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Adding Tools to the Climate Action Toolbox: ECCC Releases Draft Regulations for Federal GHG Offset System

Under the Paris Agreement, Canada has pledged to reduce domestic GHG emissions by 30% below 2005 levels by 2030. In December 2020, the federal government published A Healthy Environment and a Healthy Economy (the Plan), a road map for Canada to achieve its 2030 target and net-zero GHG emissions by 2050. As part of the Plan, Environment and Climate Change Canada (ECCC) is developing a federal greenhouse gas (GHG) offset system under the Greenhouse Gas Pollution Pricing Act (GGPPA). On March 6, 2021, ECCC published the proposed Greenhouse Gas Offset Credit System Regulations (Canada) (the proposed Regulations) in Part of I of the Canada Gazette, Part I. The proposed Regulations are available for a 60-day comment period until May 5, 2021. The publication of final regulations is expected in fall 2021.

GHG Offsets under the OBPS

The purpose of the federal offset system is to encourage voluntary project activities across Canada that reduce GHG emissions or remove them from the atmosphere by enabling the generation of emission offset credits. These credits can then be used by industrial entities subject to the federal Output-Based Pricing System (OBPS) as a way to meet their compliance obligations and to keep their overall compliance costs down. By way of background, the federal OBPS regulates facilities carrying out certain industrial activities in backstop jurisdictions that emit at least 50,000 tonnes of carbon dioxide equivalent (CO2e) per year. In addition, any other facility located in a backstop jurisdiction, operating in an industrial sector considered at risk of competitiveness impacts from carbon pollution pricing, and emitting at least 10,000 tonnes of CO2e per year may apply to opt into the federal OBPS.

A regulated facility with GHG emissions below its emissions limit receives surplus credits issued by the Minister of Environment for those emissions below the facility’s annual limit. Each surplus credit represents one tonne of CO2e. These credits may be used as compliance units or sold to other facilities in the OBPS. When the GHG emissions of a covered facility exceed its emissions limit, the facility is required to provide compensation for its excess emissions by the prescribed deadline. A covered facility has flexible compliance options. First, it can pay the excess emissions charge. Second, it can use compliance units, which are (i) surplus credits that it has earned or purchased from another covered facility; (ii) provincial or territorial offset credits formally recognized by the Minister under the Output-Based Pricing System Regulations (OBPS Regulations) as compliance units; or (iii) federal offset credits. Each GHG offset credit represents one tonne of CO2e reductions or removal enhancements.

GHG Offset System Design

The design of the proposed federal offset system is based on the recommendations of the Pan-Canadian Offset Framework, which was agreed to by the Canadian Council of Ministers for the Environment in October 2019. The proposed Regulations seek to further extend the carbon pollution price signal with the implementation of a federal offset system, while incentivizing activities that result in GHG reductions that are not required under existing regulations or otherwise covered by other carbon pricing-related measures.

The federal offset system will consist of:

  1. regulations to implement the operational aspects of the system;
  2. federal offset protocols that establish the approach for quantifying GHG emissions reductions for a given project type; and
  3. a tracking system to register offset projects, issue and track offset credits, and share key information through a public registry.

Offset project activities must be in addition to what would have occurred anyway. This means that in order for the project to generate offset credits under the OBPS Regulations, project activities must result in GHG reductions or removals that go beyond business-as-usual practices and legal requirements, and must not already be incentivized by carbon pricing.

Participation in the federal offset system is voluntary. The Minister will issue offset credits to a project proponent for GHG reductions achieved by a registered offset project for a given reporting period, provided that the applicable regulatory criteria are satisfied. Project proponents  bear the costs of generating offset credits, including costs associated with feasibility studies, verification and monitoring.

The Regulatory Impact Analysis Statement (RIAS) for the proposed Regulations note that while federal offset credits are primarily intended for use by facilities in the federal OBPS, they could be acquired and used by other interested parties to offset their emissions in certain cases. For example, regulated entities subject to a provincial or territorial carbon pricing system may be able to use federal offset credits to offset GHG emissions, provided that the use of these credits is permitted under the provincial or territorial system, and there is an intergovernmental agreement in place at the operational level stipulating that credits may only be used once. In addition, the RIAS notes that federal offset credits could also be acquired and used by government or business operations to voluntarily offset emissions in an effort to meet their GHG reduction goals, such as carbon-neutral commitments.

Overview of Proposed Regulations

The proposed Regulations establish requirements for the operational aspects of a federal GHG offset credit system to be administered by ECCC. In order to generate offset credits, a project will have to satisfy eligibility criteria, and be implemented by a project proponent in accordance with an approved federal offset protocol. Project proponents will be required to submit project reports verified by an accredited third-party verification body prior to the issuance of any offset credits. They will also have to open an account in the credit and tracking system that ECCC is establishing under the GGPPA. Details of the proposed Regulations are set out in the RIAS, and the key provisions are summarized below.

