On August 8, 2008, Environment Canada released its Guide for Protocol Developers (the "Guide") which provides guidance as to the requirements and processes involved in the completion of an Offset System Quantification Protocol ("OSQP"). OSQPs are to be developed to provide a standardized method of quantifying GHG reductions related to a particular type of offset project. Offset systems are one component of the federal government's plan, entitled Turning the Corner, to reduce greenhouse gas emissions. The Guide is open for a 60 day consultation period in which parties may provide feedback to the federal government on its proposed guide for protocol development.

The Guide is the first of three guidance documents which were promised for release this summer. It is to be followed by the Guide for Project Proponents and the Guide for Verification Bodies. These guidance documents will, along with the proposed greenhouse gas regulations, form the foundation of a domestic carbon market for Canada. The regulations are to be published later this year in the Canada Gazette for consultation, and the final regulations are to come into force on January 1, 2010.

The creation of accepted protocols for off-set credit creation is fundamental to the functioning of a carbon market. Industries in sectors with off-set credit creation potential are stakeholders in the efficacy of this protocol. It needs to be efficient, effective and equitable in its operation, with the prospect of results that are consistent with the objectives of a functioning domestic carbon market that drives greenhouse gas reductions. Stakeholders need to assess the protocol with a view to whether it would enable anticipated off-set credit creation in their sectors from contemplated as well as current projects.

Moreover, the Guide is a call to action for project proponents individually and on a sectoral basis to prepare protocols for submission. Industry associations and companies with common project type interests may wish to advance protocols to meet their offset credit creation objectives, as may local governments and other public authorities with project implementation responsibilities, such as in energy, infrastructure and transportation. Credits created in conformity with an approved protocol may then be used for either regulatory compliance purposes or for participation in the Canadian carbon market. Credits which meet compliance criteria are expected to be of greater value in the carbon market than credits which are created for voluntary market purposes only.

The Guide states that "Canada's Offset System will provide offset credits for eligible project-based greenhouse gas (GHG) reductions and removals." One credit is equal to one tonne of GHGs reduced or removed from the atmosphere. In the Guide, Environment Canada notes that an offset project cannot be considered for the creation of offset credits until such time as a standardized approach to quantifying GHG reductions is assessed and approved by Environment Canada. Once approved, OSQPs will then be required for all offset projects of a particular type to quantify the actual reductions created by that project when applying for emissions credits.

The Guide is intended to provide a framework for protocol developers to follow in the creation and development of an OSQP for Canada's Offset System. The framework is based on an internationally accepted standard for quantifying GHG emissions reductions, ISO 14064: Part 2, Specification with Guidance at the Project Level for Quantification, Monitoring and Reporting of Greenhouse Gas Emissions Reductions or Removal Enhancements. However, Environment Canada requires that a GHG reduction project meet six Offset System eligibility requirements before it is permitted to create offset credits.

To satisfy these six requirements, a proposed offset project must:

  • take place in Canada,
  • the action taken must be specific and identifiable and result in a net reduction of GHGs,
  • projects must meet various incremental criteria including:
    • the project must have started on or after January 1, 2000,
    • credits may be issued for reductions created after January 1, 2008,
    • reductions achieved must be beyond the baseline defined for the particular project type,
    • any reductions created must be over and above the relevant regulatory requirements for each jurisdiction in which the project operates, and
    • any reductions must go beyond whatever other incentives are granted in the particular jurisdiction in which the project operates.
  • any GHG emissions reductions must be quantified according to the standards arrived at through OSQP for the particular type of project undertaken,
  • the claimed reductions must be verifiable and
  • an emission reduction can be used only once for the creation of an offset credit.

The creation and approval of protocols for particular activities is comprised of three stages:

Stage 1: A Base Protocol Plan must be submitted to Environment Canada for feedback. Environment Canada will set out the issues that it requires further exploration or clarification for a particular type of project. These plans will then be published on the Offset System website to solicit feedback and provide for collaboration.

