Canada's Offsets Framework: guidance on program design elements

The Canadian Council of Ministers of the Environment (CCME) recently released the Pan-Canadian Greenhouse Gas Offsets Framework [1] (“Offsets Framework”) that sets out guidance to jurisdictions that are developing or operating an offset program. The long-term goal of the Offsets Framework is to have a consistent suite of requirements and transferability of offsets across Canada. In our last blog post [2] we analyzed the program design recommendations provided in the Offsets Framework. In this blog post, we extend this analysis to guidance on specific program design elements.

The guidance is intended to encourage alignment for sub-national jurisdictions but is non-binding and does not require that program design be uniform in all aspects across Canada. Nevertheless, it is expected that subnational jurisdictions will seek to align around this guidance in order to enable the fungibility and transferability of offset credits between markets. Program fungibility expands the eligible jurisdictions in which GHG emission offset projects can be sourced. This creates more optionality for market participants seeking to source the lowest cost GHG emission reduction opportunities across the Canadian economy. Large industrial emitters with a GHG compliance obligation will benefit from the ability to source lower cost emission reduction credits and reduce overall GHG program compliance costs.  
 

Guidance on Specific Program Design Elements

The Offsets Framework provides detailed guidance on program design elements. The guidance is organized into seven sections: eligibility, additionality, crediting period, leakage, ownership, offset use, and enforcement. Each of these sections are discussed in detail below.

Eligibility

The Offsets Framework states that offset programs should have eligibility criteria that:

• Are clearly defined at the sector and/or at the project level. It is important to note that offset eligibility is often defined by a list of approved protocols that define the rules for developing an offset credit from a particular emissions reduction technology.
• Define the geographic boundary for the project. Historically in Canada, sub-national programs require offset credits to be generated in the same jurisdiction where the obligated party exists, however, Quebec (and briefly Ontario) broke this trend through its participation in the Western Climate Initiative [3].
• Take into consideration any overlap with regulatory programs. As a general rule, emission reductions should only be credited once. In jurisdictions where a carbon tax exists, the benefit for reducing emissions subject to a carbon tax is avoidance of a carbon tax and therefore, these activities cannot earn additional financial benefits in the form a tradable emission credit.
• Specify eligible GHG types. In Canada, GHGs subject to mandatory reporting include: carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons, and perfluorocarbons [4].
• Consider the inclusion/exclusion of specific emission sources or sinks by considering indirect emission sources, in alignment with the most recent ISO-14064-2 standard [5], and to streamline project monitoring by allowing for the exclusion of emission sources that are unchanged by the offset project.

Additionality

The Offsets Framework defines additionality as “the concept that a GHG emission reduction or removal results from an activity or action that is beyond legal requirements and business-as-usual (BAU) expectations”. BAU is the scenario that would likely occur in the absence of the offset program. This is inherently a hypothetical scenario as it is impossible to say with complete certainty what would have occurred in a world where an offset program was not implemented. To address this uncertainty with respect to defining a BAU scenario, a barriers test is typically conducted. For example, BC’s Carbon Neutral Government Regulation [6], requires that revenue from GHG emissions reduction credits overcomes, or partially overcomes, one or more financial, technical or other barriers (including technical expertise, infrastructure, institutional/political, and social barriers). Projects receiving funding under Alberta’s Climate Change and Emissions Management Corporation are also subject to an additionality analysis that includes investment, technological, social, or other barriers [7].
The Offsets Framework states that project additionality can be defined by any combination of economics, legal requirements, technology uptake, or common practice. By clearly defining additionality criteria, offset project developers can determine, with certainty, which activities and emission reductions can qualify to generate offset credits. Additionality is critical to the integrity of the emission reduction claim and ultimately the credibility of the GHG emission reduction program. If sub-national offset programs are to have fungibility of offset credits, additionality criteria must be aligned. At a minimum, the Offsets Framework states that offset programs should have additionality criteria that:

• prevent the inclusion of activities that are required by law (e.g. coal phaseout of electricity generation is required by law and therefore would be ineligible to generate offset credits)
• prevent the inclusion of activities that are already taking place according to common practice (i.e. common practices may be assessed by undertaking a technology penetration study for a particular sector or region).