  1. Registration Application Requirements

The proposed Regulations set out the information that a project proponent must provide when registering an offset project, or when transferring the registration of a project to another project proponent. This information includes:

  • a description of the project, including GHGs that are to be reduced or removed, activities to be carried out, location, start date, and baseline and project scenarios;
  • an estimate of the total amount of GHG reductions that are expected to be achieved by the project over the crediting period;
  • information on project characteristics that could lead to “leakage” – that is, to indirect increases in GHG emissions outside of the project boundary; and
  • for projects consisting of biological sequestration activities, a risk management plan identifying any risks of reversals of GHG reductions, as well as a description of monitoring activities and any other measures to be implemented to mitigate those risks.

The proposed Regulations also set out when the Minister may cancel the registration of a project in the federal offset system, including:

  • when a project ends or no longer meets regulatory requirements;
  • when the cancellation is requested by the project proponent;
  • in the case of a reversal that decreases the amount of GHGs stored by a biological sequestration project below the amount of GHGs stored that is established by the project baseline;
  • when a project proponent fails to replace credits when required or fails to maintain an account in the Department's credit and tracking system; and
  • when a project proponent or their representative is convicted of an offence under the GGPPA or section 380 of the Criminal Code (fraud provisions).
  1. Project Eligibility Criteria

In order to be registered in the federal offset system, projects will need to meet eligibility criteria to ensure that the projects achieve real, additional, quantified, verified, unique and permanent GHG reductions. These eligibility criteria include:

  • (i) For a project with a start date prior to the publication date of the applicable federal offset protocol, the registration application must be made within 18 months of the protocol publication date; (ii) for any registration application made on or before December 31, 2023, the project start date must not be earlier than January 1, 2017; and (iii) for any registration application made after December 31, 2023, the project start date must not be more than five years before the application is made.
  • For a project with a start date following the publication date of the applicable federal offset protocol, the registration application must be made within 18 months of the project start date.
  • The project must be located in a single province or territory in Canada.
  • The project proponent is an individual who resides in Canada. If the project proponent is not an individual, they must have a business place in Canada.
  • Project activities that generate offset credits cannot be required by law when the registration application is made or at the time of credit issuance (i.e. they must be the result of voluntary action).
  • Project activities cannot be subject to any policy or other risk management instrument that places a price on carbon pollution, either directly through a carbon charge or tax, or indirectly through the issuance of emission credits or allowances (e.g. in a cap-and-trade or performance-based system).
  • Project activities must be additional to a baseline scenario that reflects common practice or business-as-usual activities. The project baseline and GHG reductions resulting from the project must be quantified in accordance with the applicable federal offset protocol, published on the Federal Greenhouse Gas Offset System webpage.
  • The GHG reductions quantified for the project cannot be registered in any other program that credits those same GHG reductions.
  • If the project was previously registered in the federal offset system, it has not previously been cancelled due to a reversal of GHG reductions determined to be within the project proponent's control (i.e. a voluntary reversal), nor has it already reached the end of its maximum crediting period.

In addition, a project will only be eligible for registration in the federal offset system if the project proponent is able to demonstrate exclusive entitlement to, or ownership of, all GHG reductions resulting from the project. This means that a project proponent receiving a direct financial incentive from a funding program will be eligible to register the project in the federal offset system if the funding agreement does not restrict the project proponent from claiming exclusive ownership of the GHG reductions generated. Project proponents will be required to provide information concerning direct financial incentives as part of project registration and ongoing reporting obligations. If a direct financial incentive is received for an offset project under the proposed Regulations after its registration, the project proponent must be able to continue to demonstrate exclusive ownership of the GHG reductions resulting from the project, in order to be issued federal offset credits.

  1. Crediting and Reporting

The proposed Regulations specify the length of the periods during which offset projects are eligible to generate credits, as well as the number of times that these crediting periods may be extended. In general, the crediting period is set at 30 years for forestry projects, 20 years for other biological sequestration projects, and 8 years for all other project types. Crediting periods for biological sequestration projects may be extended up to a maximum period of 100 years, while crediting periods for all other project types may be extended up to two times, provided that all regulatory requirements continue to be met.

