2).

Emissions in the model are distinguished by type and by sector for each of the 141 countries and regions in the model. Emissions data are based on several sources of data, including the GTAP 10 database (Aguiar, et al., 2019), extended energy balances compiled by the International Energy Agency (IEA), the Food and Agriculture Organization of the United Nations database (FAOSTAT 2019), and the Emissions Database for Global Atmospheric Research (EDGAR v5.0 Chepeliev, 2020a, 2020b).

Treatment of energy substitution

In the standard GTAP model, energy (i.e., coal, oil, gas and electricity) is used as an intermediate input into production and can not be substituted with value-added inputs such as land, labour, or capital. This means that in the traditional model it is not possible for producers to invest in technology to reduce energy usage with the traditional Leontief production function (see Figure 1).

Figure 1. The Nested Structure of Production in Standard GTAP

Source: Burniaux, J., & Truong, T. (2002). GTAP-E: An Energy-Environmental Version of the GTAP Model (GTAP Technical Paper No. 16). Purdue University, West Lafayette, IN: Global Trade Analysis Project (GTAP). Retrieved from https://www.gtap.agecon.purdue.edu/resources/res_display.asp?RecordID=923

In the new environmental assessment module that is based on the structure proposed by GTAP-E, energy is no longer considered to be an intermediate input and instead is considered part of a value-added capital-energy composite, which in turn is combined with other primary factors such as land and labour (see Figure 2).

Figure 2. The Nested Structure of Production in GTAP-E

Source: Burniaux, J., & Truong, T. (2002). GTAP-E: An Energy-Environmental Version of the GTAP Model (GTAP Technical Paper No. 16). Purdue University, West Lafayette, IN: Global Trade Analysis Project (GTAP). Retrieved from https://www.gtap.agecon.purdue.edu/resources/res_display.asp?RecordID=923

The capital-energy composite consists of capital and an energy composite that consists of electric and non-electric sources of energy, as shown in Figure 3. It is possible to substitute between energy and capital through a constant elasticity of substitution (CES) nested structure. The advantage of this treatment is to allow some degree of substitution between energy and capital, as well as substitution between different types of energy (i.e., coal, oil, gas and electricity), in the production function.

Figure 3. The Nested Structure of Capital-Energy Composite

Source: Burniaux, J., & Truong, T. (2002). GTAP-E: An Energy-Environmental Version of the GTAP Model (GTAP Technical Paper No. 16). Purdue University, West Lafayette, IN: Global Trade Analysis Project (GTAP). Retrieved from https://www.gtap.agecon.purdue.edu/resources/res_display.asp?RecordID=923

As can be seen on the right-hand side of Figure 3, substitution of energy products starts with a choice between electricity and non-electric sources of energy. Non-electric energy differentiates between coal and non-coal energy, which is substitutable to a moderate degree. Non-coal energy is further broken down into gas, oil and petroleum products, which are substitutable.

At the individual commodity level (e.g. coal, gas, oil, petroleum products and electricity), an Armington-like substitution structure exists that allows for substitution between domestic and foreign products, as well as further differentiation between different sources of foreign products.

There are two benefits of the nested structure of the capital-energy composite. The first benefit is that producers have a wide variety of substitutable options for energy use. As the price of individual energy commodities change, producers have the option of switching to different types of energy products. This is also the mechanism that allows producers to respond to external environmental policy, such as a policy that increases the price of certain types of energy products. The second benefit is that this structure allows for producers invest in more capital (i.e., more energy-efficient technology) to reduce expenditures on energy products. This high degree of energy substitutability and the ability to reduce energy use with capital investment is a vast improvement over the standard version of GTAP.

Treatment of Consumption

The new environmental assessment module also introduces a new nested structure for private and public consumption as shown in Figure 4 that accounts for the consumption of energy commodities. Energy commodities are separated from the non-energy commodities and the different energy products are substitutable. The nested structure under the energy commodities (e.g. coal, gas, oil, electricity) are differentiated between domestic sources and foreign sources, which are further differentiated by country of origin.

Figure 4. The Nested Structure of Public and Private Consumption

Source: Burniaux, J., & Truong, T. (2002). GTAP-E: An Energy-Environmental Version of the GTAP Model (GTAP Technical Paper No. 16). Purdue University, West Lafayette, IN: Global Trade Analysis Project (GTAP). Retrieved from https://www.gtap.agecon.purdue.edu/resources/res_display.asp?RecordID=923

The functional form of the top nest differs for public consumption compared to private consumption. The public consumption nest uses a CES structure while the private consumption nest uses a constant-difference of elasticities (CDE) structure. These structures are the same used in the standard GTAP model, so the only difference is the separation of the energy composite.

Treatment of Emissions

The majority of GHG and air pollutant emissions resulting from human activity originates from production and consumption activities. In the model, CO2 emissions are related to the combustion of fossil fuels (i.e., coal, oil and gas) and are linked in fixed proportions to fossil fuel use in production and consumption activities. Producers and consumers have a choice to substitute away from more carbon-intensive energy fuel sources or – in the case of producers – invest in capital to reduce expenditures on energy products, as the relative prices of energy fuel sources change or if faced with a price on carbon.

Non-CO2 emissions and air pollutant emissions are mostly process related, which are proportionately tied with the use of factors (e.g. land and capital), intermediates and the production of output. For the non-CO2 and air pollutant emissions that are related to private household consumption, they are simply tied to the amount of such emission-related commodities consumed by private households. Finally, the air pollution emissions related to land use activities (e.g. biomass burning) are linked to the overall output of agriculture and forestry sectors.

One caveat is that a direct substitution mechanism between air pollutants does not exist in the model. Since air pollutants are considered to be tied to processes such as the use of production factors, intermediates or the production of output, air pollutants are considered to be a secondary effect of the production and consumption process. As a result, economy-wide changes in production or consumption could change the composition of air pollutants, but a producer or consumer does not have a direct mechanism to adjust the composition of air pollutants produced.

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