The Canadian government, as all other signatory nations of the Paris Agreement, has pledged to reduce its economy-wide greenhouse gas emissions to 30% below 2005 levels by 2030. To achieve this goal, Canada must work on multiple fronts, including setting a price on carbon that will incentivize industries to reduce its environmental impact.
A price on carbon pollution (…) is one of the most efficient ways to reduce greenhouse gas emissions and stimulate investments in clean innovation. It creates incentives for individuals, households, and businesses to choose cleaner options.
CANADIAN GOVERNMENT
In December 2020, the Federal Government released an updated plan with a $15 per tonne per year increase in carbon pricing, reaching $170 per tonne in 2030. This will have dramatic consequences across not only Canada, but will send a strong signal to other nations considering such a move. More importantly, the market seems to agree; on May 4th, 2021, the EU ETS (European carbon market), reached the critical milestone of 50 Euros per tonne, a 10x increase in just 4 years, and a 25% increase in the last 6 months.
As part of its efforts to drive emission reductions across the country, this past March, the Canadian government announced draft regulations to establish the Federal Greenhouse Gas Offset System to reduce carbon emissions, a market-based approach that, despite being voluntary, will support a domestic carbon trading market under Canada’s carbon price for industry – the Output-Based Pricing System (OBPS). Once established, the Federal Greenhouse Gas Offset System is expected to drive demand for projects that reduce greenhouse gases and generate federal offset credits, incentivizing further reductions.
Despite all the hype, the Federal GHG Offset System, in its current form, is likely to have little impact on Canada’s emissions.
DAVID OLIVER
A missed opportunity?
The federal government has taken bold steps towards setting an ambitious price on carbon, and now it is setting up a nationwide GHG offset system that complements the provincial programs in B.C. and other provinces. However, many question its shortcomings and misguided approach which may render the Federal GHG Offset System yet ‘just another program’ which fails to substantially support Canada in reaching its reduction targets. Here are the top five reasons why it is unlikely to make a difference:
1. Fails to address the elephant(s) in the room
The federal government, in consultation with key stakeholders, has identified four high-priority protocols which are currently under development. These protocols target farmers, foresters, Indigenous communities, municipalities, and other project developers and allow them to generate revenues from emission reductions. These protocols are:
- Advanced Refrigeration Systems: a protocol for reducing or avoiding the use of fluorinated refrigerators such as hydrofluorocarbons that contribute to global warming;
- Improved Forest Management: a protocol for activities such as increasing rotation ages, thinning diseased trees, managing competing brush, and stocking trees for improved carbon storage;
- Landfill Methane Management: a protocol for reducing methane emissions from open or closed landfill sites;
- Enhanced Soil Organic Carbon: a protocol for agricultural activities that reduce GHG emissions and improve carbon sequestration on agricultural lands.
Although it is encouraging to see the federal government leading the development of high-priority protocols, targeting important sectors of the Canadian economy such as agriculture or forestry, these protocols fail to address the elephant in the room. Almost two-thirds, or 63% of Canada’s emissions, come from oil and gas, transport, and buildings. The proposed high-priority protocols do not address these sectors nor provide the tools for the industry to incentive its decarbonization. If the government’s goal is for this program to significantly reduce emissions in Canada, then these four protocols fail to address the largest sectors of the economy that desperately should reduce its emissions. The federal government should focus on approving protocols that incentivize high-polluting industries to greatly reduce their emissions.
2. Why develop new protocols?
Environment and Climate Change Canada has started the development of these new protocols, engaged ‘experts’, and will work to publish them in the future, so project developers can take advantage. Why is the government developing *new* protocols, instead of leveraging existing protocols developed by provinces such as British Columbia, and Alberta, or from internationally recognized standards such as UNFCCC CDM, VCS (Verra), Gold Standard, and many others?
The development of new offset protocols is simply the wrong approach, as it is completely unnecessary, redundant, and time and cost-consuming (time that we don’t have anymore). Multiple Canadian provinces, countries, as well as voluntary offset standards, have already developed environmentally sound protocols which have been in use sometimes for decades, and validated by multiple independent bodies. The federal government should consider transposing existing protocols into Canada at a federal level to expedite the implementation of such protocols. A good example of this approach is the Verified Carbon Standard (VCS) which allows the use of existing CDM (UNFCCC) protocols into the Verra program without the need for further work by the proponents. The result will be a much more expedited approach, as well as alignment to international accounting practices.
The table below provides a sample of programs that currently have available protocols which the federal government could draw upon. Naturally, each protocol may differ in some aspects from what the government intends to achieve. However, these differences should not distract from the fact that much work is done already and should be leveraged to expedite the process.
| Proposed Protocols | Sample of Programs with similar existing Protocols |
|---|---|
| Advanced refrigeration systems | American Carbon Registry (ACR) |
| Improved Forest Management | Verified Carbon Standard (VCS) – Verra American Carbon Registry (ACR) Climate Action Reserve (CAR) BC Offset Program (currently under consultation) |
| Landfill Methane Management | GHG Protocol American Carbon Registry (ACR) Climate Action Reserve (CAR) Alberta Offset Program BC Offset Program (currently under consultation) Verified Carbon Standard (VCS) – Verra CDM – UNFCCC |
| Enhanced Soil Organic Carbon | Climate Action Reserve (CAR) Verified Carbon Standard (VCS) – Verra |
These are just a few examples of programs and standards with available (similar) protocols to those listed under the high-priority protocol list by the federal government. However, there are hundreds of available protocols and methodologies available for other activities under the key economic sectors in Canada responsible for the largest share of emissions. The government should establish a process similar to that executed by ICAO under the CORSIA program to leverage existing work done elsewhere and accelerate the implementation of the program.
