Overview of Pan-Canadian Greenhouse Gas Offsets Framework

In 2016, the Canadian federal government released the Pan-Canadian Framework on Clean Growth and Climate Change [1] which sets out a plan for 1) pricing carbon pollution; 2) complementary measures to further reduce emissions across the economy; 3) measures to adapt to the impacts of climate change and build resilience; and 4) actions to accelerate innovation, support clean technology, and create jobs. The Pan-Canadian Framework on Clean Growth and Climate Change stated that federal, provincial, and territorial governments would work together through the Canadian Council of Ministers of the Environment (CCME) to examine options for the reporting of emissions and inventories to ensure consistency across provinces and territories, to support Canada’s reporting to the United Nations Framework Convention on Climate Change (UNFCCC) [2], and for a pan-Canadian offset protocol framework and verified carbon credits that can be traded domestically and internationally.

Last fall, the CCME released the Pan-Canadian Greenhouse Gas Offsets Framework [3] (“Offsets Framework”). The Offsets Framework is intended to support cooperation among sub-national jurisdictions by identifying possible collaborative approaches to a shared offset program infrastructure and operation. Additionally, the Offsets Framework is intended to provide guidance to jurisdictions that are developing or operating an offset program. The long-term goal of the Offsets Framework is the have a consistent set of requirements that will enable the transferability of offset credits across Canadian jurisdictions.

The purpose of this update is to provide stakeholders with an overview of the Offsets Framework including the program design recommendations. Understanding the Offsets Framework will be crucial for early-actors looking to gain a competitive edge in offset development, trading, or early-action compliance.
 

Overview of the Offsets Program Design Recommendations

The Offsets Framework provides some high-level goals on program design for an offsets system. The first goal is to create an efficient approach to achieving GHG targets that result in lower-cost reductions. The approach recognizes that higher-cost reduction opportunities may require technology advancement before they can be economically addressed. Therefore, an offsets system should include emission sources and sectors that are not easily reached by carbon pricing or regulatory approaches. This broadens the pool of low-cost emissions reduction opportunities that can occur in the near-term. These emission reduction opportunities commonly include nature-based carbon removal through land-based carbon sequestration.

The second high-level goal of an offset system is to provide credible emission reductions that can be used in place of direct emissions reductions. These emissions reductions should follow standard measurement and reporting. To be credible, offset programs should use best practices for measuring, monitoring, and verifying GHG emissions to ensure the offsets produced in each jurisdiction can be interchangeable (or fungible) and can credibly support Canada’s action under the Paris Agreement.

The third high-level goal is to create alignment on program design. To this end, the Offsets Framework outlines several program design elements. Alignment between sub-national jurisdictions on these program design elements can help to reduce investment uncertainty in offset projects. The Offset Framework sets out the following elements as being most essential:

Global Warming Potentials (GWPs): Canada should adopt internationally agreed-upon updated GWPs according to the UNFCCC reporting guidelines. Further, programs should only include coverage of GHGs that are recognized and accepted by the UNFCCC.

Transferability: A sub-national jurisdiction’s offset system or program design may support the creation of offsets anywhere in Canada. The Offsets Framework recommends that the sub-national jurisdiction adopt agreements with host jurisdictions to avoid double counting of emission reductions.

Quantification: The quantification of GHG emission reductions should use conservative estimation of emission reductions to avoid over-issuance of offset credits. Programs should use the same methodology for offset projects when there is a regulated quantification methodology available and methodologies should adopt the most recent ISO 14064-2 Standard [4] for the quantification of offset projects. A common approach to quantification is a critical component of offset fungibility to maintain environmental integrity and equity between sub-national programs. In Canada, large facilities are required to quantify emissions according to federal guidelines [5] and it is likely that similar standardization will be provided to offset project developers.

Protocols: Offset protocols provide guidance to project developers and assurance providers. Protocols can reduce risk for project developers and investors by clearly setting out the requirements, quantification methodology, planning, and operational expectations for a project. These project plans should be in place before a project is implemented. Alberta developed Canada’s first regulatory offset system and has a comprehensive list of offset protocols [6] which could potentially be a starting point for approved protocols under a pan-Canadian offset system.

Project Start-Date: The start date is the earliest date a project activity can qualify as an offset project and, therefore, generate offset credits. An offset is typically only awarded if the GHG emissions reduction assertion resulting from the project is at least partially influenced by the opportunity to create an offset. Programs that provide offset credits for projects that were developed prior to the emission reduction program being in place may have lower credibility.

Verification:  Verification is the process whereby project information is submitted by a project proponent to a third-party service provider (or regulatory oversight body) for assurance that the project meets program and protocol requirements. Project information typically needs to be well-documented and easily understood by market participants, governments, and other stakeholders for the verification step to be successful. Verification usually occurs in the context of “limited” or “reasonable” level of assurance. The Offset Framework recommends that programs require a “reasonable level of assurance”. This translates to level a maximum ±5 percent threshold for materiality in the emission reduction claim. The materiality threshold for a “limited level of assurance” will vary by program. It is important that sub-national programs align on the level of assurance in order to enable the fungibility of offset credits.

Carbon sequestration: Sequestration projects result in the removal or storage of GHGs. These projects should have a comparable impact to emission reductions achieved by non-sequestration projects. However, there is a risk that projects that sequester or store GHGs in geologic, organic, or man-made reservoirs could eventually be release to atmosphere. Under this scenario, the offset credits generated by the project would also need to be reversed in order to maintain the environmental integrity of the program. To address this issue, the Offsets Framework recommends that if reductions or removals for a specific project are reversible, sub-national programs should include measures to assess and ensure the permanence of project emission reductions or removals. These provisions could include: 

• Measures for effective monitoring systems, risk mitigation approaches, and contingency plans that address how any affected offsets will be replaced or returned in the event of a reversal that is the result of proponent intention or negligence.
• Measures to assure permanence for reversals that are not the result of proponent intention or negligence.
• Project contingency plans that include specific mechanisms that are exercisable at the time a reversal is identified, whether the proponent is solvent, exists in its original form, and has ownership of or responsibility for the project.

Conclusion

In theory, GHG offsets are a perfect substitute for direct emission reductions required by the regulated emitter. In practice, the sustainability of the offset credits with direct emission reductions depends on the nuanced program design elements which inform the environmental integrity of the GHG emission reduction claim.

Alignment between sub-national jurisdictions on these program design elements can increase market fungibility and the number of offset credits available to the market.  The offset credits can often be created and sold for a lower cost than that of the emitter’s direct reductions. This is 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). The Offset Framework provides insight into the potential future program design that jurisdictions will likely be seeking to align around. All existing and future market participants should pay attention to these trends.

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