Crediting Period

Offset programs typically have a pre-defined crediting period where emission reduction activities are recognized as valid compliance units. According to the Offsets Framework, programs should consider the adoption rate of project activities and current industry standards when setting a crediting period. This would involve aligning on investment returns for the project activity, so that additionality is not compromised. Given that forecasting investment returns for new technology is an inherently risky activity, there should be an opportunity for a crediting period extensions so long as financial, technical and market barriers are unchanged at the end of a project’s standard crediting period.
For projects that involve sequestration, the crediting period will need to consider a relevant timeframe over which carbon removal are to occur. Similar to the guidance provided on additionality, the crediting period should be consistent with planned regulatory requirements so that projects are not credited for actions that would otherwise be required. As a general rule, the Offsets Framework recommends the use a ten-year maximum crediting period with exceptions for unique project types. Unique projects would be those such as carbon capture and storage, agriculture, or forest-based projects that may require a longer period to achieve a material level of carbon sequestration and/or pose a risk that carbon removals could potentially be reversed.

Carbon Leakage

Carbon leakage defined as the potential for emissions reduced or sequestered through an offset project to be shifted to another jurisdiction or location without a price on carbon. Carbon Leakage is most commonly associated competitive market effects issues for emissions-intensive and trade-exposed sectors. To mitigate the impact of carbon leakage, the Offsets Framework recommends that programs 1) asses carbon leakage at some stage prior to the issuance or acceptance of an offset in accordance with the most recent ISO 14064-2 standard; and 2) consider carbon leakage throughout a project crediting period. If the potential for leakage increases over time additional monitoring may be required.

Ownership

Project ownership is important for making a valid emissions reduction claim. This helps to ensure only one offset is created for each emission reduction activity. In some cases, the right to take credit for an emission reduction activity is not always clear. To address this issue, the Offsets Framework recommends that offset programs require information that can be used to legally demonstrate ownership of an emission reduction prior to the issuance or recognition of an offset. This information should be made available to the public and should clearly distinguish between project ownership and the ownership of credits that are generated as a result of the project activity.  To assist in this, the program administrator should develop a registry or tracking system to support the identification and tracking of offsets and avoid crediting the same emission reduction activity more than once.

Offset Use

The Offsets Framework makes several recommendations regarding the use of offsets. Offset use (and any limits to their use) should be defined by the offset program. For example, under British Columbia’s Carbon Tax [8] offset use is not permitted while under the Alberta’s Technology Innovation and Emissions Reduction Regulation [9], offset credits can make up 60% of a regulated facilities compliance obligation. The rules for offset use should be incorporated into program design so that once credits are retired (or used for compliance purposes) they are no longer eligible for use. The offset program should also seek to establish credibility and transparency by making adequate information regarding offset available to the public.

Enforcement

The Offsets Framework sets out guidance on enforcement in an effort to detect and respond to the potential failure by a market participant to comply with regulations set out by the offset program. Enforcement provisions help to ensure the environmental integrity of the offset program and are important for credit fungibility between sub-national offset programs. Enforcement provisions of an offset programs should have the following characteristics:

• establish a cost of non-compliance that is an appropriate deterrent
• ensure that accuracy, correctness, and freedom from material errors and omissions is the direct responsibility of a single party
• use robust verification procedures to ensure an offset credit meets the program requirements prior to serialization
• assess, the program level, project compliance with relevant requirements
• track the creation, transfer, and retirement of credits and make key information publicly available
• government regulators should undertake period audits or review of the individual offset projects during the crediting period
• include mechanisms that enforce environmental integrity of the program; and
• include mechanisms to address the possibility of errors, reversals or fraud.

