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Federal Government Launches Greenhouse Gas Offset Credit System – Indigenous Peoples


The Government of Canada has published the Greenhouse Gas Offset Credit System
Regulations
, which establish an offset system under the
Greenhouse Gas Pollution Pricing Act (GGPPA). The system
allows registered participants to carry out projects based on
federal offset protocols to generate tradeable offset credits (each
credit representing one tonne in GHG emissions reduced or removed).
The government also published its first protocol, for Landfill Methane Recovery and Destruction.

What you need to know

  • Offset credits are one type of compliance units that covered
    facilities can use to compensate for excess emissions (i.e., above
    annual emission limits) under the Output-Based Pricing System.
    These credits can also be used for other purposes, such as meeting
    corporate net-zero commitments.

  • The offset system is intended to incentivize voluntary GHG
    emissions reductions or removals from eligible activities that are
    not otherwise legally required or covered by existing carbon
    pricing systems.

  • To generate federal offset credits, proponents must, among
    other things: have an account in the offset credit system;
    implement a project to generate GHG reductions that are real,
    additional, quantified, verified, unique and permanent; and meet
    applicable reporting and verification requirements.

  • The Regulations incorporate by reference the protocols
    published in the Compendium of Federal Offset
    Protocols
    (Compendium). ECCC is developing protocols for
    quantifying GHG reductions for various project types. The only
    published protocol to date is for Landfill Methane Recovery and Destruction,
    with a protocol for refrigeration systems scheduled for
    finalization in late summer or early fall.

  • The market for federal offset credits is already developing,
    with proponents and purchasers developing innovative agreements for
    future credit streams.

  • The publication of the Regulations concludes a multi-year
    design and consultation process led by Environment and Climate
    Change Canada (ECCC) (see prior Torys bulletins here and here).

What do the regulations say?

Application

The Regulations apply to proponents of projects to which a
federal offset protocol applies. To be eligible, a project must
have started on or after January 1, 2017 and be shown to generate
GHG reductions that are real, additional, quantified, verified,
unique and permanent. Reductions are quantified against baseline
emissions (i.e., “additional” to a business-as-usual
scenario), must not result from an existing legal requirement, and
must arise from sources, sinks and reservoirs that are not already
covered by a carbon pricing system.

The system applies in each province or territory that does not
have an active, published offset protocol for a given project type.
In other words, the federal protocols cannot be used in provinces
or territories that have methodologies covering the same project
type. For example, Alberta and Québec currently have
protocols for landfill gas recovery and destruction projects.

Conditions of registration and project
aggregation

In addition to prescribed information requirements for
registration on the Credit and Tracking System (CATS), project
eligibility will be linked to a proponent’s contractual right
to, or ownership of, offset credits generated. Proponents receiving
a financial incentive from a funding program would still be
eligible for registration provided that the exclusive entitlement
to credits resulting from the project remains with the proponent. A
proponent may group multiple projects (i.e., register them as one
aggregated project) if it is the proponent for all the projects.
Aggregated projects must be in the same province and use the same
version of the same protocol.

Crediting period

The Regulations specify the crediting periods in which offset
projects may generate credits and the number of times and maximum
duration for renewal. Unless otherwise provided in a protocol, the
crediting period is 30 years for forestry sequestration projects,
20 years for other sequestration projects, and 10 years for all
other project types1. Forestry sequestration projects
may be renewed for up to a total of 100 years, while other projects
may be renewed no more than two times.

Tonne-year accounting

The Regulations allow proponents of sequestration-based
protocols, once they are finalized, to use tonne-year
accounting.

Under this approach, the number of credits issued to a
sequestration project each year is based on an estimate of the
total GHG removals that will occur over a 100-year project
lifespan, after making deductions for leakage and uncertainty,
divided by a tonne-year conversion ratio. In that way, it allows
proponents to quantify the benefits of projects that last less than
the full 100-year period. The Québec offset program is
slated to use a similar approach for its forestry offset
protocol.

Registration application deadline

If the start date of a project predates the publication of the
applicable protocol in the Compendium, the registration deadline is
18 months after the publication date, and no more than 10 years
after the project start date (but not earlier than January 1,
2017). If the project start date is on or after the applicable
protocol’s publication, the deadline is 18 months after the
start date.

Reporting requirements and credits issuance

The Regulations set out requirements for reporting, monitoring,
verification, and record-keeping. Notably, proponents must submit
an initial project report (together with a verification report) for
the first year in the first crediting period no more than six
months after the one-year period ends. Subsequent project reports
are required no later than six months after the end of the
reporting period.

