Publication
title
Canada's Offset System, A Creative Response to the Kyoto Protocol
DATE
October 21, 2005
EXPERTISE
The Government of Canada is in the process of developing a Canadian offset system for greenhouse gases (GHGs), as envisioned in its 2005 Climate Change Plan. The Government described its proposed system in a discussion paper dated August 11, 2005, and recently completed a cross-country consultation on the proposed offset system. As part of our ongoing effort to assist our clients in understanding the challenges and opportunities associated with Canada's pending climate change regime, members of Ogilvy Renault whose practice pertains to climate change attended and participated in these consultations. This bulletin provides a brief overview of the proposed offset system.
BACKGROUND
Canada's Climate Change Plan requires "large final emitters" or "LFEs" to reduce their greenhouse gas emissions. LFEs are companies operating large facilities in the oil and gas sector, the electricity generation sector, and the mining and manufacturing sectors (i.e., chemicals, fertilizers, pulp and paper, smelting and refining, steel, cement, lime, and glass).
LFEs may satisfy their reduction obligations by: (i) actually reducing their emissions; (ii) buying emission reduction credits; or (iii) a combination of both. Credits will come from three general sources:
- (1) LFEs that reduce their greenhouse gas emissions beyond their prescribed targets will receive credits for those additional reductions;
- (2) from internationally recognized credits associated with greenhouse gas emission reductions achieved abroad; and
- (3) businesses that are not LFEs will be able to create credits for certain greenhouse gas emission reductions (commonly referred to as "offset credits").
Canada's proposed offset system deals with the third of these options.
OFFSET SYSTEM OVERVIEW
Individuals, businesses and other organizations that are not covered under the LFE regime and that reduce emissions or remove greenhouse gases from the atmosphere will be able to apply to a body under the authority of the Minister of the Environment to obtain offset credits. The proposed offset regime includes several criteria required to create credits including the following:
Quantifiable: The reductions or removals must be quantifiable (i.e., measurable) using recognized protocols or methodologies.
Real: An offset project must be a specific and identifiable action that results in greenhouse gas emission reductions or removals [carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6)].
Surplus: The reductions or removals will only generate offset credits if such reductions or removals have not occurred as the result of a specified federal greenhouse gas regulation, program, or incentive.
Verifiable: Qualified, accredited third parties must be able to verify that the reductions or removals have been achieved as claimed.
Unique: The reductions or removals must be unique, in that they must not result in "double issuance" (two credits for one unit of emission reduction).
Start date of project: Only projects commencing after January 1, 2000 may create offsets, assuming they satisfy the eligibility requirements.
Ownership: There must be clear legal ownership of the greenhouse gas reductions or removals achieved as a result of a project.
The steps to create an offset credit are as follows:
Step 1: Project Validation
- A proponent applies to an Offset Program Authority to register the GHG reduction project.
- The offset Program Authority determines if all the project eligibility requirements are met and if the quantification method is acceptable.
- The offset Program Authority registers the project.
Step 2: Verification of Emissions Reductions
- The proponent undertakes the project and measures the emissions reductions achieved (baseline emissions minus project emissions).
- The proponent arranges for third party verification of the GHG reduction assertion.
- The proponent submits a report of verified emissions reductions to the Offset Program Authority. Adequate proof of verification must be provided in order to continue producing offset credis.
Step 3: Issuance of Offset Credits
- The offset Program Authority awards the proponent one offset credit for each verified tonne of GHG reduced. Credits are deposited in the proponent's account in the national trading registry - the Canadian Carbon Unit Tracking System (CCUTS).
Environment Canada has indicated that it intends to begin the offset system on January 1, 2006. Now is the time for greenhouse gas emitters to consider the financial opportunities the offset system may provide.
We will be happy to assist you in determining the challenges and opportunities Canada's Climate Change Plan creates for your company.
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.
