Ontario Proposes Offset Credits Regulation and Protocol

The Ministry of the Environment and Climate Change (MOECC) has released its proposed Offset Credits Regulation. The Regulation is a key element of Ontario’s cap-and-trade program and would enable the creation of offset credits for eligible initiatives that voluntarily reduce, avoid or remove greenhouse gas (GHG) emissions. Capped participants could use these credits toward their emission reduction obligations.

What You Need To Know

• The Regulation is generally consistent with the framework for offset credits established under the Western Climate Initiative, a regional emissions trading program that includes California and Québec.
• The Regulation addresses the eligibility and registration of offset initiatives, and the process for creating and issuing offset credits. Capped participants in Ontario's cap-and-trade program may use offset credits to meet up to 8% of their compliance obligations.
• The MOECC will be adopting protocols that establish the rules eligible initiatives must follow to qualify for offset credits. These projects must achieve, among other things, real, quantifiable, verifiable and additional GHG reductions, avoidances or removals. The first such protocol proposed in Ontario relates to the voluntary capture and destruction of landfill methane (the LFG Protocol). The MOECC has retained the Climate Action Reserve to develop 12 additional protocols.
• The MOECC is accepting comments on the Regulation and LFG Protocol until November 18.¹

Overview of Proposed Offset Credits Regulation

The Regulation sets out the eligibility and registration requirements for offset initiatives, and the procedure for the creation of offset credits. Key elements of the proposed offset program include:

• Start date of offset initiatives. The start date of an eligible initiative is the first day on which it achieves a GHG reduction, avoidance or removal, as determined in accordance with the applicable protocol.
• Protocols. Specific rules governing each offset initiative type will be contained in initiative-specific protocols. The draft LFG Protocol is the first protocol proposed for incorporation into the offset program, and other protocols are expected to be added on a rolling basis. Currently, the Climate Action Reserve is developing twelve additional protocols for use in Ontario, Québec and potentially other provinces.
• Eligibility criteria for sponsors. Each initiative requires an Offset Initiative Sponsor, who will make the necessary submissions to the Ontario offsets registry and be responsible for reporting and verifying offset credits. To be eligible, an Offset Initiative Sponsor must, among other things, be a registered cap-and-trade program participant that is an individual, corporation, partnership or sole proprietorship and is resident (or has an establishment) in Canada.
• Eligibility criteria for offset initiatives. To be eligible for registration and to receive offset credits, each initiative must comply with the rules of the applicable offset protocol. Furthermore, the initiative must (i) not be already registered in any other program recognizing GHG reductions, (ii) be located in Canada (other than in Québec), (iii) have a start date on or after January 1, 2007, and (iv) be estimated to achieve at least one tonne of CO₂e in emissions reductions, avoidances or removals for any reporting period. A group of initiatives may also qualify for credits if the aforementioned criteria are met, and if the same Offset Initiative Sponsor and protocol version (including the calculations and baseline set out therein) apply to all initiatives in the group.
• Crediting periods. A crediting period is the period in which offset credits may be created for GHG reductions achieved by an offset initiative. It begins on the start date of the initiative and will last 30 years for GHG sequestration initiatives, 10 years for non-sequestration initiatives or another duration as specified in the applicable protocol.
• Eligibility criteria for offset credit creation. To be eligible to receive offset credits for a reporting period, the relevant GHG reductions must be achieved during an applicable crediting period. The initiative must also be registered, and an initiative report and a verification report must be prepared, with the verifier providing a positive statement that the stated emissions reductions have been achieved. The Offset Initiative Sponsor may then apply for the creation of offset credits by submitting an application incorporating the initiative and verification reports along with supporting documentation.
• Offset credit creation requirements. If an application for Ontario offset credits meets the eligibility requirements, the Minister will create offset credits equal to the amount of the GHG reductions achieved by the project, as stated in the lower of the initiative report or the verification report. Offset credits may be removed and cancelled if credits were issued under another program for the same GHG reductions.
• Verification requirements. Verification of offset initiatives must be performed by an accredited and independent body which must, among other things, assess the eligibility of the initiative and its sponsor, visit the site of the initiative at least once in respect of each initiative report, assess whether an initiative or reversal report contains any material discrepancies, and prepare verification reports.
• Holding account. The MOECC will hold back a certain percentage of offset credits to insure against the risk that issued offset credits are later invalidated. This approach has been adopted in Québec, and differs from California's "buyer liability" regime, which requires the purchaser of emissions offsets to replace any issued credits that are later reversed.

Offset Credits and Compliance Obligations

Once created, offset credits may be used by capped facilities to account for up to 8% of their compliance obligations. California enacted legislation in July which reduced the limit for offset credits usage (from 8% of compliance obligations to 4% for 2021-2025 and 6% for 2026-2030). The MOECC has not proposed any change to the 8% limit on the use of offset credits during the current compliance period, which ends on December 31, 2020. It has not yet proposed limits for the period post-2020.

Overview of Draft Offset Initiative Protocol

An offset protocol is a set of procedures and requirements for carrying out and quantifying the emission reductions, avoidances or removals achieved by a certain type of offset initiative that are real, quantifiable, verifiable and additional. The first offset protocol released by the MOECC is the LFG Protocol, which relates to the voluntary capture and destruction of landfill methane (LFG initiatives). Additional protocols are expected to be added on a rolling basis.

Key elements of the draft LFG Protocol include:

• Eligibility criteria. An LFG initiative must use an eligible destruction device to destroy methane (CH4) collected at an eligible landfill site. Eligible destruction devices include boilers, open and enclosed flares, microturbines or large gas turbines and CH4 liquefaction units. The requirements for an eligible landfill site are also established, including the amount of waste received annually and the maximum site capacity.
• GHG assessment boundary. The GHG assessment boundary defines the GHG sources, sinks and reservoirs (SSRs) associated with landfill activities that are required to be assessed under the LFG Protocol. The SSRs are used to calculate the actual GHG emissions occurring within the GHG assessment boundary (i.e., the initiative emissions).
• Calculation of emission reductions. The LFG Protocol sets out equations to calculate the baseline scenario emissions as well as the initiative emissions. The total GHG emissions reduction from the initiative during a reporting period is the difference between the relevant baseline scenario emissions and the initiative emissions for the period.

Additional Offset Protocols

Twelve additional offset protocols are currently under development by the MOECC, in collaboration with Québec. Two protocols are scheduled to be developed by the end of 2017, which will address mine methane capture and destruction and the destruction of ozone-depleting substances from insulating foam or refrigerants. The 10 other protocols, which mostly relate to initiatives in the agriculture and forestry sectors, are expected to be completed in 2018.

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¹ See: https://www.ebr.gov.on.ca/ERS-WEB-External/displaynoticecontent.do?noticeId=MTMzNTQz&statusId=MjAzMDc1&language=en

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