In an effort to provide further details on its planned regulatory framework on climate change, the Canadian government issued a new set of guidance documents on March 10, 2008 (“March 2008 Releases”), under a federal program entitled Turning the Corner: An Action Plan to Reduce Greenhouse Gases (“Federal Plan”).1 In the March 2008 Release, the federal government indicated its intent to release draft regulations in the fall of 2008, and to publish final regulations a year later. Regulations that concern greenhouse gas (“GHG”) reductions will come into force on January 1, 2010.

The federal government has acknowledged that Canada will miss the targets it committed to under the Kyoto Protocol by a wide margin. The Turning the Corner program represents a “made-in-Canada solution” to the problem of climate change and sets a new national targets. The “made-in-Canada solution” includes the type of market mechanisms found in the Kyoto Protocol including offset projects and carbon trading. This article provides an overview of the different elements of the Federal Plan which deal with market mechanisms to combat climate change: including carbon projects and carbon trading.

Unlike other countries which impose absolute GHG emission reductions, the Canadian system applies emission intensity targets, i.e. it will require regulated companies and facilities to reduce the amount of GHG emissions per unit of economic output. The March 2008 Releases clarified that the targeted industries include: electricity generation produced by combustion, oil and gas, pulp and paper, iron and steel, iron ore pelletizing, smelting and refining, cement, lime, potash, and chemicals and fertilizers.

There will be several compliance options under the Federal Plan. Besides reducing emissions through operational improvements, companies can reach their targets by purchasing units of a technology fund that is set up by the Canadian government and used to invest in novel GHG reduction technologies. The contribution rate will initially be fixed at $15 per tonne of carbon dioxide equivalent (“CO2e”), but will rise in subsequent years. Contributions to the fund can only be counted for up to 70% of a companies reduction targets, a rate that will gradually decrease in the future. Regulated emitters who implement operation improvements that result in reductions below their targets will be able to sell those credits to other regulated emitters for compliance purposes or bank them for future compliance years.

Regulated emitters will also have the option to receive credits that count towards 100% of their reduction targets by investing directly in large-scale and transformative projects that have been approved by the federal government in industries where carbon capture and storage (“CCS”) is feasible, facilities can also comply by building the appropriate storage technology. In addition, emissions reduction credits earned under the Kyoto Protocol’s Clean Development Mechanism (“CDM”), except for forest sink projects, will be accepted for up to 10% of a company’s regulatory obligations.

The Federal Plan will also create a domestic offset system for GHG’s that will allow regulated emitters to obtain offset credits that can be used for compliance purposes. The government plans to develop a list of pre-approved Offset System Quantification Protocols for various project types. Project proponents can follow these protocols to register GHG-reducing projects taking place in Canada with Environment Canada. Credits will only be issued for reductions achieved after January 1, 2008, and these reductions must not have already been required by federal, provincial or regional legislation or already have been used for other mandatory or voluntary GHG reduction programs.

An offset project will remain registered for 8 years, during which time project proponents can submit “Reduction/Removal Reports” and independently verified “Verification Reports”. Environment Canada reviews these documents and deposits the appropriate amount of offset credits in an account held by the project proponent. The federal government has not yet decided on how to deal with “Non-Permanence or Reversal Events”, i.e. the unexpected loss of a project’s expected GHG reductions (e.g. a fire that destroys a forest’s capacity to absorb CO2), but is contemplating either introducing liability periods or issuing only temporary credits for vulnerable projects. More detailed guides for protocol developers, project proponents and verifiers are expected to be released in the summer of 2008.

It will also be possible to earn credits for emissions reductions under the “Early Action Program” for GHG reductions achieved between 1992 and 2006. Companies can apply to have reduction efforts verified and approved by Environment Canada. The application process will be carried out in three phases, and phase I (Initial Information Submission) may start as early as June of 2008. The total amount of credits under this program will be capped at a total of 15 megatonnes of CO2 equivalent, which will be issued in three equal parts in the years 2010, 2011 and 2012. More information for potential applicants under the Early Action program is expected to be released in the Fall of 2008.

The commencement of trading on the MCeX on May 30, 2008 heightened interest in the carbon trading in Canada. Notwithstanding the absence of a finalized federal regulatory system, limited trading has already taken place on the MCeX at $9-11 per tonne. The trading units are contracts equal to 100 Canadian CO2e units. Each CO2e unit as defined by the federal government an entitlement to emit one metric ton of CO2e. This area has been complicated somewhat by the recent announcements by the Ontario and Quebec governments that they would implement their own cap and trade system, as well as the legislation that was recently introduced by the British Columbia government entitled the Greenhouse Gas Reduction (Cap and Trade) Act.