On March 6, 2021, Canada published the Greenhouse Gas Offset Credit System Regulations (Canada) (Offset Regulations). The Offset Regulations are subject to public input and comment for 60 days until May 5, 2021, with final enactment targeted for the fall of 2021.
WHAT ARE THE OFFSET REGULATIONS?
The Offset Regulations provide the basis for the federal offset credits (Offset Credits) regime under the Greenhouse Gas Pollution Pricing Act (GGPPA).
By way of quick recap, the GGPPA describes Canada’s federal carbon pollution pricing system. Although the federal regime is subject to an ongoing constitutional challenge before the Supreme Court of Canada (see our February 2020 Blakes Bulletin: Court of Appeal of Alberta Declares Federal Greenhouse Gas Pollution Pricing Act Unconstitutional) (SCC Reference), the federal government has released the Offset Regulations on the assumption the constitutional validity of the GGPPA will be upheld.
The GHG regulatory system under the GGPPA is comprised of two parts. Part 1 addresses a regulatory charge on the use of fossil fuels (Fuel Charge) by individuals and businesses. Part 2 describes the output-based pricing system (OBPS) for large industrial emitters. Large emitters include facilities that emit a quantity of GHGs equal to 50 kilotonnes (kt) or more of carbon dioxide equivalent (CO2e), and certain opted-in facilities that emit a quantity of GHGs equal to 10 kt of CO2e or more. Facilities subject to the OBPS are generally exempt from paying the Fuel Charge.
A covered facility under the OBPS has a prescribed GHG emissions limit under the GGPPA. If it exceeds its emissions limit, it must provide compensation through a variety of options, including:
a. payment of an excess emissions charge, the price of which is currently set at C$40/tonne of CO2e for 2021 and set to increase to C$50/tonne of CO2e for 2022; or
b. use of compliance units which include:
surplus credits it has earned or purchased from another covered facility;
provincial or territorial offset credits recognized by the Minister of Environment and Climate Change Canada (ECCC) as equivalent compliance credits; or
WHAT ARE OFFSET CREDITS?
A GHG offset is created when a project activity results in a GHG reduction in comparison to a common practice or business-as-usual activity (BAU). If a project can reduce or remove GHGs in comparison to BAU, the difference in the quantity of GHG emissions, expressed in tonnes of CO2e, constitute Offset Credits.
HOW ARE OFFSET CREDITS GENERATED?
In order to generate Offset Credits under the Offset Regulations, a project has to: (a) be implemented pursuant to acceptable federal offset protocols; (b) satisfy certain application criteria; and (c) satisfy certain eligibility criteria.
a. Acceptable Federal Offset Protocols
Canada has not yet finalized any federal project protocols, the development of which will occur separately from the Offset Regulations. However, the ECCC has identified and prioritized the following four project types for initial protocol development:
Advanced Refrigeration Systems
Landfill Methane Management
Improved Forest Management
Enhanced Soil Organic Carbon
The federal offset protocols are only intended to apply in those Canadian provinces and territories that do not address the same project activity through an existing regional offset program. Since the Minister is expected to recognize many of the common offset regimes currently enacted by provinces and territories (including those dealing with the production of renewable energy from wind or solar), it makes sense for the federal government to concentrate on finalizing these less common protocols.
b. Application Criteria
Under the application criteria, proponents are required to provide, among other things:
A project description, including location, start date, BAU and project scenarios
An estimate of the total GHG reductions to be achieved by the project over the crediting period
A description and assessment of any potential GHG leakage as a result of the project proceeding
A risk management plan identifying any risks of reversals of GHG reductions together with a description of monitoring activities to mitigate those risks
c. Eligibility Criteria
Highlights of the eligibility criteria include:
Placing timelines on project applications with start dates that occur prior to the publication date of the applicable federal offset protocol
Stale dating older project offsets after the passage of several years
Requiring a project to be located in a single province or territory in Canada
Allowing for the aggregation of several smaller projects into one project
Requiring a project proponent to be an individual or a company with a place of business in Canada
Ensuring all projects that generate offsets are voluntarily undertaken and constitute real GHG reductions from BAU
Ensuring the price of carbon for any particular project is only accounted for once (i.e., prohibiting projects from being registered in multiple GHG trading regimes)
Assuming the above requirements are met, Offset Credits must also be verified by independent third-party verifiers (who must be accredited by the Standards Council of Canada, the ANSI National Accreditation Board or similar accreditation association). Project proponents are further required to provide periodic verification reports to the Minister over the life of the project to confirm the quantity of Offset Credits created by the project. Once all the regulatory requirements are met, the Minister will then issue the proponent the equivalent number of Offset Credits (less the amounts deposited to the environmental integrity account described below).