Stage 2: At this stage, a protocol developer develops and submits the Base Protocol to Environment Canada for review and assessment

Stage 3: This stage involves the preparation of the OSQP and the collaboration with various parties, including Environment Canada. Once the OSQP is finalized and approved, it is published so that it may be used by others for the creation of offset credits for that particular activity.

However, Environment Canada has also created a "fast track" protocol development approach whereby it will impose a modified and accelerated review and approval process for those draft protocols that have already been approved in another jurisdiction. A draft protocol from another jurisdiction can be fast-tracked so long as the other jurisdiction applies a similar level of review and assessment as that imposed by the federal framework. Environment Canada has created a list of 40 protocols from other jurisdictions that are eligible for a fast-track review. See: http://www.ec.gc.ca/creditscompensatoires-offsets/default.asp?lang=En&n=7CAD67C6-1&offset=14&toc=show

Part II Base Protocol Plan

The Guide provides instructions as to the preparation and submission of a Base Protocol Plan to Environment Canada. There are various tools on the Offset System website that will assist a protocol developer to work through the creation of a draft plan in accordance with the Guide's requirements.

Part III Base Protocol

A Base Protocol sets out the proposed approach in a format that may be used by Project Proponents to quantify the reductions of GHGs from their projects. Environment Canada will conduct the initial review of the Base Protocol. Should the Base Protocol appear sufficiently complete and is consistent with Offset System eligibility criteria and ISO quantification principles, a detailed Technical Review of it and related Base Protocols will be undertaken with the objective of completing a draft OSQP. Should the Base Protocol be found to be incompatible with the Offset System eligibility criteria or ISO quantification principles or have significant gaps, it will not be used in the creation of an OSQP.

Provided below is a summary of the steps for preparing and submitting the Base Protocol. For more detailed and specific information, readers should refer to the Guide.

Preparation of the Base Protocol

The Protocol Developer must complete the Base Protocol form attached to the Guide, address all issues raised in the Base Protocol Plan Report prepared by Environment Canada and sign the Licence Agreement, the Declaration and the Waiver of Moral Rights included in the completed Base Protocol form. It is important to note that during the preparation of the Base Protocol, the Protocol Developer must demonstrate that it meets all the eligibility criteria necessary and wherever the Base Protocol form asks for justification, a detailed explanation must be provided.

Details in the Base Protocol form:

Part I - contains the identification details of the Protocol Developer.

Part II - contains information on the applicability of the Base Protocol, the development approach and a list of key terms that will be used.

One key item to note is that in order to be eligible for offset credits, the reduction in GHGs must be the result of a specific action such as a process change, the implementation of a new process or the introduction of a new technology, as specified by the 'real' eligibility criterion of the Offset System. A simple reduction in production levels would not be eligible. A net reduction in GHGs, when the impact of the project activities on all "relevant" sources, sinks and reservoirs ("SSRs") has been taken into account, must be demonstrated.

Part III - addresses the identification of all SSRs in a project, any potential baseline approaches, all SSRs that will be considered in constructing a baseline, the comparison of all SSRs in a project and the baseline to determine the "relevant" SSRs that must be quantified and the identification of key SSRs in terms of risk.

Part IV - contains the methods for quantification of emissions and/or removals for the project and the baseline(s) and for determining the final GHG reductions.

Part V - contains specific project type measures to control the quality of data and maintain the data generated throughout the operation of the project.

Part VI - contains the summary of instructions for Project Proponents.

Part VII - contains the License Agreement, the Moral Rights Waiver and the Declaration.

The Guide provides very specific information, instructions and requirements on how to complete the Base Protocol form. In additional, fast track process applicants should also refer to the instructions for specific information regarding their application procedures.

Submission of the Base Protocol

All documentation submitted by the Protocol Developer must be in electronic format and hard copy, and must include the Base Protocol form, the license, the moral rights wavier, the declaration, the consent and any other supporting information or additional licenses or agreements.

