The Government of Canada is developing a federal GHG offset system. This is great news for regulated entities. An offset system provides additional compliance options for those companies that have a compliance obligation under the federal Output-based Pricing System. Additional compliance options typically means lower compliance costs. The not so great news is that the regulation are being delayed due to COVID-19. The draft regulations were originally targeted for June 2020. Environment and Climate Change Canada (“ECCC”) is now targeting fall 2020. However, the work continues throughout the pandemic. In July 2020, ECCC published a discussion paper entitled Carbon Pollution Pricing: Considerations for Protocol Development in the Federal Greenhouse Gas Offset System [1]. The paper provides additional details and design considerations for the Federal GHG Offset System (“the System”), with a focus on protocol development.
This recent discussion paper builds on a previous discussion paper called Carbon Pollution Pricing: Options for a Federal GHG Offset System [2], released in June 2019, and the Canadian Council of Ministers of the Environment (CCME) Pan-Canadian Greenhouse Gas Offsets Framework [3] (“Offsets Framework”) that sets out guidance to jurisdictions that are developing or operating an offset program. In previous newsletters, we provided an overview of the Offsets Framework design recommendations [4] and guidance on specific design elements [5]. We also released a newsletter overviewing details of the System as set out in the June 2019 discussion paper [6]. In this newsletter, we provide an overview of the July 2020 discussion paper focused on protocol development.
Protocols specify the mandated requirements for project planning and operating expectations, including monitoring and data management requirements, for greenhouse gas (GHG) emissions reductions or removal enhancements projects. Understanding protocol requirements is essential for offset project developers as well as for offset purchasers looking to conduce due diligence on offset credits. In other words, if your company plans to be involved in the offset market as either a developer or purchaser, you need to understand offset protocols.
Update to key policy elements of the Federal GHG Offset System
The July 2020 discussion paper outlines key policy elements that have been refined based on feedback received following the release of the June 2019 discussion paper. The first update relates to the application of the System. ECCC has clarified that in provinces where an offset program is already in place, the federal system will not apply if there is already an active protocol for the same project activity. For example, a federal landfill gas capture protocol would not apply in Alberta given that Alberta already has landfill gas capture listed as an approved protocol type [7]. If a protocol is published by a province after the federal system takes effect, projects will be able to continue generating credits under the federal system (but will not be able to extend the crediting period). ECCC also notes that facilities covered under the OBPS can submit eligible provincial offset credits (referred to as “recognized units”) to meet their compliance obligation, provided the credits are from offset programs and protocols on ECCC’s List of Recognized Offset Programs and Protocols for the OBPS. To be included on the List, provincial offset programs and protocols must meet certain eligibility criteria. Recognized provincial offset programs and protocols are still to be determined, but will not be limited to the project types discussed in the July 2020 paper.
The second update on key policies under the System relates to the receipt of financial incentives and project eligibility. ECCC had previously stated that offset projects must demonstrate financial additionality above and beyond any other climate change incentives (e.g. government grants). However, there was significant pushback on this proposal. The primary concern came from project developers who felt that this could have a negative impact on project development and be difficult to track when financial incentives were not explicit. ECCC heard this and changed course. Project eligibility will now be linked to entitlement. So long as the project proponent is entitled to the emissions reduction benefit of a project, the project can generate credits. Some government incentives require project developers to forfeit entitlement, but not most. This change of course should increase credit development and supply in the federal system.
The final update on key policies relates to avoiding overlap with other GHG emissions reduction programs. ECCC originally announced that offset projects are not eligible if the project is registered in another regulatory or voluntary offset system. For example an offset project that is registered under the BC offset project could not also register the same credits under the federal system. This requirement is now being expanded to include the Clean Fuel Standard ("CFS"). In other words, project proponents will need to choose which program they will participate in. Given that credit prices in programs similar to the CFS trade above CAD $300 per tonne of carbon dioxide [8], if is likely that project developers will choose the CFS over the federal offset system where prices will be capped at $50 per tonne of carbon dioxide (at least until 2022).
Protocol Development
The focus of the July 2020 discussion paper is on offset protocols. The paper begins by providing details on offset protocol development. ECCC has stated that protocol development will happen in parallel with the System regulations. This should ensure that protocols will be ready for use with the regulations come into effect.