The proposed Regulations also set out requirements for reporting, monitoring, record-keeping and verification. In terms of reporting, the proposed Regulations establish the frequency and content for reports that project proponents must submit to be eligible for issuance of federal offset credits. Project proponents will need to submit an initial project report to ECCC no more than six months after the first year of the crediting period, and at least once every six years thereafter for biological sequestration projects, or at least once every three years thereafter for all other project types. The proposed Regulations also mandate the reporting of voluntary reversals, as well as errors or omissions. Further, monitoring reports for biological sequestration projects will be required annually during the crediting period and for 100 years following the end of the crediting period, in order to mitigate against the risk of reversals of GHG removals from the atmosphere.

The number of credits issued will be based on the GHG statement provided by the project proponent in their report that must be verified by an accredited third party. The GHG reductions upon which the GHG statement in the project report is based must be quantified in accordance with the proposed Regulations and the applicable federal offset protocol.

The proposed Regulations also describe the circumstances when the Minister may suspend credits in the project proponent’s account in respect of a project (e.g. when a reversal occurs or when an error in a report is identified), as well as the circumstances when the Minister may revoke credits (e.g. when there is a voluntary reversal or when an error in a report is confirmed). Project proponents may be required to replace offset credits that are found to no longer be valid due to voluntary reversals, or to errors or omissions.

  1. Environmental Integrity Account

An environmental integrity account will be established under the proposed Regulations, in which a percentage of offset credits issued would be deposited by the Minister. This account will comprise a pool of credits acting as a form of insurance for the environmental integrity of the federal offset system. When there is a reversal of GHG reductions determined to be out of the project proponent’s control (i.e. an involuntary reversal), ECCC would cancel offset credits deposited by the Minister in the environmental integrity account. This account would also be used to replace offset credits when project proponents fail to replace them when required. For biological sequestration projects, the percentage of credits deposited in the environmental integrity account will be based on risk factors set out in the applicable federal offset protocol. The percentage of credits deposited in this account will be 3% for all other project types.

  1. Federal Offset Protocols

The proposed Regulations specify the content that federal offset protocols developed by the Minister must contain, such as methods for the quantification of GHG reductions and the assessment of risks specific to the project activity. Federal offset protocols will also set out requirements for project implementation, including setting project baselines, monitoring permanence, minimizing leakage and data management. The development of federal offset protocols will occur separately from the regulatory development process. A project proponent must carry out project activities in accordance with the applicable federal offset protocol. Federal offset protocols would be applicable in all provinces and territories in Canada, with the exception of jurisdictions in which the same project activity is covered by a current protocol in a provincial or territorial offset program.

Schedule for Protocol Development

To date, ECCC has identified and prioritized four project types for its initial protocol development:

  • Advanced refrigeration systems: A protocol for activities that reduce or avoid the use of fluorinated refrigerants, such as hydrofluorocarbons (HFCs), which have high global warming potential (GWP). These activities may include installing new low-GWP refrigeration systems or substituting GHG-intensive refrigerants with less GHG-intensive alternatives through the replacement or retrofitting of existing refrigeration systems.
  • Landfill methane management: A protocol for activities that reduce methane emissions from open or closed landfill sites, such as the installation and operation of equipment to capture and destroy methane.
  • Improved forest management: A protocol for activities may include increasing rotation ages, thinning diseased trees, managing competing brush, and stocking trees to maintain or enhance carbon storage.
  • Enhanced soil organic carbon: A protocol for sustainable agricultural land management activities that reduce GHG emissions and enhance soil carbon sequestration on agricultural lands.

The development process for these offset protocols is currently underway and updates can be found on the Federal Greenhouse Gas Offset System webpage. ECCC will also consider developing protocols for additional project types in the future.

Interaction with Provincial GHG Offset Systems

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 proposed 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. Since the federal offset system is meant to complement provincial systems, 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. Finally, ECCC may choose to adapt protocols from existing offset systems in British Columbia, Alberta and Québec, as well as from other offset systems, for application across Canada.

Under the OBPS Regulations, a unit or credit qualifies as a “recognized unit” for compliance purposes if it is issued under a provincial offset protocol and offset program that is specified on ECCC’s List of Recognized Offset Programs and Protocols. In addition to program and protocol eligibility criteria, the OBPS Regulations specify eligibility criteria for credits issued by provinces. At the time of remittance, all recognized units must be valid, have been generated from a project located in Canada with a project start date of January 1, 2017 or later, and have been verified by an accredited verification body in good standing, in accordance with the OBPS Regulations. Only provincial or territorial offset programs and offset protocols that meet the specific eligibility criteria outlined in the OBPS Regulations will be placed on the List of Recognized Offset Programs and Protocols for the federal OBPS.

Consultation Period

As noted above, the proposed Greenhouse Gas Offset Credit System Regulations (Canada) are available for a 60-day public comment period until May 5, 2021. Written comments can be sent to [email protected]. The final regulations are expected to be published in fall 2021.

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