On Wednesday June 10, 2009, Federal Minister of the Environment (“Minister”) Jim Prentice announced the release of two draft documents for public comment pertaining to the federal government’s highly anticipated Offset System. In conjunction with last summer’s Program Rules and Guidance for Protocol Developers, the Program Rules and Guidance for Project Proponents (the “Rules for Project Proponents”) and Program Rules for Verification and Guidance for Verification Bodies (the “Rules for Verification Bodies”), provide details regarding the federal government’s plan to reduce greenhouse gas (“GHG”) emissions through the creation of a national carbon market. The following is a brief discussion and outline of the Rules for Project Proponents and Rules for Verification Bodies.

introduction

The federal government has a current goal of reducing GHG emissions by 20 per cent from 2006 baseline levels by the year 2020 and by 60 to 70 per cent by the year 2050. In doing so, the federal government will impose mandatory emissions reductions targets across a number of Canadian industries. The Offset System is just one of the ways in which the federal government has sought to achieve these targets.

The Offset System, established by section 322 of the Canadian Environmental Protection Act 1999 (“CEPA”), will issue offset credits for projects that meet requirements for reducing and removing GHGs. This market-based approach helps to create a “currency” for the price of carbon in the form of offset credits, which can be bought and sold by investors or industry members who will be subject to mandatory emissions reductions targets under the proposed regulatory framework. Each offset credit is equal to one tonne of GHG emissions that is reduced or removed from the atmosphere.1

rules for project proponents

The Rules for Project Proponents sets out the requirements for certifying offset credits, including the necessary registration, reporting and verification documentation. The project cycle is encompassed in four stages:

1. Project Registration: The Project Proponent applies to the Minister to register the project in the Offset System to receive offset credits. Projects may be aggregated and bundled, provided that: a) the aggregated project consists of a number of similar subprojects that share a common project type, site or aspect the Minister deems acceptable; and b) each subproject meets the project eligibility criteria. In determining project eligibility, the Minister considers the following six criteria:

i. the project is within the scope of the Offset System (i.e., reductions must occur in Canada and must pertain to one or more of the GHGs set out in Schedule 1 of CEPA: carbon dioxide (CO2); methane (CH4); nitrous oxide (N2O); hydrofluorocarbons (HFCs); perfluorocarbons (PFCs) and sulphur hexafluoride (SF6));

ii. the reductions are quantifiable (i.e., emissions must be calculated in accordance with an approved Offset System Quantification Protocol);

iii. the project achieves real GHG reductions (i.e., reductions must be demonstrable and include one or more specific and identifiable actions resulting in net reductions of GHGs, taking into account relevant GHG sources, sinks and reservoirs);

iv. reductions are incremental (i.e., the project must have started to achieve reductions on or after January 1, 2006 and only reductions occurring on or after January 1, 2011 will be eligible for offset credits. This goes beyond the baseline defined for the project type, beyond all federal, provincial/territorial and regional legal requirements and beyond what is expected for other climate change incentives);

v. the offset project is verifiable (i.e., capable of being monitored and assessed by a third-party Verification Body for accuracy, transparency, and the ability to replicate its raw data); and

vi. the GHG reductions are unique (i.e., used once to create an offset credit; reductions cannot be used or sold in any other mandatory or voluntary system or program);2

2. Project Implementation: The Project Proponent implements the project in accordance with all procedures and requirements of the Offset System Quantification Protocol, which defines the requirements related to monitoring, data quality assurance / quality control and record-keeping;3

3. Reporting and Verification of GHG Reductions: A GHG Assertion and a Project Monitoring Report is completed by the Project Proponent and submitted to a thirdparty Verification Body. After reviewing this material, the Verification Body submits a Verification Statement, which ascertains the accuracy of information submitted by the Project Proponent;4 and

4. Certification of Reductions and Issuance of Credits: The Minister decides whether or not to certify the issuance of offset credits based on the satisfaction of necessary registration, reporting and verification criteria. Each offset credit is assigned a unique serial number, which is deposited into the Project Proponent’s account in the national tracking system.5

After a credit is issued, a Project Proponent must maintain a copy of all project records for a minimum of eight years after the end of the registration period.6 Additional rules apply to offset credits issued for biological sink projects, which carry a 25-year liability for carbon storage following the end of the final reporting period. The Rules for Project Proponents stipulates that the Project Proponent must submit evidence and provide a certification statement to confirm that the carbon storage for these types of projects is maintained over the liability period and that no reversal has occurred. Project Proponents must also apply a discount factor to the GHG removals achieved from the project to reflect the risk that the Project Proponent will not be able to replace the credits if a carbon reversal occurs. The certification statements do not need to be verified.7

