Federal Environment Minister Jim Prentice has given some long awaited direction regarding the Federal Government’s plans for a carbon offset system. In issuing two draft documents on June 10, 2009 entitled Program Rules and Guidance for Project Proponents and Program Rules for Verification and Guidance for Verification Bodies, the Minister provided detail for those looking to enter the carbon market.

The two draft documents provide the Government of Canada’s plan for the certification and issuance of offset credits for greenhouse gas (‘’GHG’’) reductions. Offset credits will be issued on the basis of individual projects and the document outlines the various requirements and stages project proponents must complete in order to receive offset credits.

Below is a review of the draft documents issued by the Minister and a discussion of some of the issues that they address. Until the documents are finalized following a 60 day public comment period, their precise contents will not be certain. That said, these draft documents will be welcomed by industry and interested stakeholders as they provide more insight into the future of the carbon market in Canada.

PROGRAM RULES AND GUIDANCE FOR PROJECT PROPONENTS

Canada’s Offset System, which is established under s. 322 of the Canadian Environmental Protection Act, 1999, defines an offset credit as representing one tonne of greenhouse gas emissions reduced or removed from the atmosphere. Before an offset credit will be awarded for any project, there are four major stages that must be completed: project registration, project implementation, verification and reporting of GHG reductions, and certification and issuance of offset credits. The document Program Rules and Guidance for Project Proponents provides the details of these stages and is described below.

1. Project Registration

During this stage, the Project Proponent will first need to determine the project’s eligibility to generate offset credits and ensure there is an approved Offset System Quantification Protocol available for its project type. Mechanisms exist to develop new Protocols in the case that none exists for a specific project type. Next, the Project Proponent must create a description of the project and how it will reduce or remove greenhouse gases, a description of the baseline, and a description of the baseline’s conformance with the relevant Offset System Quantification Protocol. The baseline year must be the year in which the registration begins. Supporting evidence must be gathered where necessary. All of this information will be used to prepare a Project Application Form, which the Project Proponent will submit to the Minister of the Environment (“the Minister”) for approval.

Upon receipt of the Project Application Form, the Minister may issue up to two Information/Revision Requests. Project Proponents will have fifteen business days in which to respond to the request. If, after the application is revised the information is insufficient, the Minister will refuse the project. If the Minister accepts the project application, it will be posted on the Offset System website for thirty days of public review and comment. Within ten days following this review period, a Public Comment Report and, if required, an amended Project Application Form must be submitted. The Minister will not accept a project application until satisfied that all public comments have been addressed. If the Minister accepts this final application package, the project will be registered in the Offset System. If the project is registered, the information will remain publicly available for the duration of the registration period and the Minister will continue to evaluate comments submitted on the project relating to the entitlement of the Project Proponent to the offset credits.

An offset project registration will last for eight years and will receive offset credits for the time, during this period, that it is achieving eligible reductions.

Offset projects may be aggregated or bundled. Aggregation allows a group of project developers working on projects of the same project type (i.e. using the same Offset System Quantification Protocol) to submit all of their projects as a single project. Bundling allows a Project Proponent to bundle together projects that share a common element (e.g. project location, data set, or baseline) and submit them as one project. Each sub-project must satisfy all Offset System eligibility criteria. Additionally, locations, timelines, Offset System Quantification Protocols, and an identification/justification of baselines must still be provided.

Project Eligibility

There are six eligibility criteria that greenhouse gas reductions must satisfy to become an offset project and be eligible to receive offset credits. They are:

1. Scope: The offset project must be located in Canada and must achieve reductions in one or more of the following greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulpure hexafluoride (SF6).

2. Real: The offset project must achieve specific and identifiable greenhouse gas reductions.

3. Incremental: The offset project must have started to achieve reductions in greenhouse gases on or after January 1, 2006, except for projects subject to easy reversal. Only reductions occurring on or after January 1, 2011 will be eligible for offset credits. Reductions must go beyond government defined baselines and reductions caused by legally required actions, and must be beyond what is expected due to the receipt of climate change incentives.

4. Quantifiable: The offset project must be quantifiable, which means that greenhouse gas reductions achieved must be quantified as specified in an Offset System Quantification Protocol for the project type.

5. Verifiable: The offset project must be verifiable, which means that project information and data must be monitored and reported.

6. Unique: The greenhouse gas reductions must be unique, which means the reduction cannot be used or sold in another mandatory or voluntary system or program.

2. Project Implementation

The offset project must then be implemented and monitored. For each type of offset project there will be a different approach to monitor, calculate and report the applicable greenhouse gas reductions. These approaches will be set out in the Offset System Quantification Protocol relevant to the offset project.

If at any time the offset project changes such that the information contained in the registered Project Application Form is no longer true, the Project Proponent will be required to submit an updated Project Application Form according to the process outlined by the Minister.

For periods of maintenance or equipment repair when the Project Proponent is unable to follow the accepted monitoring procedure, the contingency measures specified in the Offset System Quantification Protocol must be put into place. If no contingency measures are provided, the Project Proponent will not receive any credits during this time.

