Government of Canada releases discussion paper for federal greenhouse gas offset system

On July 2, the Government of Canada released a discussion paper titled Carbon Pollution Pricing: Considerations for Protocol Development in the Federal Greenhouse Gas Offset System. Offset credits are a key element of the federal Greenhouse Gas Pollution Pricing Act1, which establishes a levy on fossil fuels and an Output-based Pricing System (OBPS) for industrial facilities. Under the OBPS, to cover greenhouse gas (GHG) emissions in excess of annual limits, facilities must make payments or remit compliance units (including offset credits from eligible projects, as quantified pursuant to offset protocols). The discussion paper is the next significant step toward the development of those protocols.

What you need to know

The discussion paper builds on a June 2019 proposal by Environment and Climate Change Canada (ECCC) that discussed options for a federal GHG offset system. After considering public comments, ECCC has now outlined a further refined approach for offset protocol development, including the following:

  • Federal offset protocols are intended to apply in each province or territory that does not already have an active, published protocol for a given project type.
  • Project eligibility under the federal system will be linked to a proponent’s contractual right to, or ownership of, offset credits generated.
  • In developing offset protocols, ECCC will aim to ensure that the emissions reductions occur in Canada, that the protocols promote projects in industry sectors (such as agriculture or forestry) that are generally not covered by carbon pricing, and that the system is as administratively simple as practicable.
  • ECCC proposes to apply an “umbrella” approach, which will establish a core set of requirements in each protocol that are unlikely to vary across jurisdictions.
  • Under a phased development approach, ECCC will: 1) in the initial phase, target priority project types; and 2) in later phases, focus on newer or more complex project types. The current shortlist of priority project types includes: advanced refrigeration, aerobic composting of organic waste, afforestation/reforestation, anaerobic digestion, improved forest management, landfill methane, livestock manure, and soil organic carbon.

ECCC is seeking public comments on the discussion paper until September 4. It also plans to hold an information webinar on the topic (details to be announced).

Highlights of current proposal

National scope

The federal GHG offset system will function as a national backstop. If a province or territory has an active, published protocol for a given type of project activity, the corresponding federal protocol will either not apply or cease to apply after 6 months from the date such jurisdiction publishes its protocol. In order to generate credits for use under the federal OBPS, provincial protocols must meet the eligibility criteria prescribed by the Output-Based Pricing System Regulations and arrangements must be in place for the tracking and use of the provincial offset credits.

After a provincial or territorial protocol is published, projects covered by such protocol that are federally registered will be able to continue generating federal offset credits for the duration of their crediting period, but will not be able to renew their federal registration for the subsequent period.

Project eligibility and financial incentives

ECCC is now proposing to link project eligibility under the federal system with a proponent’s entitlement to offset credits. In the initial proposal, projects were ineligible if their emissions reductions were not incremental to what would have occurred from the receipt of financial incentives under a funding program. More specifically:

  • As long as all other eligibility criteria are met, a project for which a proponent receives direct financial incentives can register federally if: a) the proponent can demonstrate its contractual right to, or ownership of, offset credits generated from the project (i.e., the funding agreement does not transfer entitlement to the funding program); or b) financial incentives from a funding program are in exchange for a portion of any offset credits generated.
  • On the other hand, the above-noted project will not be eligible if the funding program: a) explicitly restricts the proponent’s ability to participate in another crediting program; or b) claims entitlement to some or all of the emission reductions generated by the project.

Under ECCC’s current proposal, the federal offset system will not accept projects registered in another program that provides GHG emissions reduction credits (including the Clean Fuel Standard, a complementary policy that is under development as part of Canada’s climate change plan). Proponents will need to choose which program to participate in.

Design considerations for federal offset protocols

Offset protocols set out the rules for quantifying emissions reductions for a project type. According to the discussion paper, ECCC in developing federal offset protocols will aim to ensure that:

  • emissions reductions occur in Canada,
  • projects in industry sectors not covered by carbon pricing are promoted,
  • the system is as administratively simple and cost-effective as practical, and
  • the system builds on the experience gained from similar programs in Canada and other jurisdictions.

