In May, as result of the the COVID-19 pandemic, the Government of Canada announced a delay to the publication of proposed regulations for the federal GHG offset system in Canada Gazette, Part I. The proposed regulations were originally targeted for June 2020. Environment and Climate Change Canada (ECCC) is now targeting fall 2020 to publish the draft regulations. In light of this pause, there is an opportunity for offset market participants to take stock and prepare for the introduction of a federal GHG offset system.
The federal GHG offset system will provide additional compliance options under the federal Output-based Pricing System. The system is being developed to encourage low-cost domestic GHG emissions reductions or removal enhancements through voluntary activities that are not covered by carbon pricing. This includes activities in the forestry, agriculture, and waste sectors. The Government of Canada intends to publish a discussion paper in mid-2020 to seek input on specific aspects of the proposed federal GHG offset system, including which project types should be prioritized in the first phase of protocol development. The forthcoming discussion paper will build on a document entitled Carbon Pollution Pricing: Options for a Federal GHG Offset System [1], released in June 2019. In this blog post, we provide an overview of the June 2019 document.
Background
A price on carbon is a central focus of the Pan-Canadian Framework on Clean Growth and Climate Change (PCF) [2]. In October 2016, the Prime Minister announced the Pan-Canadian Approach to Pricing Carbon Pollution. The Pan-Canadian approach effectively sets a national benchmark for pricing carbon while allowing provinces and territories to develop their own equivalent carbon pricing systems.
In 2019, the federal government finalized the Output-Based Pricing System (OBPS) Regulations under the Greenhouse Gas Pollution Pricing Act [3]. The OBPS was developed to regulate GHG (greenhouse gas) emissions from facilities carrying out certain types of industrial activities. The OBPS sets an emissions-intensity threshold, or output-based standard (OBS), for each sector under the system. Each facility calculates an emissions limit based on it sector OBS and its level of production. Facilities that emit less than their limit earn credits they can sell or bank for future compliance use. Facilities with emissions above their limit can comply by paying an excess emissions charge and/or remitting a compliance unit.
A compliance unit can be 1) a surplus credit issued to facilities that emitted less GHGs than their OBS limit; 2) a federal offset credit; or 3) something called a “recognized unit”. At this time, the only “recognized units” proposed to be permitted for compliance use are provincially issued offset credits that meet the offset program and offset protocol eligibility criteria in the OBPS Regulations. In addition to program and protocol eligibility criteria, the OBPS Regulations will specify eligibility criteria for credits issued by provinces. This means that certain offset credits under existing offset programs in British Columbia, Alberta, or Quebec could be eligible recognized units under the OBPS in the future.
Principles of a Federal Offset System
The establishment of a federal GHG offset system (the System) is expected to increase the supply of compliance units that are available for use under the OBPS. The design of the Federal GHG Offset System will also take into consideration the following principles:
- Reductions occur in Canada
- Complement existing climate policies
- Administratively simple
- Builds on expertise in carbon markets in Canada and other jurisdictions
Over the course of 2016 to 2018, federal, provincial and territorial governments collaborated through the Canadian Council of Ministers of the Environment (CCME) to develop the Pan-Canadian Greenhouse Gas Offsets Framework (Offsets Framework). Under the Offsets Framework, federal, provincial, and territorial government authorities committed to supporting the alignment of the System with other programs across Canada.
In previous newsletters, we provided an overview of the Offsets Framework design recommendations [4] and guidance on specific design elements [5]. ECCC has stated it will align with the Offsets Framework in the design and development of its proposed federal system. ECCC will be responsible for the following aspects of the System:
- overseeing operations
- overseeing federal protocol development, review and approval;
- registering offset projects, issuing verified offset credits and retiring offset credits after they are used for compliance or voluntary purposes; and
- providing compliance and enforcement structures and processes.
Proposed Criteria for Offset Project Eligibility
The proposed eligibility criteria for offset projects include the following elements: scope, real, quantifiable, additional, incremental to other incentives, unique and verifiable. Each of these criteria are discussed in Figure 1.
Figure 1 - Proposed criteria for offset project eligibility
Federal Offset Protocol Development and Protocol Considerations
Only activities where ECCC has an approved protocol in place will be eligible to generate offsets. ECCC plans to evaluate the potential to adapt offset protocols from existing provincial offset systems to minimize costs and to accelerate federal protocol development. ECCC has also stated that Technical Advisory Teams may be created on an ad-hoc basis to help develop federal protocols. The focus and composition of the Technical Advisory Teams will vary depending on the offset project type.
