On June 8, 2022, Canada released its final Greenhouse Gas Offset Credit System Regulations (Regulations). The Regulations provide a roadmap as to how greenhouse gas (GHG) emission offset credits generated by acceptable projects can be used by facilities to meet GHG emission reduction requirements under the output-based pricing system (OBPS) aspect of Canada’s Greenhouse Gas Pollution Pricing Act (GGPPA). For a discussion regarding the mechanics of the GGPPA, including carbon pricing under the OBPS, see our December 2018 Blakes Bulletin: Federal Carbon Pricing System Coming Into Force January 2019: How Will it Impact Your Business? Although many aspects of the Regulations are similar to the draft regulation issued in March of 2021 (see our March 2021 Blakes Bulletin: Canada Issues Proposed Federal Greenhouse Gas (GHG) Offset Regulations), there are also some important distinctions, several of which are discussed herein.
The federal OBPS applies in those provinces and territories that do not otherwise have an equivalent carbon pricing regime for large emitters. Currently, these provinces and territories include Manitoba, Saskatchewan (for certain facilities), Prince Edward Island, Nunavut and Yukon. Under the OBPS, offset credits are generated by registered projects wholly situate within Canada that generate GHG reductions (by preventing GHG emissions or removing GHGs from the atmosphere) in comparison to “business as usual” GHG emissions. Once generated, offset credits can be used by facilities subject to the OBPS for compliance purposes. Alternatively, they can be used to meet corporate net-zero commitments or conditions of an Impact Assessment Act approval.
NOTEWORTHY ASPECTS OF THE REGULATIONS
At its most basic level, the Regulations describe the process by which offset credits can be generated under the GGPPA pursuant to an acceptable offset protocol. However, there are several noteworthy aspects of the Regulations, many of which differ from, or were not addressed in, the draft regulation, or simply bear repeating, including the following:
- Generating Offset Credits
- Environmental Integrity Account
- Sequestration and Risk Management Plans
- Project Duration and Renewals
- Compendium of Federal Offset Protocols
A. Generating Offset Credits
Offset projects can be limited to a single project or include an aggregate of projects. If a project (aggregated or otherwise) is situated in more than one province, the portions situate in each province must be registered as distinct projects. Every federal project must be registered and the project generator requires a federal GHG offset credit system account. Before any offsets are finalized, they must be verified by an independent third-party verification body (verifier). The project cannot be registered under any other offset credit system. In particular, a project will not be eligible to generate credits under the GGPPA if the province in which it is situate has an acceptable offset credit regime and an offset quantification protocol that covers the same activities. This latter requirement is important and reinforces Canada’s position that the GGPPA only applies as a “backstop” in those jurisdictions that do not otherwise have equivalent provincial OBPS regimes.
B. Environmental Integrity Account (EIA)
The EIA is essentially a reserve created to ensure the integrity of the federal offset credit system. A minimum of 3% of all offset credits generated by a registered project is annually deposited to the EIA. In the event there is an involuntary reversal of GHG reductions (such as a forest fire that destroys a forest-related carbon sequestration project), the Minister can revoke the corresponding number of offset credits deposited into the EIA. The EIA may also be used as a last resort to replace offset credits when project proponents fail to comply with replacement requirements.
C. Sequestration and Good Stewardship
The Regulations differentiate between forestry-related sequestration projects and non-forestry sequestration projects (which would include other biological/agricultural sequestration projects as well as non-biological/agricultural sequestration projects). Although the specific mechanics are not defined, the Regulations provide that forestry-related sequestration projects based solely upon good forestry stewardship practices can generate offset credits. In our view, this is the most nebulous aspect of the Regulations. It remains to be seen how offset credits can be generated from good forestry stewardship practices if the business as usual scenario is also good forestry stewardship. The concept of good stewardship is reinforced by the choice of three alternative GHG quantification methods for sequestration projects, namely the tonne-tonne method; tonne-year method; and hybrid tonne-year method. Project proponents involved with any sequestration project must specify the particular quantification methodology in their project application.
The tonne-tonne method calculates the GHGs sequestered during the reporting period, taking into account the monitored quantity of GHG emissions to, and removed from, the atmosphere with respect to the project for 100 years. For example, a forest-sequestration project is considered to facilitate permanent carbon removal provided the forest remains uncut (and unburnt) for 100 years.
Conversely, the tonne-year method and hybrid tonne-year method consider the climate benefit of withholding carbon from the atmosphere (or delaying its release into the atmosphere) annually over a reporting period as opposed to over 100 years. More particularly:
The tonne-year method calculates the GHGs removed from the atmosphere based on the climate benefit from withholding carbon from the atmosphere over the reporting period and for which a proponent is not required to monitor the quantity of GHG emissions to, and removed from, the atmosphere with respect to the project;
The hybrid tonne-year method calculates the GHGs removed from the atmosphere based on the climate benefit from withholding carbon from the atmosphere over the reporting period and for which a proponent takes into account the monitored quantity of GHG emissions to, and removed from, the atmosphere with respect to the project.
From an offset credit generation perspective, more credits will be generated by projects using the tonne-tonne method in comparison to the tonne-year or hybrid tonne-year methods. However, the latter two alternatives may be attractive to some proponents, particularly those involved in agricultural sequestration projects where ensuring specific land-use and agricultural practices for 100 years may be impractical or unrealistic.
D. Project Duration and Renewals
The period in which a project can generate offset credits varies depending on the nature of the project, and unless otherwise set out in the applicable protocol, is:
30 years for a forestry-related sequestration project;
20 years for a non forestry-related sequestration project; and
10 years for all other projects.
If a project was previously registered in provincial offset system and transitions into the federal offset system, the duration over which the project was registered in the provincial system will be deducted from the crediting period in the federal offset system. Project crediting periods can be renewed as follows:
up to 70 more years for forestry-related sequestration projects (i.e., no more than 100 years including all renewals); and
all other projects can be renewed no more than two more times based upon their initial offset credit periods (i.e., up to 40 more years for non forestry-related sequestration projects and up to 20 more years for all other projects).
E. Compendium of Federal Protocols
Project proponents can only generate offsets pursuant to approved offset credit protocols set out in the Compendium of Federal Offset Protocols (Compendium). In March of 2021, when Canada released the draft regulation, it stated it was prioritizing the following four protocols for development: (i) advanced refrigeration systems; (ii) landfill methane management; (iii) improved forest management; and (iv) enhanced soil organic carbon. In concert with the release of the Regulations, Canada has added a fifth protocol priority: livestock feed management. Furthermore, it finalized and issued the Federal Offset Protocol for Landfill Methane Recovery and Destruction, which is currently the only recognized protocol in the Compendium.
Notwithstanding the Regulations are now in force, unless and until more protocols are developed and recognized as part of the Compendium, they has limited application. The only recognized protocol under which offset credits can be currently generated is the Landfill Methane Recovery and Destruction protocol.
We will continue to monitor developments with respect to the generation and measurement of offsets from biological sequestration projects and more particularly whether those projects truly represent emission reductions beyond business as usual.