3. Lacks price transparency
The federal offset program promises project developers the ability to generate revenue from carbon credits produced using the newly developed protocols. Yet, it lacks a clear pricing signal, or floor, to ensure credits created and traded using this program are sufficient to attract project developers, and buyers. The federal government seems to trust that the market will sort itself. Instead, the government should establish a floor pricing aligned to the federal carbon tax and the OPBS. This will generate the necessary confidence in the market to attract long-term investments, innovations, and good jobs.
Leaving pricing out to market forces is likely to generate downward pressure and unnecessary uncertainty which may delay a fast and decisive action to reduce emissions from project developers.
4. The devil is in the details
The federal announcement lacks many critical details necessary to ensure the program is successful in reducing large amounts of greenhouse gases. These are just two examples of key details needed to ensure the program successfully incentivizes project developers:
The proposed mechanism to ‘bundle’ projects into grouped projects (also called project of activities, or PoA) is a welcome cost-cutting addition, which should help small and mid-sized projects to become financially viable when grouped. However, the regulation lacks detail as to what and how that grouping will occur and the instances where it will be allowed (ie. is there a limit on the number of grouped projects, or the size in terms of GHG reductions?).
Also, it is unclear how the validation and verification process will occur. The regulation includes language around ‘accredited verification bodies’, but there seems to lack detail as to how these organizations will be accredited, and how service standards will be maintained. The federal government should lead the accreditation of validation and verification bodies (auditors) and maintain a public registry to ensure these organizations maintain the highest standards. Similarly, other organizations involved across the value chain, such as brokers, should also require registration and be required to comply with a certain level of integrity.
5. Take the bull by the horns
Given the learnings from other jurisdictions, including provinces, as well as voluntary markets, the federal government should take a more proactive role in the operational and transactional aspects of this offset program. Maintaining a proactive role in all aspects related to the program will be key during the initial phases to ensure the ultimate goals of this program are achieved, this is, reducing GHG emissions across the country. Some examples of actions that the federal government should take action include:
- Establish a publicly accessible trading exchange (in-house or third-party),
- Establish pricing floor mechanisms and pricing forecasts,
- Establish standard contractual agreements between parties,
- Actively police the exchange to ensure compliance with its regulations, both on the supply and demand sides.
The establishment of an insurance mechanism (3% of the credits in most cases) is a welcome action and a clear indicator that the government intends to ensure certain guarantees are in place, it does not go far enough. Instead, it seems that the government sees itself as the one setting the table, and watching the players play.
6. Lacks linkage to international carbon markets
The federal offset program provides a framework to align with existing provincial programs, enabling project developers and credit buyers to work with both. Generally, it is the right approach. However, the proposed approach fails to take into consideration international carbon markets, and their potential for Canadian project developers. This way, Canadian offset projects (forestry, agriculture, or any other project using future protocols) could generate reductions and sell carbon credits to international buyers who would in turn invest in further reductions in our country.
Unfortunately, the proposed federal offset program lacks the ability to link offset projects under the federal program to international markets, both compliance and/or voluntary. This linkage, if it was possible, would greatly enhance the potential to generate larger reductions in Canada if these project proponents had the ability to market their credits in international markets (CDM/RGGI/EU ETS, etc, or voluntary such as VCS, Gold Standard, Plan Vivo, etc). The federal government should consider engaging with leading international organizations to create agreements to enable these transactions to occur.
7. Liquidity remains a blind spot
The proposed federal offset program fails to address one key aspect of today’s carbon markets: lack of liquidity, caused by the delay that occurs between the generation of GHG reductions, and the monetization of such reductions as offsets. The current approach taken follows programs from elsewhere, and does not bring a mechanism to address this key issue.
Although current markets try to address this through financial mechanisms, including forward crediting, or alternative forms of financing, the key issue remains the time delay between the development of an offset project, and the monetization of emission reductions generated. The federal government has a unique opportunity to explore new (alternative) solutions to address this key issue, which in turn is likely to attract new and innovative offset developers and projects.
Possible solutions include the establishment of online trading platforms, regular auctions (daily, hourly, etc), the use of blockchain and cryptocurrencies, etc. The introduction of innovative mechanisms to provide liquidity to the offset market (traditionally and illiquid market) would bring much-needed capital to develop and expand GHG reduction projects.
These are just some key concerns that are likely to damper the impact of Canada’s federal offset program if it keeps its current form. However, the government should receive credit for taking a bold approach, establishing aggressive carbon pricing, and implementing a national GHG offset system. These are not simple initiatives, and let’s hope the final implementation incorporates some of these changes. After all, the 60-day consultation period ends on May 5, 2021 (today). Written comments can be sent to ec.creditscompensatoires-offsets.ec@canada.ca.
DAVID OLIVER 