Canada proposes regulations for greenhouse gas offset system

The Government of Canada has released its proposed Greenhouse Gas Offset Credit System Regulations (Regulations) for public comments until May 5. The Regulations are intended to establish an offset system under the federal Greenhouse Gas Pollution Pricing Act (GGPPA), enabling the Minister of the Environment to issue offset credits for voluntary greenhouse gas (GHG) reductions achieved by eligible projects. Offset credits are among the types of compliance units that regulated facilities can use to cover any GHG emissions exceeding their emissions limits under the GGPPA’s Output-based Pricing System (OBPS).

What you need to know

• The Regulations—building on the federal government’s recent discussion papers¹—would establish the criteria for creating offset credits under the GGPPA as a means to incentivize voluntary GHG reductions. According to these criteria, eligible projects must demonstrate their GHG reductions are real, additional, quantified, verified, unique and permanent. Among other things, the offset project activities:
• must adhere to an approved protocol—i.e., a methodology for quantifying GHG reductions from certain eligible project types—which the federal government plans to develop and publish in the coming year;
• cannot be required by law or be given credit under another carbon pricing program; and
• must be additional to a “business-as-usual” baseline scenario, with that baseline and the subsequent GHG reductions verified by an independent, accredited third party.
• In the first phase of offset protocol development, the federal government will focus on protocols for advanced refrigeration systems, improved forest management, landfill methane management, and enhanced soil organic carbon.

Highlights of the proposed Regulations

The main elements of the draft Regulations include project eligibility criteria, registration requirements, crediting and reporting requirements, and establishment of an environmental integrity account.

Project eligibility

To generate federal offset credits, projects would have to satisfy certain eligibility criteria, including:

• For any registration application made prior to the end of 2023, the project must have a start date that is on or after January 1, 2017. For applications made in 2024 onwards, the project start date must not be more than five years before the application date.
• The registration application must be made within 18 months of the publication date of the applicable federal offset protocol or the project’s start date, whichever is later.
• The project proponent shall be an individual resident in Canada or have a business place in Canada. A proponent receiving direct financial incentive from a funding program would be eligible if the funding agreement does not restrict the proponent from claiming exclusive ownership of the GHG reductions.
• Eligible project activities must be voluntary (i.e., cannot be mandated by law) when the registration application is made or at the time of credit issuance, and cannot be subject to any policy or risk management instrument that places a price on carbon pollution.
• Project activities must be additional to a “business-as-usual” baseline scenario, which (along with GHG reductions to be credited) must be quantified pursuant to applicable offset protocols that are under phased development². These protocols would apply across Canada except in jurisdictions where the same project activity is covered by a current protocol under a provincial or territorial offset program.

Registration application

When applying to register an offset project or transfer an existing registration, the project proponent must furnish information regarding the project activities, GHGs to be reduced/removed, baseline project scenarios, as well as:

• the estimated total GHG reductions to be achieved by the project over the crediting period (see next section below);
• information on project characteristics to that could lead to indirect increases in GHG emissions outside the project boundary; and
• for biological sequestration activities, such as certain forestry and soil management projects, a risk management plan identifying any risk of reversals of GHG reductions and corresponding monitoring and mitigation measures.

Crediting and reporting

The Regulations set out the periods during which eligible projects may generate federal offset credits. Generally, the crediting period is 30 years for forestry projects, 20 years for other biological sequestration projects, and eight years for other project types. The crediting periods for projects may be extended up to two times, with the exception of biological sequestration projects which are subject to a different limit of no more than 100 years in a credit period (including renewals). The Regulations also stipulate requirements for reports that proponents must submit, including an initial project report no more than six months after year one in the crediting period, and at least once every six years thereafter for biological sequestration projects, or at least once every three years thereafter for other project types.

The quantity of offset credits issued would be based on the proponent’s GHG statement in their report that must be verified by an accredited third party. The Regulations also outline the circumstances when the Minister of the Environment may suspend credits or when a proponent may be required to replace credits, including as a result of reversals or errors/omissions in a report.

Environmental integrity account

As a form of insurance for the integrity of the offset system, the proposed Regulations would establish an environmental integrity account in which a percentage of offset credits issued in respect of a given project would be deposited by the Minister. In the event GHG reductions resulting from an offset project activity are reversed due to circumstances outside the proponent’s control, credits in the account would be cancelled to compensate for the reversal. Similarly, if a proponent failed to replace any invalidated offset credits, the Minister could decide to use credits from the environmental integrity account to effect the replacement.

For biological sequestration activities, the percentage of credits deposited in the account would be based on risk factors set out in the applicable offset protocol. For other projects type, the percentage of credits deposited would be 3% of the credits issued in respect of the project.

Public comment period

The public comment period for the proposed Regulations is open until May 5. Written comments can be sent to [email protected]. Once draft offset protocol start becoming available, there will be a consultation period of 30 days for each protocol.

_________________________

¹ See Torys bulletin regarding the most recent offset system design discussion paper released in July 2020.

² As indicated by Environment and Climate Change Canada’s website for offset protocol development, the first phase of development will focus on: advanced refrigeration systems, improved forest management, landfill methane management, and enhanced soil organic carbon.

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.

© 2024 by Torys LLP.

All rights reserved.