Environment Canada released two new draft rules and guidance documents to develop and implement its proposed Offset System for Greenhouse Gases on Wednesday June 10, 2009. The draft documents are now subject to a 60-day comment period. Final documents are expected in the fall of 2009, the release of which will launch the Offset System. The Offset System will be part of the federal framework to reduce greenhouse gas emissions which will include a cap-and-trade system. Credits created under the Offset System will be eligible for compliance purposes in a future regulatory regime, the details of which have still not been released. The system will be administered by the Government of Canada under the authority of the Canadian Environmental Protection Act, 1999.

The announcement indicates that the government is moving forward with its Offset System, albeit with caution and at a slower than originally advertised pace. The draft documents indicate projects that began on or after January 1, 2006 will be eligible to create credits for reductions achieved on or after January 1, 2011. These documents suggest that the crediting system will not be up and running until January 1, 2011. Previous iterations of the government's plan suggested projects that began on or after January 1, 2000 would be eligible and reductions achieved on or after January 1, 2008 could earn credits. The previous plan also indicated that the regulatory system would be up and running by January 1, 2010.

The documents released include the Program Rules and Guidance for Project Proponents and the Program Rules for Verification and Guidance for Verification Bodies.

To be eligible under the Canadian Offset System credits must be real, incremental, quantifiable, verifiable and unique. Offsets credits can be generated in those sectors of the Canadian economy which will not be subject to a future cap on greenhouse gas emissions, and for projects where an established Quantification Protocol exists. An offset system aims to incent innovation in non-regulated sectors to reduce greenhouse gases, while reducing the cost of compliance for those regulated entities that may find reducing emissions very difficult.

The draft rules establish guidance for all of the steps a Project Proponent must take to create a credit. The draft documents indicate that the quantification, monitoring and reporting requirements are to be based on the framework and principles of the international standard ISO 41064-2. The documents include increased detail and proposed timetables for each step in the process, which are listed as follows:

  1. Establish Quantification Protocol for the Project type;
  2. Registration of the Project in the Offset System (subject to mandatory public consultation and ministerial approval);
  3. Implementation of the registered project and monitoring of data;
  4. Reporting and verification of reductions from the registered project; and
  5. Certification of reductions and issuance of offset credits.

Once issued, an offset credit may be traded, banked or used for compliance purposes. The market will set the price. It is expected that, in the future, Canadian offset credits may be eligible for compliance purposes in other jurisdictions.

Environment Canada will be the body responsible for establishing and enforcing the Offset System rules, approving protocols, registering projects and issuing offset credits. It has suggested that some of these roles may be handed over to private sector organizations in the future. Initially, private sector services that will be required include technical experts, aggregators, and verification bodies.

Project Proponents will be responsible for implementing the project and engaging accredited third-party verification bodies. These verification bodies must be accredited by the Standards Council of Canada. More information on verification body accreditation can be found on the Offset System Website.

In his announcement, Environment Minister Prentice indicated that the release of these documents marks a milestone towards establishing a carbon market in Canada and that the government aimed to complement established and emerging provincial and regional carbon markets, "not supplant or duplicate them". He also indicated that the federal government will pursue equivalency agreements with the provinces where appropriate.

There are some key differences with the proposed federal system and the offset system already in place in Alberta. Under the Alberta system offsets submitted for compliance purposes can later be found to be invalid and ineffectual. The proposed federal system attempts to address the uncertainty surrounding offsets by requiring Ministerial Certification of credits that have been verified by a third-party before credits are issued. Under the proposed federal system, if reductions are later found not to have occurred, the Project Proponent will be required to source new credits to ensure the integrity of the system, but the original credits will remain valid for compliance purposes.

Although providing some certainty that a greenhouse gas regulatory system is developing, the documents released acknowledge that changes may be required to ensure fungibility with a future U.S. system and eventually a global market.

For more information please see the news release and backgrounder issued by Environment Canada and the Offset System website.