On June 10, 2009, the Federal Government announced its draft "Offset System for Greenhouse Gases" (Offset System) as a component of Canada's plan to reduce greenhouse gas emissions (GHG) to a target of 20 percent below 2006 levels by 2020. This announcement is in furtherance of statements made by the Minister of the Environment (Minister) Jim Prentice in late 2008 and early 2009 about seeking to pursue a "harmonized" and "continental" climate change strategy with the United States, although it does not in itself establish the cap-and-trade regime expected to be implemented. The announcement also does not explicitly state that the "Turning the Corner" intensity-based framework previously announced is affected, but the "Turning the Corner" framework is expected to be replaced. At the moment, this should be viewed as an additional tool that will be a key component of any climate change regime the federal government adopts. The Minister did note in announcing the Offset System that the forthcoming federal scheme would complement, and not supplant, any existing or emerging provincial climate change regimes.
The Offset System will be based on the ISO 14064-2 international standard and will be administered by regulation under the Canadian Environmental Protection Act, 1999. The draft Program Rules and Guidance documents that have been released will be published in the Canada Gazette on June 13, 2009 for public review. Final versions are to be published in the Fall of 2009, following which "Offset Quantification Protocols" will be developed.
The Offset System will play a key role in the development of a Canadian GHG cap-and-trade regime because it will give industry some certainty once firm GHG caps have been imposed on industry sectors. However, the importance of this role is not clear because it is not known whether the Canadian regime will include an alternative compliance mechanism, such as Technology Fund contributions (as in Alberta and the "Turning the Corner" plan) and what financial penalties might be imposed for exceeding emissions caps. Additionally, the regulatory and administrative burden, both in time, cost and paper remains unknown, but is not likely to be insignificant.
Highlights of the Draft Offset System
The Offset System is designed to recognize, in a systematic and verifiable way, projects that reduce the emission of greenhouse gases into the atmosphere. The Minister may issue offset credits to any project proponents who can prove that their project:
- fits under one of the approved Quantification Protocols;
- has been successfully registered with the Offset System; and
- has been verified by an accredited "verification body."
The Offset System also envisages its own tracking system to track each credit from issuance to retirement and to ensure that every credit is unique. Importantly, the federal government has acknowledged that if formal linkages are developed between this system and others in North America or abroad, consideration will be given to the mutual recognition of credits among systems.
Offset System Details
Technical Requirements for Offset Projects
In Canada's Offset System, all Offset Projects must:
- occur in Canada;
- achieve real and verifiable reductions in one of the greenhouse gases listed in Schedule 1 of the Canadian Environmental Protection Act, 1999;
- have started on or after January 1, 2006 and reductions must have occurred on or after January 1, 2011;
- exceed the reductions defined in the baseline for that project type;
- exceed any legal requirements for the project;
- exceed what is expected from receipt of other climate change initiatives (i.e., the same credit cannot count towards both the federal and Alberta regimes); and
- be unique, in the sense that a reduction in greenhouse gas emissions can only be used once to create an offset credit.
Quantification Protocols set out processes that projects must follow to generate recognized offset credits. For example, if an offset project consists of planting trees and protecting that land from any future development, an "afforestation quantification protocol" would set out, in a systematic way, the criteria for verifying the project.
Quantification Protocols must be in place prior to submission of a project application. However, individuals may design and propose Quantification Protocols for recognition. Protocols that have already been developed in other offset or project-based crediting systems will be reviewed in a "fast tracked" manner for possible adaptation for use in Canada's Offset System. Initial Protocols will be developed for: afforestation; landfill gas capture and combustion; reduced or no tillage soil management; wind; forest management; wastewater management; and anaerobic biodigesters. These protocols are expected to be released by the end of 2009 or the start of 2010. External systems from which these Protocols will be adapted include Alberta, the California Climate Action Registry, GE AES Greenhouse Gas Services, the Clean Development Mechanism and the Climate Action Reserve.
Registration of Offset Projects
All projects must be registered to generate approved offset credits. However, registration expires after eight years, with the option of an additional 8-year term if re-approved (Note that agriculture and forestry projects have the option to re-register two or four times, respectively). Once the registration period ends, the project can no longer generate offset credits.
Before credits may be issued, proponents must first submit a "Greenhouse Gas Assertion and a Project Monitoring Report" at the conclusion of the first calendar year after the project was registered or when 100,000 tonnes of GHG reductions have been achieved, whichever comes first. The Report must set out the GHG reductions that are being claimed and must demonstrate conformity with the requirements in the Quantification Protocol. An independent third-party "Verification Body" that has been accredited by the Standards Council of Canada must then review the Report and provide a Verification Statement.
The federal government has now identified how it will implement the necessary step of generating and verifying carbon offsets for any climate change regime that it implements. Industry should be aware of the emissions protocols that will be fast-tracked and consider what opportunities may lie within present operations to minimize the difficulty of complying with the eventual federal regime. Importantly, the federal government has also indicated that its regime should not conflict with provincial regimes, such as the existing Alberta regime and the proposed Ontario and Québec cap-and-trade schemes, although it is not yet clear how such conflict will be avoided. Also key is the potential willingness to recognize offset credits from other jurisdictions, which should allow for the development of a broader carbon market beyond Canada's borders. While the announcement may give some much-needed detail and certainty on the federal intentions regarding climate change regulation, the political uncertainty in Ottawa could once again cause the national greenhouse control approach to return to the drawing board.
Dan Kirby is a partner and Co-Chair in the firm's Environmental Law Group. Shawn Denstedt is a partner in the firm's Calgary office. Alexander Duncanson is a summer student in the firm's Calgary office.
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