Effective January 1, 2012, offset credits under the Alberta Specified Gas Emitters Regulation will only be available on a "go-forward crediting" basis, meaning that historic emission reductions will not be accredited on the Alberta Registry. In addition, verification of emission reductions for offset credits will be held to a more stringent "reasonable" and not "limited" assurance standard. These changes suggest that anyone in Alberta that wishes to receive offset credits for historic emission reductions must seek accreditation promptly or else risk losing the ability to do so in the future. Furthermore, offset credit proponents and holders should be mindful of who has been engaged for third-party verification purposes to ensure that their offset credits are verified in accordance with the new verification standards.
Background
The Alberta Specified Gas Emitters Regulation (Alta. Reg. 139/2007) (the SGER) requires that all facilities in Alberta emitting more than 100,000 tonnes of carbon dioxide equivalent (CO2e) per year must reduce their "emissions intensity" by 12% from baseline levels (subject to a ramp-up period for newer facilities). One of the ways to do so, in addition to improving operational efficiency or making a technology fund contribution, is to purchase offset credits. Such credits must be derived from a project located in Alberta that has reduced its own emissions and has had such emission reductions verified by a third party.
Compliance under the SGER became mandatory on December 31, 2007. Since that time, approximately 17 million tonnes of CO2e have been reduced, offset, or compensated for through the technology fund. Roughly 30% of this compliance has come via the purchase of offset credits and this is increasing year-over-year.
Current Offset Credit Regime
Offset credits represent absolute reductions of CO2e emissions available for purchase by emitters to meet their emission reduction targets. The key to this system working, however, is confidence that the offset reductions have actually occurred and are permanent. In order to verify that offset credits do in fact represent absolute emission reductions, Alberta Environment (AENV) has established quantification "protocols" that provide the methods and calculations that must be used to create offset credits. In addition, third parties must be hired to establish the emission baseline for that specific project, determine the emission reductions that would occur already through compliance with regulations and standard industry practice (offset credits must represent reductions that are "additional" to reductions that would otherwise occur), and then monitor ongoing operational data to verify the reductions.
Based on audits during the first three years of compliance under the SGER, AENV has discovered inconsistencies in how third-party verifiers have been quantifying emission reductions for offset credits. There appears to have been confusion over the level of assurance being verified to and the tests needed to verify an offset. In addition, AENV has discerned several verification errors that were not caught prior to the emission reduction receiving accreditation.
Changes to Offset Credit Regime
As announced in late 2010 by AENV, given poor audit results of third-party verification reports, the Alberta Government plans to revise the verification guidelines and standards for offset credits and some existing protocols. These changes are expected before the end of 2011.
If offset credits exist in the Alberta Registry and pertain to projects for which "material" verification errors have been discovered, they will be revoked and removed from the Registry. Those offset projects may resubmit for offset credits in the future, so long as they can demonstrate compliance with the applicable protocol and program requirements. "Immaterial" verification errors may result in retroactive corrections to existing offset credits in the Registry.
In addition, effective January 1, 2012, third-party verifiers will be required to verify offset emission reductions to a "reasonable" – rather than a "limited" – level of assurance, consistent with international auditing standards. This change aims to make the verification process for offset credits more accurate, as well as more consistent. The "reasonable" assurance standard will require more stringent verification procedures and may entail future accreditation of third-party verifiers.
Finally, as of January 1, 2012, offset credits that are already serialized on the Alberta Registry will continue to be honoured, but all new offset credits will only be accredited on a "go-forward crediting" basis, meaning that credit will no longer be granted for historic emission reductions. While the "use" of offset credits is subject to Ministerial Guidelines under subsection 7(2)(d) of the SGER, subsection 7(1)(c) of the SGER explicitly allows accreditation for any emission reduction made on or after January 1, 2002. A change to the SGER may therefore be required to implement this policy.
Implications of Changes to Offset Credit Regime
Generators of offset credits in Alberta have until the end of 2011 to gain accreditation for any historic or ongoing emission reduction according to current verification standards. After that time, only ongoing reductions will be honoured and those reductions must be verified in accordance with the "reasonable" assurance standard. Offset generators should therefore move quickly to register any offset credits that they may not be able to register in 2012. In addition, offset credit generators and holders should be mindful of who has been engaged for third-party verification purposes to ensure that their offset credits have been and continue to be verified in accordance with the new verification standards. If errors are discovered in how those offset credits were calculated, the offset project may be revoked, those credits may be cancelled and the credit holder may be unable to rely on those credits to meet its emissions intensity targets.
Martin Ignasiak is a partner in Osler's Calgary office whose practice focuses on regulatory and environmental law. Matthew Keen practices environmental, energy and regulatory law. Alexander Duncanson is an articling student and completed his LL.B. (with distinction) at the University of Calgary.
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