Since 2007, the Canadian province of Alberta has operated a unique, economy-wide approach to greenhouse gas ("GHG") emissions control that (while imperfect) has functioned to incentivize emission reductions and the development of low-carbon technologies. This Alberta system focuses on emission-intensity reductions, offsets, trading in market instruments, and technology innovation, positioning Alberta to achieve the dramatic GHG emission declines required over the next years and decades.

Although criticized for (1) the low level of its existing emission reduction targets, (2) defects in its offset development and certification process, and (3) potential over-reliance on carbon capture and storage ("CCS"), the Alberta system successfully:

Imposes costs on larger scale industrial GHG emissions,

Creates market incentives to reduce or sequester GHGs,

Directs funds into critical new low-carbon technologies, and

Is likely capable of accommodating much more stringent targets without wholesale redesign.

Moreover, as the Alberta system is compatible with significant economic growth and generates both government and private sector income, it can obtain political support across the province, including rural areas. With all of these benefits, the Alberta system could provide a template for GHG emission control systems in rapidly industrializing countries with large rural, agriculturally focused economic sectors.

Alberta Background

Alberta covers a large inland area in the west of Canada, including the eastern part of the Rocky Mountains and its foothills, and the prairie forest regions to the east. Becoming a Canadian province in 1905, Alberta was an agricultural province which changed dramatically into a resource extraction and industrial economy after World War II due to the discovery of fossil fuels (first oil and subsequently gas) in large quantities in a number of regions. In addition, Alberta has been described as the "Saudi Arabia of coal", and currently uses coal to generate the vast majority of its electricity. The rapid growth of Alberta's population (now over 3.5 million), in particular the cities of Calgary and Edmonton, as well as the development of large petroleum, petrochemical, resource extraction and recently oil sands projects have resulted in billions of dollars being invested in modern facilities energized almost entirely by locally-sourced fossil fuels.

Alberta's Growing GHG Emissions

In 2010, Alberta GHG emissions (expressed in CO2e terms) were 236 megatonnes (Mt), accounting for over one third of the GHG emissions in Canada, up from approximately 28% in 1990. This percentage appears likely to continue increasing in the future, with approximately 40% of Canada's GHG emissions from Alberta in 2020 and oil sands emissions of 104Mt, triple the level in 2005. The federal government predicts such an increase due to the expected growth in petroleum production from oil sands, which relies on a large amount of fossil fuel combustion for heat to separate the petroleum product out of the "oil sands".

Climate Change and Emissions Management Act1 ("CCEMA") and CCEMA Regulations

In 2003, Alberta put CCEMA in place. CCEMA prescribes significant reductions in "specified gases" (CCEMA's term for GHGs, specifically including the six Kyoto Protocol categories of GHGs) on an "intensity" basis with reduction target of 50% or more for GHGs emitted per unit of Alberta's gross domestic product by 2020, as compared to 1990 levels. Alberta's 2008 Climate Change Strategy also contains an "expectation" statement suggesting a 14% reduction on an absolute basis below 2005 GHG emission levels in 2050. Alberta describes its targets as seen in Figure 1.

It should be noted that over time, CCS is expected to play the greatest role in reducing emissions from "business as usual" levels, accounting for 50 Mt/year by 2020.

Click here to view Figure 1. 

GHG Emissions Reporting

Under CCEMA, a GHG reporting regulation was put in place in 2004 that required facilities with annual emissions of 100,000 tonnes CO2e /year or more to file a verified emissions report. In 2011, this threshold was reduced to 50,000 tonnes CO2e /year or more. Industrial GHG emissions in Alberta are estimated to account for more that 50% of all GHG emissions in the province, and approximately 100+ large emitting facilities are obligated to report (often referred to as large final emitters or "LFEs"), which represent 70%+ of all industrial emissions. Reporting is coordinated with the federal government's GHG emission reporting requirements through a "single window" reporting arrangement.

Specified Gas Emitters Regulation

On July 1, 2007, the Specified Gas Emitters Regulation ("SGER") went into effect and created the emissions reduction and market instrument portion of the Alberta system.

Intensity Reductions for LFEs

SGER imposed GHG emission intensity reduction requirements on the LFEs (for this purpose, the 50,000 tonne/yr threshold has not been adopted). The emissions intensity approach (which is similar to that used by CCEMA) was adopted to permit regulated facilities that make up a major portion of the Alberta economy to continue to expand while simultaneously addressing GHG emission reductions. For plants existing in 2000, a 12% reduction from a baseline intensity (calculated as the average of the emissions intensity in the facility's 2003, 2004 and 2005 operations) was prescribed for each compliance period.1 For facilities commencing operations after 2000, the baseline intensity is that of the third year of operations, and the reduction obligation is 2% per annum starting in the fourth year of operations, to a maximum of 12%. A frequent criticism of the SGER requirement is that as facilities become more energy efficient over time, the fixed 12% obligation becomes less onerous. Alberta has indicated that it is considering increasing the percentage reduction requirement as part of the pre-September 2014 SGER review referred to below. It is also possible that differential rates for different economic sectors could be instituted as part of such a reform.