3. Verification and Reporting Requirements

In order to receive offset credits, project proponents will be required to engage in a verification and reporting process. At the beginning of a project, Project Proponents will be required to file a Greenhouse Gas Assertion that describes the actual performance of the project over the reporting period. The document serves as a declaration by the Project Proponent that the assessment of GHG reductions or removal is accurate and supported by evidence and that the project satisfies the requirements and eligibility criteria of the Offset System as contained in the Offset Quantification Protocol and Program Rules and Guidance for Project Proponents. The Greenhouse Gas Assertion must also undergo certification by an eligible third-party Verification Body upon completion.

Following the Greenhouse Gas Assertion, Project Proponents must prepare a Project Monitoring Report that summarizes the evidence and supporting statements from the Greenhouse Gas Assertion. It is an important tool to be used by both the Verification Body and the Minister in assessing how well the project proponent has implemented the requirements of the Offset System Quantification Protocol.  

Although the Project Proponent is responsible for both the Greenhouse Gas Assertion and the Project Monitoring Report, these documents will be submitted by the Verification Body along with a final Verification Statement. The Verification Statement is a critical document as it contains the Verification Body’s conclusion on the Greenhouse Gas Assessment. All Verification Statements will be reviewed for completeness and consistency with the Program Rules for Verification and Guidance for Verification Bodies. If it is not accepted by the Minister, no offset credits will be issued. Similarly, if the Verification Statement includes an adverse statement it will also result in no credits being issued. However, in the case of incompleteness or insufficiency, the Minister may provide a maximum of two Information/Revision Requests to Project Proponents to which they will have 15 business days to respond. As well, the Minister may also assess whether a reversal has occurred in the case of an adverse conclusion. These decisions will be made on a case-by-case basis and may be subject to other conditions at ministerial discretion.

The reporting period is the time covered by the verification of the Greenhouse Gas Assertion and Verification Statement. However, there will likely be a number of reporting periods per each eight year registration period. A Greenhouse Gas Assertion, Project Monitoring Report and Verification Statement must be submitted for each reporting period while the reporting periods themselves must be contiguous and not span more than one registration period. The Government of Canada anticipates that the first reporting period will be required no later than one calendar year from the start of the crediting period. The Greenhouse Gas Assertion, Project Monitoring Report and Verification Statement must be submitted within one year of the end of a reporting period.

4. Certifcation and Issuance of Credits

The Program Rules and Guidance for Project Proponents contains a long list of conditions that must be met in order to obtain certification of GHG reductions. In addition, the Verification Statement must be complete and consistent with ISO 14064-3 requirements. If all certification conditions are satisfied, the Minister will issue a Certification Report indicating the number of credits to be deposited in the Project Proponent’s account. The report will be forwarded to both the Project Proponent and the tracking system, and the credits will accordingly be deposited into the Project Proponent’s account with a unique serial number for each credit.

After Credit Issuance

Project Proponents remain responsible for maintaining documents and records on file relating to the project following the issuance of offset credits. This requirement will last for a minimum of eight years following the end of the registration period.

In addition, Project Proponents are responsible for notifying the Minister in the case of any errors in credit issuance. Likewise, if the Minister discovers any errors they will be reported to the project proponent in writing.

The Minister may issue up to two Information/Revision Requests upon discovery of the error and, based on the information provided, assess whether the error requires revisions to the Greenhouse Gas Assertion and Verification Statement or wholly new documents. If it is the latter, the project proponent must also arrange for reverification of the documents. Where offset credits are issued in error, the credits will remain valid but the Project Proponent will be required to cancel an equivalent number of credits that are accepted for compliance from the tracking system within the timeframe and amount specified by the Minister.

At the end of the eight year registration period, offset projects will typically be able to re-register for an additional eight years using the same procedure as with initial registration. Agricultural sink projects will only be able to reregister twice (for a total of 24 years), and forest sequestration projects will only be ale to re-register four times (for a total of 40 years).

Certification for Sinks

The certification process is similar for biological sink projects subject to two important caveats. First, where the Minister determines that a reversal from a Verification Statement has occurred in a sink project, the Project Proponent will be notified in writing and required to replace an amount of credits equal to the magnitude of reversal in their account in the tracking system (as opposed to canceling them as with all other projects). Second, offset credits issued for biological sink projects have a 25-year liability period whereby carbon must be stored for at least 25 years following the end of the final reporting period. Project Proponents must produce evidence and certification statements in accordance with this requirement, albeit without a requirement for verification. In the event a Project Proponent fails to do so within six months of the deadline for submission, they will be required to replace all previously issued credits with an equivalent number accepted for compliance in the tracking system (as in the case of reversal).

PROGRAM RULES FOR VERIFICATION AND GUIDANCE FOR VERIFICATION BODIES

As a supplement to the Program Rules and Guidance for Project Proponents, the Program Rules for Verification and Guidance for Verification Bodies provides detailed information meant to guide the verification bodies assessing Greenhouse Gas Assertions and Project Monitoring Reports. In particular, it provides an elaborate version of program rules for verification and provides guidance on verification fundamentals including objectives, standards, and principles.

CONCLUSION

While the precise nature of the offset system will not be certain until these documents are finalized, their issuance by the Federal Government provides more definition to the shape of the carbon offset market in Canada than has been available to date. In the still-developing carbon market, these documents are an important step towards the market’s maturity.