The system aims to stimulate innovation in GHG-reduction activities as part of the country’s 2030 Emissions Reduction Plan.
On June 8, 2022, Canada launched the Greenhouse Gas (GHG) Offset Credit System (the System) to create a “market-based incentive to undertake innovative projects that reduce greenhouse gases.” The System, which will be administered by Environment and Climate Change Canada (ECCC) and will apply across the country, represents a key element of Canada’s 2030 Emissions Reduction Plan to reduce GHG emissions to 40–45% below 2005 levels by 2030.
Requirements for Federal Offset Credit Generation
The System was created under Canada’s federal carbon pollution pricing system known as the Greenhouse Gas Pollution Pricing Act. It establishes a process for municipalities, foresters, farmers, indigenous communities, and others to create GHG-reducing projects that generate tradeable offset credits, as well as a system to manage ownership and remittance (or retirement) of those credits.
A project must comply with one of the Federal Offset Protocols developed by ECCC and published in the Compendium of Federal Offset Protocols to be eligible for federal offset credit generation. To date, the only protocol published is for Landfill Methane Recovery and Destruction, though the following protocols are currently under development with ECCC, which is also expected to begin developing the Direct Air Carbon Capture and Sequestration this summer:
- Reducing Greenhouse Gas Emissions from Refrigeration Systems
- Improved Forest Management
- Enhanced Soil Organic Carbon
- Livestock Feed Management
- Direct Air Carbon Capture and Sequestration
The System’s environmental integrity requirements are generally in line with the leading offset credit trading programs. All federal offset credits must result from GHG reductions that are real, additional, quantified, verified, unique, and permanent, and the program prohibits double counting and requires third-party verification. Project proponents must be individuals who reside in Canada, or a company with a place of business in Canada, though the regulations do not explicitly require that projects be geographically located in Canada.
Use of Federal Offset Credits
Federal offset credits can be purchased and used to meet compliance obligations under the Output-Based Pricing System (OBPS) and to meet voluntary emissions reduction commitments. The OBPS, which came into effect in 2019 as part of Canada’s Greenhouse Gas Pollution Pricing Act, regulates over 200 entities that report emissions of 50 kilotons or more of CO2 and are located in Ontario, New Brunswick, Manitoba, Prince Edward Island, Yukon, Nunavut, and parts of Saskatchewan. Under the OBPS, covered facilities are subject to an emissions limit and must compensate for any emissions exceeding their limit by either paying a penalty or remitting compliance units.
The launch of the System is expected to increase the current supply of compliance units available for remission under the OBPS. According to the Regulatory Impact Analysis Statement of the System, “without the ability to generate and sell credits, proponents may not have a sufficient economic incentive to carry out activities that generate additional GHG reductions. In addition, in the absence of regulations that establish a federal offset system, facilities in the federal OBPS have fewer options to meet their compensation obligations under the Act and the OBPS Regulations.”
Latham & Watkins will continue to monitor developments regarding the System and what it means for companies.
This post was prepared with the assistance of summer associate Michael Hengerer.