Environment Canada and Climate Change ("ECCC") has published the list of project types associated with the Federal Offset Protocols (the "Protocols") that are currently in development. The Protocols will establish an approved approach for quantifying Greenhouse Gas ("GHG") emissions reductions for applicable offset projects.

Canadian Greenhouse Gas Pollution Pricing Act

The Greenhouse Gas Pollution Pricing Act (the "Act") was introduced in 2018 to establish the legal framework to help Canada achieve its GHG reduction targets and to stimulate investments in clean technologies. Part I of the Act imposes a regulatory charge for, among other things, the production, distribution and use of applicable fuels. Part II of the Act establishes an Output Based Pricing System ("OBPS") which is a mechanism that is intended to reduce Canada's carbon footprint by putting a price on GHG emissions for large industrial emitters.

The OBPS serves as a federal backstop, meaning that it only directly applies in provinces and territories that have opted in, or do not have a carbon pollution pricing system that meets the federal stringency benchmark. Under the OBPS, persons responsible for covered facilities will be required to emit GHGs at levels below their applicable threshold over the course of the compliance period. Persons responsible for covered facilities that emit above that threshold will be required to provide compensation for the excess emissions by means of

  • a remittance of compliance units, including surplus credits and offset credits;
  • an excess emissions charge payment; or
  • a combination of both.

Firms who succeed in emitting GHGs at levels below their threshold will accumulate more compliance units, namely surplus credits, which can be traded for their market value for additional revenue.

Federal GHG Offset System

The Act provides that the Governor in Council may make regulations to establish an offset credit system for projects that prevent GHGs from being emitted or that remove GHGs from the atmosphere. Each offset credit issued under the Federal GHG Offset System represents the reduction or removal of one ton of carbon from the atmosphere by the offset project. The main purpose of the offset credits is to be traded in the same manner as surplus credits in the OBPS context. Firms that voluntarily reduce or avoid emissions from the source or increase removals by GHG sinks will have the opportunity to monetize their activities by generating offset credits and transferring them to, among others, OBPS participants and to other companies who have set internal GHG reduction targets. More details on the structure and operational aspects of the Federal GHG Offset System will be made available in the draft regulation, which the Federal Government has targeted to release in winter 2021.

Federal Offset Protocol

ECCC has recently published a list of Protocols that are currently in development. These Protocols establish the approved approach for quantifying GHG emissions reductions for a given offset project type. The Protocols also impose planning and operational requirements, including monitoring and reporting requirements associated with a given project type.

According to the ECCC, the first Protocols scheduled for development include the following offset project types:

  • Advanced Refrigeration Systems;
  • Improved Forest Management;
  • Landfill Methane Management; and
  • Enhanced Soil Organic Carbon.

While the Protocols for the above project types will likely be the first to be completed, ECCC has indicated that the following project types are under consideration to be included in the subsequent batch of Protocols to be developed:

  • Aerobic Composting;
  • Afforestation/Reforestation;
  • Livestock Feed Management; and
  • Avoided Conversion of Forests.

Furthermore, ECCC has indicated that it will analyze future results of various protocols to assess the feasibility of the following additional GHG offset project types:

  • Avoided Conversion of Grasslands;
  • Reduced Nitrogen Oxide Emissions from Agriculture Fertilizers;
  • Anaerobic Digestion; and
  • Livestock Manure Management.

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