Key Takeaways from our “Building Blocks of a Carbon Market” Seminar
On February 1, 2022, McCarthy Tétrault hosted Building Blocks of a Carbon Market: A Primer on Emissions Offsets, Carbon Pricing and Offset Contracts (the “Seminar”). The Seminar’s presenters included:
- Joanna Rosengarten, Partner (Toronto), Environmental Group;
- Selina Lee-Andersen, Partner (Vancouver), Environmental, Regulatory and Aboriginal Group;
- Kimberly Howard, Partner (Calgary), Energy & Infrastructure Group; and
- Kerri Howard, Partner (Calgary), Oil & Gas Group.
The following are the key takeaways from the Seminar. Please contact Joanna Rosengarten, Selina Lee-Andersen, Kimberly Howard or Kerri Howard if you would like additional information about the topics discussed during the Seminar or environmental, social, and governance (“ESG”) best practices for your business.
Carbon Markets and Emission Offsets
Joanna spoke about carbon markets and emission offsets. Carbon markets transact quantified units known as carbon offsets or credits, which represent one metric tonne of carbon dioxide equivalent emissions that has been reduced, avoided, or sequestered by an entity to compensate for emitting that tonne elsewhere. Two types of carbon markets were discussed in detail. Compliance offset markets are created as a result of government regulations to reduce greenhouse gas (“GHG”) emissions, meanwhile voluntary offset markets refer to the collective global offset transactions that are not driven by regulatory obligations. A common example of the voluntary market is the offsets people purchase to offset emissions from flying. Valid offset projects need to achieve real, additional, quantified, verified, unique and permanent GHG reductions.
There are two mechanisms to price GHG emissions: emission trading systems and carbon taxes. In Canada, each province and territory can decide on a pricing mechanism, and create a system of implementation. If a jurisdiction does not implement a system to price carbon at the federally-stipulated levels, the federal government imposes a “backstop” system. As of this year, carbon in Canada is priced at $50 per tonne with a federal government plan for an annual increase of $15 per tonne until it reaches $170 per tonne in 2030.
Carbon Pricing and the Road Ahead for Voluntary Carbon Markets
Selina discussed Canada’s progress towards its commitments under the Paris Agreement. Emission trends since 2005 remain consistent, with increases in the oil & gas and transport sectors being offset by decreases in other sectors, notably electricity and heavy industry. Although Canada accounted for approximately 1.5% of global GHG emissions in 2017, it is one of the highest per capita emitters. The federal government is pursuing a broad range of emission reduction policies to reach its 2030 target under the Paris Agreement.
Global demand for voluntary offset credits is expected to surge in the next few years. Corporate commitments to net-zero targets are the main driving force behind the growing demand for offset credits. As of October 2020, 1,565 companies globally have adopted net-zero commitments. In 2020, the voluntary offset market was valued at approximately USD $473 million, while in 2021, the global value of the voluntary carbon market hit US $1 billion for the first time. As demand for voluntary offsets grows, there are also growing demands for better oversight and transparency in the market. Initiatives such as the Taskforce on Scaling Voluntary Carbon Markets and the Voluntary Carbon Market Initiative are looking to establish global standards for high quality offset credits in the voluntary market.
Emission Offset Contracts
Kimberly closed the Seminar with an overview of emission offset contracts. Following an introduction of the types of offset agreements, Kimberly focused on four key issues and the provisions to address each within offset agreements. First, parties must ensure they have a clear understanding of the form of offsets and the mechanics for delivery to ensure the contractual provisions reflect the regulatory requirements. Second, counterparty risk is a key factor considered in reaching agreement on many key terms within an offset agreement, including price, term and whether additional performance assurance requirements are warranted. Third, provisions addressing changes of law are critically important with the rapidly changing policies regarding the regulation of greenhouse gases and climate change. Forth, parties should allocate the risk of disallowed or invalidated offsets.
We’re here to help
McCarthy Tétrault has a multidisciplinary ESG and Sustainability team that is equipped to provide clients with a full suite of advice and support to assist them in integrating ESG thinking into their organizational DNA. With a robust understanding of business, industry, and market drivers, we are well-suited to provide contextualized guidance. Please contact Robert Richardson, Kimberly Howard, Kerri Howard, or Gurvir Sangha to learn more – we would be happy to assist you.