WHAT ARE THE ANTICIPATED TRADING PRICES OF OFFSET CREDITS?
Offset Credits are expected to trade at prices below the federal excess emissions charge. As noted above, the current price of the excess emissions charge is C$40/tonne CO2e, which price is set to rise to C$50/tonne in 2022. Furthermore, if the proposals set out in Canada’s A Healthy Environment and a Healthy Economy released in December of 2020 are enacted as law, the excess emissions charge could subsequently increase by C$15/tonne each year from 2023 to 2030 resulting in a final excess emissions charge of C$170/tonne of CO2e in 2030. When the excess emissions charge price is coupled with the fact that project proponents must utilize the excess emissions charge to meet a minimum of 25 per cent of their compliance obligations as of February 16, 2023 (as per section 54 of the Output-Based Pricing System Regulations), the economics associated with a project that creates Offset Credits are anticipated to change dramatically over the next few years.
INTERPLAY BETWEEN THE FEDERAL REGIME AND PROVINCIAL/TERRITORIAL REGIMES
In a manner similar to the operation of the GGPPA, the Offset Regulations are intended to act as a backstop regime, and only apply in those jurisdictions that do not have an equivalent provincial or territorial offset program. If a project is originally subject to a federal offset protocol and then a provincial or territorial protocol over the same project is subsequently enacted, the Offset Regulations provide the Minister with the authority to deactivate the federal offset protocol. In that way, the government can ensure one project is not registered under two regimes.
Finally, depending on the decision rendered by the Supreme Court of Canada in the SCC Reference, if the constitutional validity of the GGPPA is upheld, the prices under the GGPPA would also dictate all provincial and territorial prices. In other words, projects currently subject to provincial or territorial offset regimes and all associated emissions fund prices would be subject to the same price increases as the federal regime.
IS THERE ANYTHING NOVEL IN THE PROPOSED FEDERAL OFFSET REGULATION?
Yes, there are several novel items in the Offset Regulations as set out below, with the most notable being the creation of an environmental integrity account.
Environmental Integrity Account. This is akin to a safety valve or insurance plan to address inaccurate calculations of Offset Credits and previously verified Offset Credits that are subsequently reversed. Under the Offset Regulations a project proponent must deposit a minimum of 3 per cent of all created Offset Credits into the environmental integrity account, which will be maintained by the Minister. Any Offset Credits deposited to the account cannot be sold or transferred. Rather, the Minister can use the account to address cancelled or reversed Offset Credits that are not otherwise replaced by the project proponent.
Responsibility for any offsets that are cancelled remains with the project proponent. Project proponents remain accountable for the validity of all Offset Credits associated with their project and must replace invalid Offset Credits. This requirement is intended to improve the marketability of Offset Credits and ensure the responsibility for replacing Offset Credits remains with the seller.
Project transfers. In parallel with the above responsibility requirement, once a project is transferred to a new owner, the new owner is deemed to have been the project proponent since the registration of the project and assumes the obligations of the previous proponent (i.e., the new owner becomes responsible for the validity of any and all Offset Credits generated by the project including those generated prior to its purchase of the project).
Duration that a project may generate Offset Credits and emphasis on biological sequestration projects. Many projects subject to the Offset Regulations will be able to generate credits for a period of eight years, with the ability to renew for up to an additional 16 years. However, biological sequestration projects will be able to generate credits for a period up to 20 years (non-forestry projects) to 30 years (forestry projects) with the ability to renew for up to a maximum of 100 years.
Involuntary versus voluntary reversals and the role of risk-management plans. The Offset Regulations extensively address the scenario of offsets being cancelled or reversed and differentiate between a voluntary reversal (reversal within the control of the proponent or due to the proponent’s failure to implement its risk management plan), versus involuntary reversal (reversal out of the proponent’s control or despite a proponent’s risk management plan. An example of an involuntary reversal would be the loss of a forestry project due to a forest fire).
The Offset Regulations are the culmination of years of deliberation by the federal government and describe a robust offset creation and trading regime under the GGPPA. Although several details still need to be finalized — such as the nature and extent of risk management plans and how and under what circumstances provincial/territorial offset programs will be recognized, etc. — the Offset Regulations provide a roadmap of the federal government’s plan. With all of the novel issues surrounding Offset Credits coupled with potential dramatic price increases, this plan is markedly different from where the federal government has gone in the past.
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