ECCC’s protocol requirements for quantification, monitoring, and reporting will be based on the international standard ISO 14064-2, Specification with Guidance at the Project Level for Quantification, Monitoring, and Reporting of Greenhouse Gas Emission Reductions or Removal Enhancements [9]. The ISO standard’s key elements are outlined in Figure 1. Using the ISO framework, as well as an assessment of protocol-level additionality, ECCC will look to adapt existing protocols or protocol methodologies from both domestic and international compliance programs and voluntary markets. This will help to streamline protocol development and prevent lengthy delays in the process.
Figure 1 – Key principles of the ISO 14064-2 standard
Protocol-level additionality
All protocols approved by ECCC will be assessed on the basis of protocol-level additionality. ECCC has stated that additionality will be informed by the United Nations Framework Convention on Climate Change (UNFCCC’s) “Tool for the demonstration and assessment of additionality” [9]. This will help to ensure that a consistent and transparent approach. Figure 2 outlines that criteria that will be used to assess project additionality.
Figure 2 - Criteria to assess whether a proposed project type is additional in particular jurisdictions or across Canada
In assessing protocol-level additionality, Figure 3 can be used as a guide. All projects must meet the requirement of regulatory additionality (i.e. the project is not required by law and is not covered by carbon pricing). If a project activity is a “first of its kind” project if will be deemed additional regardless of penetration rate and other additionality criteria. If the project is not a “first of its kind” project can still meet the additionality test by being either below a 40% penetration rate or by having overcome one or more financial, technological, or societal barriers.
Figure 3: Federal offset protocol-level additionality assessment process
Other criteria to assess protocols for inclusion in the federal system
When determining which project types it will prioritize in its protocol development process, ECCC will consider a number of factors. These include:
- Whether project activities are economically and technically feasible. This means that project technologies that are years away from commercialization will have to wait before and offset protocol is in place.
- The potential for the project to generate credits. Priority will be given for those projects that have potential to reduce GHG emissions at scale.
- Potential environmental co-benefits (e.g. biodiversity). This means that projects related to forestry and land-use will be high on the list of priority protocols.
- Anticipated time for completion of a final protocol. Time to completion for a protocol largely relates to the complexity of the baseline scenario. More complex baseline scenarios (e.g. dynamic versus static) will add to the protocol development timeline.
- Application of the protocol across the country. Protocols that have broad applicability will be prioritized for development.
Conclusion
In this newsletter we provided and overview of updates to key policy elements of the federal offsets system including the application of the system, the receipt of financial incentives, and avoiding overlap with other GHG emissions reduction programs. We also provided details on protocol development including additionality tests at the protocol-level. The July 2020 discussion paper goes onto provide information on the protocol development process, design considerations, and development phases. We will provide details on these policy design elements in our next newsletter. For now, digest the information discussed here. Understanding how offset protocols will be approved is crucial for getting your project off the ground. Those who understand the rules of the game and act now to gain a competitive advantage in this emerging market will reap the rewards.
References
[1] https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/output-based-pricing-system/federal-greenhouse-gas-offset-system.html
[2] https://www.canada.ca/content/dam/eccc/documents/pdf/climate-change/pricing-pollution/Options-GHG-Offset-System.pdf
[3] https://www.ccme.ca/files/Resources/climate_change/Pan-Canadian%20GHG%20Offsets%20Framework%20EN%201.0%20secured.pdf
[4] https://us12.campaign-archive.com/?u=9260b91e2aab82400d1bb3232&id=b6cec9e2f7
[5] https://us12.campaign-archive.com/?u=9260b91e2aab82400d1bb3232&id=ce423c06af
[6] https://mailchi.mp/fab7d777a996/options-for-a-federal-greenhouse-gas-offset-system
[7] https://www.alberta.ca/alberta-emission-offset-system.aspx
[8] https://mailchi.mp/7ce775a359fb/canadas-clean-fuel-standard-credit-trading-and-markets
[9] https://cdm.unfccc.int/methodologies/PAmethodologies/tools/am-tool-01-v5.2.pdf/history_view