Canada: Draft Federal Greenhouse Gas Offset Rules Issued – Subject To Comment Until August 12, 2009

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Environmental/CleanTech, June 2009

Canada's Environment Minister, Jim Prentice, recently announced that the government is moving forward with its offset credit system for greenhouse gases. Two draft guides were published in the Canada Gazette on June 12, 2009 to set out proposed rules and guidance for offset project proponents and for verification bodies, each of which is described in further detail below. The Environment Canada overview document describing the Offset System was also updated. The two draft guides are respectively entitled Program Rules and Guidance for Project Proponents and Program Rules for Verification and Guidance for Verification Bodies. To put these two guides in context, reference should be made to the April 16, 2009 report of the National Round Table on the Environment and the Economy.

The comment period for the draft program rules and guidance documents closes on August 12, 2009. Interested parties should review the draft program rules and guidance documents with a view to providing comments by this deadline. Requests for information, copies of documents and comments should be ad-dressed to the Manager of Canada's Offset System for Greenhouse Gases at os_scc_consultations@ec.gc.ca . Final versions of the two program rules and guidance documents together with the Guide for Protocol Developers (a draft of which was published in the Canada Gazette on August 9, 2008) are expected to be published in the fall of 2009.

The objective of the Offset System is to establish tradeable credits and thereby to encourage cost-effective reductions in domestic greenhouse gas emissions in sectors that will not be subject to the proposed federal greenhouse gas regulations. Agriculture and forestry are two examples of such sectors.

Once the Offset System is established, regulated and unregulated businesses, organizations and individuals will be able to acquire and use the offset credits created under the system to offset greenhouse gas emissions resulting from their activities. These offset credits may be used by companies which are subject to greenhouse gas emission regulations to assist them to achieve compliance with their emission targets.

The Program Rules and Guidance for Project Proponents sets out draft rules and guidance on the requirements and processes which are to be used to create offset credits. The rules are to include step-by-step instructions for preparing the required registration, reporting and verification documents. The draft rules set out six principal eligibility criteria that greenhouse gas reductions must satisfy in order to be eligible to receive offset credits:

1. The greenhouse gas reduction must occur in Canada and must achieve reductions in one or more of the specified greenhouse gases.

2. The reductions must be real, meaning that the project includes one or more specific actions that result in a net reduction of greenhouse gases that could not be achieved as a result of decreasing the level of activity or production of the project vis-à-vis a comparable baseline.

3. The reductions must be considered incremental, meaning:

(i) the project must have started on or after January 1, 2006,

(ii) the reductions must have occurred on or after January 1, 2011,

(iii) the reductions go beyond the applicable baseline,

(iv) the reductions must also be surplus to all legal or regulatory requirements, and

(v) the reductions must not be subject to any other climate change incentives.

4. The greenhouse gas reductions must be quantified as specified in an applicable offset system quantification protocol.

5. The emission reduction or removal must be verifiable by an accredited third-party Verification Body ensuring that its quantification is accurate, transparent and replicable.

6. A particular greenhouse gas reduction can only be used once to create an offset credit.

The Program Rules for Verification and Guidance for Verification Bodies provides rules and guidance on the processes and requirements which must be satisfied in order to verify the eligible greenhouse gas reductions or removals which are achieved by a registered project.

In the Canadian context, it should be noted that to date Alberta is the only Canadian province with a mandatory greenhouse gas reduction regime in place. This regime has been in place since July 2007 and applies to Alberta facilities that emit greater than 100,000 tonnes of CO2 equivalents (CO2e) annually. Like the proposed federal Offset System discussed in this bulletin, Alberta facilities subject to the province's regime are able to comply with their greenhouse gas emissions obligations by, among other options, purchasing emissions offset credits.

In Alberta, offset credits arise when an entity with emissions less than 100,000 tonnes of CO2e/year (i.e., a non-regulated entity) produces a product or completes a process in a manner that releases less CO2e than the business as usual or baseline case. The difference between the CO2e actual emissions and the business as usual case represents an emissions offset credit. Regulated emitters who cannot otherwise meet their required reduction requirements can purchase emissions offset credits and use those credits to offset their CO2e emissions. To qualify under the Alberta regime, emissions offset credits must:

1. Occur in Alberta.

2. Not be otherwise required by law.

3. Arise on or after January 1, 2002.

4. Be real, demonstrable, quantifiable and measurable.

5. Have clearly established ownership.

6. Only be used once.

7. Be verified by a third party verifier.

To assist in calculating the business as usual or baseline case, and thus calculating emissions offset credits, Alberta has enacted 24 emissions quantifications protocols.

In its press release Backgrounder: Canada's Offset System for Greenhouse Gases, Environment Canada states: "As we finalize the [Canadian] offset system, we will explore approaches to harmonize the federal and various provincial offset systems, with an objective to ensure that carbon trading markets can function efficiently." The Alberta experience offers Canada valuable guidance in the area of offset credit systems – hopefully, Canada will take advantage of it.

Further information concerning the draft offset rules may be found on the Environment Canada website for Canada's Offset System for Greenhouse Gases.

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