Each project report must be verified by an accredited third
party and quantify the GHG reductions and removals for each year in
the reporting period based on the applicable protocol. Moreover,
sequestration projects that use certain quantification
methodologies (i.e., tonne-tonne and hybrid tonne-year) must
prepare a reversal risk management plan and submit monitoring
reports to document and confirm the measures implemented to
mitigate credit reversal risk.

The credits issued into a proponent’s Offset Credit System
Account for a given year will correspond to such quantified
reductions and removals, minus: (i) any credits the proponent may
have agreed to forgo under a funding agreement, (ii) credits
required to be deducted and deposited into the environmental
integrity account2, and (iii) credits corresponding to
any net increase in GHG carried over from a previous year.

Protocol development and Indigenous participation in offset
system

The first published protocol (Landfill Methane Recovery and
Destruction) allows the quantification of GHG reductions from
landfill sites, due to the installation and operation of equipment
to capture and destroy methane.

ECCC is currently developing protocols for: refrigeration
systems3, improved forest management, enhanced soil
organic carbon, and livestock feed management. According to ECCC,
the refrigeration protocol is expected to be finalized in late
summer or early fall. In addition, in summer 2022, ECCC will begin
to develop protocols for direct air carbon capture and
sequestration. Subsequent project types under consideration for
federal offset protocol development include: bioenergy carbon
capture and sequestration, improved forestry management on public
lands, livestock manure management and anaerobic digestion.

In addition, to facilitate opportunities for Indigenous
participation in the federal offset system, ECCC has released a discussion paper outlining existing and
proposed initiatives, with a focus on forestry projects. About 88%
of Canada’s forests are located on provincial Crown land and
public land in the territories. According to ECCC, it is important
to consider how forestry offset projects can be enabled on Crown
land, while respecting Indigenous rights. Given that the
Regulations require proponents to have exclusive entitlements to
the offset credits from their projects, ECCC is therefore
considering the following:

  • In land tenure contexts where Indigenous peoples hold
    title to the land or have the right of exclusive use and occupation
    of the land
    , Indigenous peoples could undertake an offset
    project or assign entitlement to a project
    proponent4.

  • For forest-based offset projects on Crown land where
    entitlement is not clear
    (i.e., in contexts other than the
    above scenarios), a project proponent would need to enter into an
    agreement with a provincial or territorial government managing
    Crown land in order to meet requirements to demonstrate entitlement
    under the federal GHG offset system.

Comments may be submitted on this discussion paper to ECCC (at
creditscompensatoires-offsets@ec.gc.ca) by June
30, 2022.

Market development

Demand for federal offset credits is expected to come from
several sources.

Under the GGPPA, facilities covered by the Output-Based Pricing
System can use these credits to compensate for any excess emissions
(i.e., emissions above their annual emission limits). Those
facilities may also comply by lowering their GHG emissions or
purchasing recognized units (currently, from certain approved
protocols under Alberta’s offset program). However, if the
federal backstop carbon price rises to $170 per tonne of carbon
dioxide equivalent by 2030, as the federal government has proposed,
these facilities will increasingly explore lower cost abatement
options in the offset sector.

ECCC has also suggested that demand for federal credits could
arise in the voluntary markets. Increasingly, companies are
voluntarily committing to achieve net-zero GHG emissions and
setting interim GHG reduction targets. To the extent these
emissions reductions cannot be achieved internally, organizations
may seek to balance their emissions using high-quality carbon
credits. The development of a robust federal offset program, with a
high degree of environmental integrity, may therefore be an
attractive option for companies voluntarily seeking to purchase
credits for retirement towards their corporate targets, while
helping minimize some of the integrity concerns in the offset
markets.

The market for these credits is already being developed, with
proponents of projects that may be eligible for federal offset
credits already entering into agreements for the sale of future
credit streams. As part of our climate change counsel to clients,
we are working with many of the country’s largest investors and
resource companies as they pursue carbon purchase and streaming
agreements, and are helping them manage the delivery risks
associated with early entry into the market for federal
offsets.

Footnotes

1. Projects that were previously registered in another
offset system before transitioning to the federal system will have
their previous period of registration deducted from the federal
crediting period.

2. This account will be used as a form of insurance. When
there is a reversal of GHG reductions beyond the proponent’s
control, a corresponding number of offset credits from the
environmental integrity account will be revoked. The account may
also be used to replace credits when proponents fail to comply with
replacement requirements.

3. The draft protocol Reducing Greenhouse Gas Emissions from
Refrigeration Systems
was published on January 17, 2022 for a
30-day public comment period.

4. These contexts include First Nation reserve lands,
lands purchased by a First Nation under a Treaty Land Entitlement
Agreement prior to transfer to reserve status, proven Aboriginal
title land, and fee simple settlement land under a land claims
agreement.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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