Offsets

To permit the rest of the Alberta economy to participate in the SGER scheme and to provide a potential cost relief valve for industrial facilities required to reduce their GHG emissions intensity, an offset credit system was established. Reductions in GHG emissions, as well as GHG sequestrations, outside of the regulated industrial facilities are eligible to produce such offset credits.

Currently, offset credits used for compliance in the Alberta System can only be produced in Alberta, preventing the use of offset credits generated elsewhere. However, the offset requirements of the Alberta System substantially incorporate ISO 14064, which makes Alberta offset credits potentially comparable with offsets from other jurisdictions. Thus, the potential for linking the Alberta system to other systems, such as those being developed and/or operated in Alberta's neighbouring provinces and the Western Climate Initiative (WCI), has not been eliminated.

The additionality requirements for offsets under the SGER are limited to prescribing that the activity producing the reduction is not required by law. However, as offset credits can only be used when produced in accordance with government-approved protocols, a decision by Alberta Environment & Water ("AEnv") to develop and modify protocols with additionality in mind has forced the Alberta offset credit system to consider issues similar to those that have arisen in the CDM.2

As of July 2012, there were over 30 protocols approved for developing Alberta offset credit projects, with many of these protocols relating to:

Agricultural activities such as conservation cropping (no-till or low-till farming), N2O emission reductions in agricultural applications, manure management and aspects of animal husbandry,

Industrial and resource activities of importance to Alberta such as enhanced oil recovery and acid gas injection, and

Traditional energy efficiency and renewable energy opportunities.

Notwithstanding the large number of protocols potentially useable, offsets actually generated and used in the SGER system have been concentrated on a handful, particularly conservation cropping. In 2011, AEnv announced that it will permit two tonnes of credits to be created for every tonne of CO2 sequestered by a large-scale CCS project intended to inject CO2 captured from an oil sands upgraded directly into geological formations; this project is receiving $745 million from the Alberta government and $120 million from the federal government, indicating the size of the financial challenge of CCS. It is not clear that this two-for-one approach will be available to others. Another project to capture CO2 from an Alberta coal-fired electricity generating facility that was to receive a similar amount of government funding support was abandoned by its proponents which indicated that uncertainty in offset credit valuation was a significant factor in the abandonment decision.

Fund Credits

To keep the cost of emission reductions for LFEs lower, LFEs are allowed to acquire "fund credits" (which act like offset credits) by contributing $15 per tonne to a fund (the "Technology Fund") operated by the government-controlled Climate Change and Emissions Management Corporation ("CCEMC"). Fund credits can be used in an unlimited amount by LFEs. Both the price and the unlimited use have been criticized, most likely resulting in these aspects being part of the review of SGER and the Alberta system now underway in preparation for a pre-September 2014 decision on the system's fate.

Emission Performance Credits

"Emission Performance Credits" ("EPCs"), which were authorized as a compliance mechanism by SGER, are available to any regulated facility that reduces its emissions below its emissions intensity requirement. One EPC is available for each tonne that the facility's emissions are below its prescribed target. EPCs can be used by the facility generating them in future years (i.e. banked) or by any other LFE but only for the same year it which it was created.

Click here to view Chart 1.

Effectiveness of the Alberta System

The targets for Alberta's climate change emissions control plan are criticized as inadequate and most likely incompatible with Canada's Copenhagen Accord/Cancun Agreements GHG emissions commitment of 17% below 2005 emission levels by 2020. Critics of the Alberta system point to the fact that an emissions intensity system is prone to permitting GHG emission increases if and when production increases (as is expected in Alberta, particularly from the oil sands). However, these comments can be countered by highlighting the need to keep challenges managable during the "learning by doing" stage while GHG and market capabilities are being built and political support is necessary. Moreover, the Alberta system functioned effectively throughout the economic downturn, showing that reduced production does not, and did not, take the "bite" out of intensity reduction requirements.

Lack of Price Discovery

Since offset credits and EPCs are frequently traded in Alberta, a market for them clearly exists. However, as these instruments are moved over-the-counter without any public reporting of prices paid (even on an aggregated basis), the benefits of price discovery are not available. The $15/tonne price of fund credits effectively caps the price, but little is know of the prices actually paid. The issue is likely to be reviewed in the near future, particularly if linking to neighbouring provinces or other jurisdictions is to occur.

Nature of Tradeable Units

CCEMA states that offset credits, fund credits and EPCs are "revocable licenses" usable in the Alberta system to meet the LFEs' prescribed emission targets. The uncertainty inherent in that definition has lead to difficulty in characterizing the units for legal purposes and in establishing a commodity for use in financing arrangements.

Auditor General Report

The Auditor General of Alberta ("AG") reported on various aspects of the SGER system in November, 2011, following up on two earlier reports. In this report, the AG identified a number of concerns. In particular, the AG reported that guidance from AEnv to facilities, verifiers, offset project developers and offset protocol developers was not as clear as it should be. As well, the process for developing offset protocols needed improvement, particularly transparency and ensuring that protocol development standards were met.

