Climate Action Toolbox: Federal Government Publishes Final GHG Offset System Regulations
On June 8, 2022, the federal government published the final Greenhouse Gas Offset Credit System Regulations (Regulations) under the Greenhouse Gas Pollution Pricing Act (GGPPA) and launched the federal greenhouse gas (GHG) offset credit system. The federal offset system will provide regulated industrial emitters with one of the tools available under the Output-Based Pricing System Regulations (OBPS Regulations) – offset credits – to meet their compliance obligations and which may allow them to lower their compliance costs. The OBPS Regulations require regulated emitters to provide compensation on an annual basis for any GHG emissions exceeding their annual facility emissions limit during a compliance period. Federal offset credits are one of three types of credits that emitters under the Output-Based Pricing System (OBPS) may provide as compensation for excess emissions. In addition to being used for compliance by regulated emitters, federal offset credits can also be sold and used by others who are looking to meet voluntary climate targets or commitments.
In a nutshell, the offset credit system governed by the Regulations allows eligible projects to generate one tradable offset credit for each tonne of GHG emissions reduced or removed from the atmosphere. The validity of offset credits is guaranteed by the Government through the Environmental Integrity Account in which a percentage of the credits created are deposited to act as a form of insurance policy if the offsets are eventually invalidated.
In order to be issued federal offset credits, proponents must meet various conditions including implement a project that generates GHG reductions that are real, additional, quantified, verified, unique and permanent and prepare project reports in conformance with reporting requirements, have them verified by an accredited verification body, and submit the project reports accompanied by the verification reports.
The project will only be eligible for registration in the federal offset system if the project proponent is able to demonstrate exclusive ownership of all GHG reductions resulting from the project. This is something important to keep in mind especially in the context of financing transactions where lenders commonly require ownership of all environmental attributes.
For more information on the OBPS and offset credits, see our previous post published in March 2021, when the draft Regulations was released. Our detailed description remains valid except for the following main changes:
i) as part of the initial protocol development, in addition to the four announced in the proposed regulations, a new protocol has been prioritized: livestock feed management;
ii) inclusion of non-biological sequestration projects, which will be discussed in greater detail below;
iii) for projects that are not classified as forestry and sequestration types, the period of which offsets can be generated was extended from 8 years to 10 years;
iv) the frequency of monitoring report submissions has been reduced from annually to every six months; and
v) project proponents are now required to report on environmental and social safeguards, and Indigenous engagement.
Federal offset protocols provide technical rules for project implementation and the methods for quantifying GHG emissions and reductions. Only eligible project activities included in an approved federal offset protocol will be able to generate credits in the federal offset system. Five project types are being developed as part of the initial protocols under the regulations:
i) Reduction of GHG emissions from refrigeration systems;
ii) Improved forest management;
iii) Enhanced soil organic carbon;
iv) Livestock feed management; and
v) Landfill methane recovery and destruction (LFG).
Effective Federal offset protocols are listed in the Compendium of Federal Offset Protocols. LFG is currently the only protocol eligible to generate federal offset credits. Municipalities and landfill operators may generate offset credits from landfill gases that are either recovered or destroyed. This protocol allows for landfill methane to be converted into biogenic carbon dioxide, instead of it being released into the atmosphere. For example, a project under this protocol could install gas collection wells and measurement devices to collect methane. The project could then be granted federal offset credits that are equal to the amount of GHG emissions reduced. The credits could eventually be sold to industrial facilities regulated under the OBPS to meet their emission reduction obligations. We note that Alberta and Québec have regulations respecting methane reclamation and destruction in landfills. A similar protocol is under development in British Columbia.
We can anticipate the advancement of a protocol for direct carbon capture utilization and sequestration (CCUS) - an important change from the Draft Regulations. The text of the Draft Regulations contemplated setting rules to enable protocols for biological sequestration projects to generate credits, but was limited in scope. In response to feedback from industry stakeholders, the final text of the Regulations was amended to reflect sequestration projects more broadly. By expanding the language to include non-biological sequestration, CCUS projects may soon be considered for protocol development.
Lowering the Costs of Compliance
At this time, there is no information on the pricing of federal offset credits, which will be largely driven by market dynamics. The federal government has indicated that it expects the price of offset credits to broadly track Canada’s benchmark price on carbon, which is currently set at $50 per tonne and will rise to $170 per tonne by 2030. That said, federal offset credits will likely provide an opportunity for regulated emitters to lower their compliance costs under the OBPS.
Interaction with Provincial Regimes
ECCC has sought to align the federal offset system with existing offset systems in Canadian jurisdictions (i.e. British Columbia, Alberta and Québec) where possible. That said, the Regulations include provisions to reflect the national context and specific objectives of the federal system, such as allowing for the development of offset projects nationwide. Federal offset protocols would not apply to any new project in a province or territory with an offset system that has or develops a protocol for the same project activity. In the event that a provincial or territorial offset system does not have a current protocol for a project activity that is covered by a federal offset protocol, the project proponent could apply to register in the federal offset system using that federal protocol.
The GGPPA permits a unit or credit recognized under the OBPS Regulations as a compliance unit to be remitted by regulated emitters as compensation for excess emissions, including offset credits issued under a recognized provincial or territorial offset protocol. Under the OBPS Regulations, a unit or credit is recognized as a compliance unit if it is issued by a province or territory under an offset protocol and offset program that is specified on Environment and Climate Change Canada’s List of Recognized Offset Programs and Protocols. ECCC has recognized the emission offset systems in Alberta and BC, but so far only five offset protocols from Alberta have been included (the BC protocols to be recognized have not yet been listed).
In Québec (within the context of its existing cap-and-trade system with California), and in Alberta, a province with 18 offset protocols, the federal offset system may not foster much new offset project activity. However, the federal offset system allows for flexibility for proposed projects located in a province that has an existing offset system to register under the federal regime. Within this context, we may see an increase in project proponents generating federal offset credits in Canadian jurisdictions without a credit system and with the introduction of novel protocols not found under the provincial systems.
Finally, regulated entities subject to a provincial or territorial carbon pricing system may eventually be able to use federal offset credits to offset GHG emissions under the provincial or territorial jurisdiction. This will however require modification to the provincial/territorial framework to recognize the validity of federal offsets and probably an intergovernmental agreement. To our knowledge, no such steps are ongoing in British Columbia, Alberta and Québec.
Indigenous Participation in Federal Offset System
To facilitate the participation of Indigenous groups in the federal offset system, Environment and Climate Change Canada has published Carbon Pollution Pricing: Considerations for facilitating Indigenous participation in the Federal Greenhouse Gas Offset System for public comment. The consultation paper outlines considerations related to potential barriers and increasing opportunities for participation by Indigenous groups in the federal offset system, with a focus on nature-based offsets (including forestry projects) that can help contribute to biodiversity and environmental protection goals. The deadline for comments on the consultation paper is September 2, 2022. Written comments can be sent to [email protected].
We’re here to help
McCarthy Tétrault is here to assist you in navigating these regulatory changes and potential opportunities. To discuss how you or your organization may be able to participate in the offset credit process or to understand the effects of this process on proposed projects, please contact Selina Lee-Andersen, Joanna Rosengarten, or Cindy Vaillancourt – we would be happy to assist you.