For the Fast Track Process: Submission of the Base Protocol must be made within seven weeks of the publication of the final version of the Guide in the Canada Gazette. Should information be available in existing external protocols, the Protocol Developer need only make a one-sentence reference to the appropriate section of that protocol.

Initial Review of the Base Protocol

Environment Canada will conduct an initial review of each Base Protocol based on four requirements: (1) whether the Base Protocol was submitted by the specified deadline in the Base Protocol Plan Report; (2) whether the Base Protocol is complete; (3) whether the proposed quantification approach is consistent with the eligibility criteria; and (4) whether the Base Protocol addresses any issues flagged by Environment Canada resulting from the review of the Base Protocol Plan.

Technical Review of the Base Protocol

The Technical Review will consist of three to six Technical Review Experts who will provide an expert assessment of Base Protocols, with the goal of identifying whether and how a Base Protocol could be used (or contribute) in whole or in part of a draft OSQP for the project type.

For the Fast Track Process: Environment Canada will conduct an internal technical assessment that relies mainly on the technical reviews that have already been conducted of the external protocols.

"Record of Decision" on the Technical Review

Environment Canada will determine what additional work must be done on the Base Protocols so they can become or contribute to a draft OSQP. In the "Record of Decision", Environment Canada will outline what it will accept as quantification approaches in a draft OSQP and what documents are required to justify the rationale for the selection of these approaches. For a given project type, only one draft OSQP will be developed from the reviewed Base Protocols unless there is adequate reasoning for any additional ones. If there are more than one Base Protocols being used to develop an OSQP for a specific project type, the Protocol Developers will be required to work together to prepare the draft OSQP.

Part IV Offset System Quantification Protocol

An OSQP consists of two sections: (1) a core section that explains to Project Proponents how to quantify GHG reductions from a project; and (2) a background section.

Preparation of the draft OSQP

Protocol Developers will prepare the draft OSQP by revising and/or compiling the Base Protocols that were assessed in the Technical review to reflect the direction provided by Environment Canada in the "Record of Decision". The Protocol Developer will also be required to execute and submit a new License Agreement, Waiver of Moral Rights and Declaration as previously described. This draft OSQP will be reviewed by Environment Canada to ensure that the formatting is proper and that the direction provided in the "Record of Decision" has been correctly captured.

Consultation on the draft OSQP

A draft OSQP that has been accepted by Environment Canada for use in the Offset System will be posted for 30 calendar days on the Offset System website. During the consultation phase, requests to increase the flexibility options in the OSQP will not be considered. Such requests would need to be submitted later as an Offset System Quantification Protocol Extension. Therefore, it is important for potential Protocol Developers to engage in the OSQP development phase early. All comments received by Environment Canada on the draft OSQP will be assessed and input will be sought from the Technical Review Experts if necessary.

Finalization of the OSQP

When Environment Canada has determined that all necessary revisions have been made to the draft OSQP and such OSQP is acceptable for use in the Offset System, the OSQP will be approved by Environment Canada. The new OSQP for the given project type will be posted on the Offset System website and be freely available for use in the Offset System by any interested stakeholders.

It is anticipated that the entire process, from the deadline for submission of a Base Protocol Plan to the posting of an approved OSQP, could require between five to eight months depending on a number of factors. Note that for the Fast Track Process, some OSQPs could be approved in as little as three months after the deadline for submission of Base Protocol Plans.

Should Project Proponents find that the OSQP is not appropriate for their specific project, the OSQP could be "extended" to apply to additional projects with the introduction of flexibility options. If Environment Canada finds the proposed Extension acceptable, it will work with the Protocol Developer to incorporate it into the OSQP. The OSQP Extension and revision process is still under development and will be discussed in a future version of the Guide.

To review a copy of the Guide for Protocol Developers, see Environment Canada's website at:

http://www.ec.gc.ca/creditscompensatoires-offsets/default.asp?lang=En&n=7CAD67C6-1&offset=1&toc=show>