Canada: Compliance With Flexibility: Ontario Releases Regulatory Proposal For Offset Credits Under Cap-And-Trade Program

As Ontario puts the finishing touches on its cap-and-trade program, which will commence on January 1, 2017, the Ministry of Environment and Climate Change (MOECC) has released its Compliance Offset Credits Regulatory Proposal (the Regulatory Proposal) for a 45-day public comment period that will end on December 30, 2016. Under the cap-and-trade program, capped facilities will be required to either reduce their greenhouse gas (GHG) emissions or meet their compliance obligations through other regulatory tools, including the use of offset credits. As a compliance mechanism, offset credits provide emitters with greater flexibility and potentially lower cost options to meet their compliance obligations.

MOECC has proposed certain amendments to the Cap and Trade Program Regulation (the Regulation) to create the regulatory framework for the offsets component of the cap-and-trade program. Facilities and sectors which are not subject to the Regulation, and which are able to reduce GHG in accordance with the proposed requirements and associated protocols, will be eligible to seek to have offset credits created and issued. Offset credits, which are aimed at increasing the compliance options for capped facilities, may be used to meet up to 8% of a capped facility's compliance obligation.

The draft Regulatory Proposal provides an overview of the criteria, process and administrative requirements for the registration of offset initiatives and the creation and issuance of offset credits that can be used to meet a compliance obligation. In particular, the Regulatory Proposal outlines a number of program elements, including:

  • Offset Participants – The Regulatory Proposal identifies two types of participants : (i) Offset Initiative Operators (persons who undertake action to remove GHG or reduce/avoid emissions outside of capped sectors); and (ii) Offset Initiative Sponsors (persons who register an initiative, submits annual reports and application for offset credits). An Offset Initiative Operator will have the legal authority to implement the offset project and apply for offset credits; an Offset Initiative Sponsor can be either the Offset Initiative Operator or an individual designated by the Offset Initiative Operator to act on their behalf (the Offset Initiative Sponsor must be a resident or an entity with a presence in Ontario, and will be required to register with the Compliance Instrument Tracking System Service (CITSS)).
  • Offsets Initiative Registry – MOECC will establish an Offsets Registry as an online website which will be the public registry of compliance offset credit initiatives that are eligible to apply for Ontario offset credits. Offset Initiative Sponsors will submit offset initiative descriptions through the Offset Registry as well as all forms, data reports and verification reports in accordance with the Regulation. A prerequisite for registering an offset initiative on the Offsets Registry is the establishment of an account for the Offset Initiative Sponsor with CITSS.
  • Offset Project Start Dates – GHG emission reduction initiatives are eligible to create offset credits for use in Ontario's cap-and-trade program for offset initiatives that began on or after January 1, 2007.
  • Offset Crediting Periods – Crediting periods will be identified in the relevant protocols with the following limitations: (i) a non-sequestration offset credit initiative will have a continuous crediting period of no more than 10 years (i.e. offset credits cannot be created after 10 consecutive years unless a new crediting period is approved); and (ii) a sequestration offset credit initiative will have a continuous crediting period of no more than 30 years.
  • Offset Credit Creation Criteria – Offset credits must meet essential regulatory criteria with clear ownership to be real, additional, permanent, quantified, independently verified, enforceable and unique.
  • Reporting Requirements – No later than 18 months after the offset initiative begins, the Offset Initiative Sponsor must submit an Initiative Data Report of the first 12 months of reductions, avoidances or removals in a project report to the Offset Registrar, and annually thereafter for the duration of the offset initiative in order for the initiative to be eligible for offset credits. The Initiative Data Report will be in a format specified by MOECC.
  • Verification Requirements – Each Initiative Data Report submitted to MOECC to request the issuance of offsets must be accompanied by a Verification Report prepared by a verification organization accredited under ISO 14065 by a member of the International Accreditation Forum in either Canada or the United States and according to an ISO 17011 program, with respect to the sector of activity for the offset initiative. Details concerning verifier qualifications/criteria are as defined in Reg. 143/16 (Quantification, Reporting and Verification of Greenhouse Gas Emissions).
  • Buffer Account – The Buffer Account is a holding account for Ontario offset credits issued to sequestration offset credit initiatives where a percentage risk of reversal has been established in an Ontario Offset Protocol. The Regulation and protocol will set out the portion of the offsets that will be required to be placed in the Buffer Account. The intent of the Buffer Account is to provide a pool of offsets to serve as an insurance mechanism against unintentional reversals for all sequestration offset initiatives under an Ontario Offset Protocol and to provide an insurance pool to the overall offsets program. The requisite number of offsets will be placed in the Buffer Account at no cost to MOECC and will be administered by the Ministry. The Buffer Account will also include 3% of all non-sequestration offset credits as insurance for any offset credits found to be created in error or fraudulently and that are not replaced by the Offset Initiative Sponsor as required.
  • Offset Credit Issuance – Offset credit creation and issuance involves MOECC reviewing offset initiative documentation presented as evidence supporting the emissions reduction, avoidance or removal assertion being made by the Offset Initiative Sponsor, and accepting that documentation when it is satisfied all regulatory requirements of the Ontario offset program have been met. The documentation must consist of the annual Initiative Data Report accompanied by the annual Verification Report.
  • Project Reversals – Ontario offset protocols and the Regulation will have mechanisms in place to address permanence, including provisions to address unintentional and intentional reversals, error, and fraud. MOECC will remove offset credits from an Offset Initiative Sponsor's CITSS account in the event of an intentional reversal. The Regulation will also set out a requirement for the Offset Initiative Sponsor to replace offset credits for any offset credit issued for an offset initiative in the following cases: (i) an intentional reversal; (ii) where offset credits that were issued were not eligible for offset credits because of omissions, inaccuracies or false information in the information and documents provided by the applicant; (iii) where it is found that offset credits were applied for under another program for the same reductions, avoidances or removals as those covered by the application for offset credits under the Regulation; (iv) where the offset initiative was not carried out in accordance with the provisions of the Ontario offset protocol and/or the Regulation.

Protocols are a critical component of any offsets program. The Regulatory Proposal notes that Ontario is working with Québec to develop thirteen protocols that, in most cases, proponents across the country will be able to follow to create offset credits eligible for use in Ontario's cap-and-trade program. These protocols will be adapted from the best existing protocols for each offset initiative type. The first three will be based on Québec's existing protocols, with the remaining ten being mostly agriculture and forestry-related. The establishment of the Offset Registry will include the creation of Offset Application Forms, Offsets Program Guidance, and the Verification System (draft of verification statement template and forms). Other implementation details will be developed as the Regulatory Proposal is refined and ultimately finalized.

The Regulatory Proposal has been posted for a 45-day public review and comment period starting November 15, 2016. Stakeholders have until December 30, 2016 to submit comments to the individual listed on the Environmental Registry web site or comments may be submitted on-line (Reference: EBR Registry number 012-907).

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