Provincial Offset Considerations

Having discussed the detailed guidance on offset program design, we now turn our attention to its practical implications. At this time, five provinces in Canada have an offset credit compliance mechanism that is available, or will be available, to large industrial emitters in the future. Provinces that list performance credits as a compliance option either in proposals or legislation include: Alberta [10], Saskatchewan [11], Manitoba [12], Ontario [13], Quebec [14], New Brunswick [15], Nova Scotia [16], and Newfoundland and Labrador [17]. While all of these jurisdictions have (or intend to have) a provincial-level GHG pricing regulation, currently large emitters in Manitoba, Ontario, and New Brunswick are subject to the federal governments Output-based Pricing System (OBPS) [18]. The interplay between these compliance programs will continue to evolve.
In addition to the Offsets Framework which provides guidance on policy design for sub-national offset programs, the federal government has also indicated that it may be developing its own national offset system. The OPBS regulation enables these offset credits to be used as compliance units under federally regulated facilities. The OPBS regulation also enables the use of provincial offset credits and protocols as valid compliance units under federally regulated facilities, so long as they align with the Offsets Framework. To date, the Government of Canada has not recognized any provincial offset credits for use in the OPBS. Instead, the near-term focus has been on recognizing offset protocols for activities that occur across multiple jurisdictions. The protocols will include emissions reduction activities that steam from agriculture, waste, land use and land-use change, and the forestry sector.

Conclusion

The purpose of this update is to provide stakeholders with an overview of the guidance provided in CCME’s Pan-Canadian Greenhouse Gas Offsets Framework. Understanding the specific program design elements will better inform offset market participants whether they are looking to develop offset projects, minimize future compliance costs, or capitalize on offset trading opportunities. The area of using carbon offsets for compliance use is still in its nascency across most Canadian jurisdictions and we anticipate that early actors in this space will have a competitive edge.


References
[1] https://www.ccme.ca/files/Resources/climate_change/Pan-Canadian%20GHG%20Offsets%20Framework%20EN%201.0%20secured.pdf
[2] https://mailchi.mp/2b60578886e9/pan-canadian-greenhouse-gas-offsets-framework-program-design
[3] http://www.environnement.gouv.qc.ca/changements/carbone/WCI-en.htm
[4] https://www.canada.ca/content/dam/eccc/documents/pdf/climate-change/emissions-inventories-reporting/facility-greenhouse-gas-reporting/technical-guidance-emissions-2017data-en.pdf
[5] https://www.iso.org/standard/66454.html
[6] http://www.bclaws.ca/civix/document/id/loo82/loo82/392_2008
[7] http://bio.albertainnovates.ca/media/60579/schuh.pdf
[8] https://www2.gov.bc.ca/gov/content/environment/climate-change/planning-and-action/carbon-tax
[9] https://www.qp.alberta.ca/1266.cfm?page=2019_133.cfm&leg_type=Regs&isbncln
[10] http://www.qp.alberta.ca/1266.cfm?page=2017_255.cfm&leg_type=Regs&isbncln=9780779800193; https://www.alberta.ca/documents/climate/Ouput-Based-Allocation-System-Discussion-Document.pdf
[11] http://publications.saskatchewan.ca/#/products/102902
[12] https://web2.gov.mb.ca/bills/41-3/pdf/b016.pdf; https://www.gov.mb.ca/asset_library/en/climatechange/manitoba-output-based-pricing-system.pdf
[13] https://prod-environmental-registry.s3.amazonaws.com/2019-02/EPS%20Regulatory%20Proposal%20%28EN%29_0.pdf
[14] http://www.environnement.gouv.qc.ca/changements/carbone/credits-compensatoires/index-en.htm
[15] https://www2.gnb.ca/content/dam/gnb/Departments/env/pdf/Climate-Climatiques/HoldingLargeEmittersAccountable.pdf
[16] https://climatechange.novascotia.ca/sites/default/files/Nova-Scotia-Cap-and-Trade-Regulatory-Framework.pdf
[17] https://www.assembly.nl.ca/legislation/sr/annualregs/2018/nr180116.htm
[18] https://www.canada.ca/en/services/environment/weather/climatechange/climate-action/pricing-carbon-pollution/compliance-options-output-based-system.html