Due to regional differences, ECCC proposes to apply an “umbrella” approach, which will establish a basic set of requirements in each protocol that are unlikely to vary across jurisdictions and will be supplemented over time by modules that account for specific locations, practices and applications.

Federal offset protocols will generally apply standardized baselines, such that all projects using the same protocol are subject to quantification using the same emission factors, methodologies and assumptions. However, a protocol may include multiple approved quantification methodologies where it is appropriate to reflect individual project conditions.

Approach/process for developing offset protocols

ECC will develop offset protocols in parallel with the development of the federal offset system regulations, having regard to the principles of ISO 14064-22, including:

  • Relevance – select GHG sources, sinks reservoirs, data and methodologies that are appropriate to the needs of the intended user.
  • Completeness – include all relevant emissions and removals (and supporting information).
  • Consistency – ensure the ability for meaningful comparisons.
  • Accuracy – reduce bias and uncertainties.
  • Transparency – disclose sufficient and appropriate information.
  • Conservativeness – use conservative assumptions to avoid over-estimation.

ECCC will also explore the adaptation of existing protocols from domestic and international compliance programs and voluntary markets as well as mechanisms for voluntary participation in the protocol development process.

Once a project type is selected for protocol development (selection criteria is discussed in the section below), ECCC will post an online notice to interested parties and establish a technical team to advise the development process. ECCC will then prepare a high-level scoping document for the protocol based on stakeholder feedback. If ECCC decides to proceed with development, it will draft the offset protocol based on the scoping document and post the draft for public comment. Once a protocol is finalized and published, proponents will be able to register offset projects using that protocol.

Criteria to assess project types for inclusion

Fundamental to the selection of protocols for development is an assessment of “additionality” (i.e., to ensure that project activities are above and beyond a baseline scenario). The criteria to assess additionality (either for developing new protocols or reviewing existing protocols) will include:

  • Legal Requirements – Project activities must be able to achieve emissions reductions beyond what is already required by law.
  • Carbon Pricing – Sources of reductions from project activities must not be covered by federal, provincial or territorial carbon pricing systems.
  • First-of-its-kind – A project type that represents a new approach to achieving emissions reductions will be deemed additional for purposes of assessing new federal protocols.
  • Penetration Rate – Where penetration rate (i.e., the rate at which a technology or practice has been adopted in a sector) is deemed a good proxy to assess additionality, and the penetration rate exceeds a certain threshold (currently proposed by ECCC to be 40%), then the project activities would not be considered additional.
  • Barrier Testing – Supplemental barrier testing may be conducted to determine if any financial, technical and/or social barriers exist that could influence the decision to carry out an offset project.

Under its phased development approach, ECCC will: 1) in the initial phase, target identified priority project types; and 2) in later phases, focus on newer or more complex project types. Based on its preliminary assessment, ECCC has developed a shortlist of priority project types that includes: advanced refrigeration, aerobic composting of organic waste, afforestation/reforestation, anaerobic digestion, improved forest management, landfill methane, livestock manure, and soil organic carbon. ECCC expects to publish a protocol development schedule once the priority list is finalized.

Public comment period

The public comment period for the discussion paper is open until September 4. Parties wishing to provide comments and/or register for updates regarding the protocol development process are invited to do so by email to ECCC3.

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1 Each offset credit represents one tonne of carbon dioxide equivalent (CO2e) GHG emission reductions from activities taken voluntarily to reduce or avoid emissions or increase removals by carbon sinks, as measured relative to a baseline scenario (i.e., in the absence of the offset activity).

2 ISO 14064-2: Specification with Guidance at the Project Level for Quantification, Monitoring, and Reporting of GHG Emission Reductions or Removal Enhancements.

3 By emailing ec.creditscompensatoires-offsets.ec@canada.ca.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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