Registration in the Offset System lasts eight years. Re-registration for another eight years is typically possible but not guaranteed. The same steps must be taken to submit a revised Project Application Form to the Minister for reassessment of the project. In addition, reregistration must occur before the end of the current registration period.8

Agricultural projects can be re-registered up to two times for a registration totalling 24 years, while forest sequestration projects can be re-registered up to five times for a maximum of 40 years. Avoided and reduced deforestation projects can only be re-registered once.9

rules for verification bodies

The verification process occurs after the registration, implementation and reporting stages of the project cycle. Its purpose is to evaluate the statements made by a Project Proponent when reporting on GHG reductions achieved from a registered offset project. This provides third-party assurance to the Minister that the information submitted by the Project Proponent is complete and accurate. The Rules for Verification Bodies sets out the policy on eligibility requirements for Verification Bodies, as well as a process for developing a verification approach.10

Verification Bodies must be conducted by a party that has:

  1. been accredited by the Standards Council of Canada in accordance with the requirements outlined in the Greenhouse Gas Accreditation Program and Canada’s Offset System for Greenhouse Gases – Accreditation Requirements for Verification Bodies;
  2. been accredited for technical scope consistent with the project type being verified; and
  3. at least one team leader who successfully completed one of the verification training courses listed by the Minister on the Offset System.11

If a project has a Verification Body that was accepted into the Standards Council of Canada’s Greenhouse Gas Accreditation Program but does not otherwise meet the above requirements, certification of the project will not occur until the accreditation certificate is received by the Minister. If the Verification Statement is not received by the Minister within one year of acceptance of the corresponding Verification Statement, the project will require re-registration for that reporting period.12

The Verification Body is required to draw a conclusion on the GHG Assertion submitted by the Project Proponent. This is judged in accordance with the National Standard of Canada CAN/CSA-ISO 14064-3 and corresponding International Standard ISO 14064-3 (collectively, “ISO 14067-3”).13

There are four stages involved in the verification process:

  1. Pre-Verification Activities: A verification and internal review team is appointed, which must possess the appropriate technical expertise and be impartial. The provision of verification services by this team must be legally enforceable through an agreement;14
  2. Planning the Verification: Each Verification Plan must be completed in accordance with ISO 14064-3;15
  3. Conducting the Verification: All verifications must be conducted in accordance with the requirements in ISO 14064-3 and continuously monitored for real or potential conflicts of interest;16 and
  4. Completing the Verification: After conducting the verification, the Verification Body can reach a conclusion that is positive, negative or neither entirely positive or entirely negative based on three factors:

i. whether the stated amount of GHG reductions is a fair and accurate representation of the reductions achieved over the period reported;

ii. whether the project has been implemented in accordance with the requirements of the Offset System Quantification Protocol; and

iii. whether the project satisfies the eligibility criteria of the Offset System.17

The findings and conclusions made by the Verification Body are to be presented to the Project Proponent, who is then given an opportunity to amend the GHG Assertion or provide the Verification Body with additional information (if required). If the GHG Assertion is modified, the Verification Body must re-verify the statements and produce a final Verification Statement. Lastly, all working papers and supporting evidence must be collected and documented by the Verification Body.18

next steps

The release of the two draft documents are subject to a 60 day comment period. Publication of the final versions of the documents is expected in the fall of 2009.

In the meantime, the federal government is in the process of establishing a National Registry and credit tracking system to ensure accurate reporting of credits that are bought and sold in accordance with regulatory requirements.19

The Minister has stated that the federal government is pursuing its climate change plan on “three fronts – domestic, continental and international”. To this end, the federal government is reportedly “working closely” with the new U.S. Administration to coordinate climate change policies and clean technology development. In addition, Canada is gearing up for the COP 15 meeting in Copenhagen this December which brings together countries that have ratified the United Nations Framework Convention on Climate Change. It is during this meeting that the follow-up steps to the Kyoto Protocol will be determined.20

In order to show its commitment to taking action against climate change, Canada must be able to show that its Climate Change Plan will actually lead to real reductions in the Country’s levels of GHG. To that end, expect to see further developments to the federal Offset System before the end of 2009.