The AG found a wide variation in methodologies applied to quantify emissions from tailings ponds, leading to potentially significant variability in results. With respect to offset credits from changes in cultivation practices to "reduced till" or "no-till", the AG found a wide variety of evidence used to validate offset credits, with at least one protocol requirement not sufficiently addressed in any of the approaches. Th AG was also critical of a number of other practices related to protocol and offset credit creation.

AEnv has indicated that the AG's findings and recommendations have been taken into consideration and are being dealt with effectively for current and future years. However, there is a widespread concern amongst market participants that further changes will be needed to satisfy the AG, resulting in uncertainty that is adversely affecting the enthusiasm of potential participants.

Offset Credit Issuance

The SGER system contains no step where an offset credit is "issued" (i.e., certified as in existence by a government official) prior to its attempted use buy an LFE. As a result, project developers go through the offset credit creation cycle, assemble the documents required to demonstrate that existence of an offset credit, obtain third party verification, and pass on their right to the offset credit without any assurance from the government that the offset credit is valid. When the offset credit materials are provided to the government, they may be rejected, creating the potential for the LFE to be out of compliance. Even more concerning for all participants is that offset credit documentation is subject to audit by the government for a period of at least two years. If the offset credit is found to not comply, the offset credits can be disallowed. This exaggerated form of buyer liability could lead to penalties being imposed beyond the requirement to replace the disallowed offset credits ($200 per tonne of excess emissions), creating the risk of significant potential liability. As a result of the AG's report referred to above, the level of assurance required from verifiers will be increased going forward.

Verification of Offset Credits

When the SGER system was put in place, the accreditation of verifiers under ISO 14065 did not exist. Accountants, engineers and other qualified entities were permitted to do verifications if approved by AEnv. The varying approaches adopted by these entities have led to apparent inconsistencies in verification results. It has also led to audit concerns, where the original verification was done by, for example, an engineering company and the audit/re-verification is performed by an accounting firm using different methods.

The Technology Fund

The Technology Fund is to be used for purposes related to reducing emissions or improving Alberta's ability to adapt to climate change. CCEMC, the Fund's operator, envisions this being achieved through the discovery, development and deployment of clean technologies. As fund credits are replacements for emission reductions, but do not represent in and of themselves any reductions, the use of the funds needs to result in emission reductions (ideally comparable to or greater than those that would have been achieved in the absence of the issuance of the fund credits). This could mean that the investments are directed into near-term emission reduction projects. On the other hand, the Alberta system (and particularly the Technology Fund) is designed to produce transformative changes through the creation of new technologies, which includes funding risky ventures into new technologies, like CCS. These investments may not pay off in emission reductions, either in the short term or ever. As well, while some investments for adaptation projects have been announced, this focus remains a challenge for CCEMC. Lessons from the operation of the Technology Fund for the structure and operation of the UNFCCC Green Climate Fund are likely worthy of exploration.

Interaction with Federal Climate Change Policy

The Canadian federal government has indicated that its program to achieve GHG emissions reductions to meets its Kyoto Accord/Cancun Agreements target of a 17% reduction for 2005 levels by 2020 will consist primarily of a sector-by-sector performance-based regulatory approach. Following on from new vehicle emission standards, the federal government is close to putting requirements on the coal-fired electricity generation sector that will require new facilities built post-July 1, 2015, as well as existing facilities exceeding a defined "useful life" (likely 45 or 50 years), to meet the GHG emissions standards appropriate for a modern combined-cycle natural gas electricity generation production facility (by using CCS or otherwise) or to shut down. As the vast majority of electricity in Alberta is coal-fired generation, this requirement may deprive the SGER of a significant demand component. Moreover, the next sectors planned for federal performance regulations include oil and gas and chemicals, both mainstays of the Alberta economy and of the SGER system. The federal government had indicated its willingness to enter into equivalency agreements that would suspend the application of federal GHG regulations in Alberta if the Alberta system achieves comparable results. This interaction deserves watching as CCEMA prohibits signing any inter-jurisdiction GHG agreement unless the agreement is consistent with CCEMA and its GHG emissions target.

2014 Review

SGER is set to expire on September 1, 2014, but provides for a review to determine its ongoing relevance and necessity. The option of repassing SGER in its current or an amended form is available. This review is currently underway and it is understood that all options are being considered, including a carbon tax, a modified SGER system or an end to the SGER (including its emissions trading component).

Conclusion

The Alberta GHG emissions control system has operated for over five years and has achieved a number of desirable results, including the creation of trained personnel and service providers, as well as an economy-wide focus on GHG emissions, reductions, and sequestrations, that may be unparalleled in the world. It has demonstrated that requiring emission-intensity reductions offers a potentially successful approach for an industrializing economy and that such an approach can incorporate offset projects and credits that are very similar to offsets used in a cap-and-trade allowance-based system. The Technology Fund, which focuses funds paid for fund credits (similar to allowance auction revenues) into new clean technologies and adaptation, may also be attractive to others. That 5.3 million tonnes of offset credits have been issued and used, arguably representing at least that amount of emission reduction, is also positive.

Published in the International Emissions Trading Association's (IETA) Greenhouse Gas Market 2012: New Markets, New Mechanisms, New Opportunities, p. 50.