The federal protocols will adhere to the principles of relevance, completeness, consistency, accuracy, transparency and conservativeness. In addition, each offset protocol will address the elements outlined in Figure 2.
Figure 2 - Federal Offset Protocol will address the elements of additionality, leakage, verifiability, and leakage
Monitoring, Reporting, and Verification
All offset projects must be implemented in a way that is consistent with the applicable federal protocol, including the requirements for GHG quantification, monitoring, and record keeping. To this end, ECCC requires projects to complete a Project Report that will identify: the project, applicable protocol, the reporting period covered, and the GHG reductions in tonnes of CO2e that are claimed. ECCC has proposed a maximum crediting period for non-sequestration projects of 8 years and (with the potential for renewal) or a 10 years (with no renewal). The ten year crediting period is intended to provide certainty around project economics in a timeframe that aligns with bank financing durations. Sequestration projects are given a longer crediting period given long-lived nature of these project types. For example, forest sequestration projects absorb carbon slowly over a long period. The proposed maximum crediting period length would be 30 years unless specified in the applicable protocol. Beyond the 30-year crediting periods, there would be potential for renewal.
In addition to monitoring and reporting requirements, ECCC also specifies details for verification. All Project Reports must be verified by a Verification Body in accordance with ISO 14064-3: Specification with guidance for the verification and validation of greenhouse gas statements [6]. Validation, which occurs prior to the development of a Project Report, is not a requirement. However, ECCC suggests that validation may help ensure the offset project’s case for additionality is robust, conservative and justifiable. Project Proponents may want to consider validation prior to commencing project activities in order to reduce risk associated with the offset project. In some cases, a project may successfully complete the verification step and be issued credits, but the credits are later found to not be valid. Remedies for offset credits issued in error or credits that are no longer valid are discussed in Figure 3.
Figure 3 - Federal offset credits issued in error or are no longer valid
International Use of Credits
ECCC has noted that international offset credits could complement domestic emission reductions. Article 6 of the Paris Agreement provides a framework for “internationally transferred mitigation outcomes” (ITMOs) that allow emission reductions or increased removals that occur in one country to be transferred and recognized towards meeting another country’s national GHG target. Canada has not yet decided whether it will acquire ITMOs to help meet its 2030 GHG target under the Paris Agreement. Furthermore, negotiations under the United Nations Framework Convention on Climate Change (UNFCCC) are still ongoing for elaborating guidance on the use of ITMOs under Article 6.
ECCC has stated that it will also consider how offset credits might be used by other international programs such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) in addition to ITMOs under Article 6 of the Paris Agreement. The area of international offset credit use has garnered much discussion since the Paris Agreement was reached in 2015. International offset credits have the potential to drastically reduce GHG compliance costs for Canada’s industry so this will continue to be an area of keen interest for offset market observers.
Conclusion
Given the fact that offset credits can often be created and sold at a lower cost than an emitter’s direct reductions, offset credits have the potential to reduce compliance costs. For offset developers, an offset system that is linked to the national carbon price creates a stable and predictable source of revenue. In short, a federal offset system has the potential to be a win-win for both large emitters (which can meet compliance obligations at a lower-cost) and offset project developers (which can create financial value in the form of an additional revenue stream for their project or activity). Canada has taken a major step towards a national GHG offset system with the release of the document entitled Carbon Pollution Pricing: Options for a Federal GHG Offset System. The principles and projects criteria for offset projects will shape the design of this new program. All existing and future market participants should pay attention to this discussion document. Market participants that understand the nuances of the system can act now and gain a competitive edge.
References
[1] https://www.canada.ca/content/dam/eccc/documents/pdf/climate-change/pricing-pollution/Options-GHG-Offset-System.pdf
[2] https://www.canada.ca/en/environment-climate-change/news/2016/10/canadian-approach-pricing-carbon-pollution.html
[3] https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/output-based-pricing-system.html
[4] https://us12.campaign-archive.com/?u=9260b91e2aab82400d1bb3232&id=b6cec9e2f7
[5] https://us12.campaign-archive.com/?u=9260b91e2aab82400d1bb3232&id=ce423c06af
[6] https://www.iso.org/standard/66455.html