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The Onset of Offset

To address climate change, governments are looking at ways to mandate emissions reductions and to put a cost on the release of carbon dioxide and other greenhouse gases. The Government of Canada has announced that a domestic response to climate...


To address climate change, governments are looking at ways to mandate emissions reductions and to put a cost on the release of carbon dioxide and other greenhouse gases. The Government of Canada has announced that a domestic response to climate change will include a cap-and-trade regime with an “offset system.” A cap-and-trade system will limit the emissions of regulated entities. Those entities that emit in excess of their cap can come into compliance by purchasing credits or allowances from other regulated entities that emit less than their caps allow, or from credits created by those outside of the regulated sector (the “trade” in cap-and-trade). The credits created by the non-regulated sector are called offset credits. Potential sources of offset credits include landfill gas projects and projects that create greenhouse gas emissions reductions in the forestry and agricultural sectors.

An offset system should be operational in advance of the full cap-and-trade system to ensure there is enough supply of credits for regulated entities to purchase. As a result, the federal government is moving forward with the development of the Canadian offset system before the regulatory system has been unveiled. Further details about the regulatory regime, it promises, will be released in the coming months.

The offset system opens the door to a more lenient interpretation of when offsets will be allowed. On June 10, 2009, Environment Canada released the long awaited draft rules and guidance documents to develop and implement its proposed offset system for greenhouse gases. The draft documents released include the Program Rules and Guidance for Project Proponents and the Program Rules for Verification and Guidance for Verification Bodies, which will provide guidance to both offset project developers and those wishing to be accredited as verification bodies. The draft version of Canada’s Offset System for Greenhouse Gases: Guide for Protocol Developers was published on August 9, 2008. Final versions of all three guides are expected in the fall of 2009, after comments have been received and addressed. The release of the final guides will launch the offset system. Offsets created under this system may be sold for compliance purposes into a future federal cap-and-trade regime and may also eventually be eligible for compliance purposes in other countries, including the United States.

The newest draft documents indicate that projects that began on or after January 1, 2006 will be eligible to create credits for reductions achieved on or after January 1, 2011. These documents suggest that the crediting system will not be up and running until January 1, 2011. Previous iterations of the government’s plan suggested projects that began on or after January 1, 2000 would be eligible and reductions achieved on or after January 1, 2009 could earn credits. The previous plan also indicated that the regulatory system would be up and running by January 1, 2010.

Normalized baselines

Significantly, the draft documents indicate that the government will consider the use of normalized baselines for certain offset protocols. This means that in order to quantify the amounts of emissions reductions that the project will realize, it may not always require site-specific data, but may apply normalized baselines based on national statistics.

The draft Program Rules and Guidance for Project Proponents state that the use of normalized baselines may be required to ensure that the offset system does not significantly disadvantage proponents in jurisdictions that have been more proactive in regulating greenhouse gas reductions. This could have interesting implications for landfill gas and waste diversion offset projects. In some provinces laws exist or are being developed to require landfill gas capture. In these provinces, projects may not pass the offset system requirement that reductions be surplus to all legal requirements. In order to address inequalities in provincial legal requirements and to prevent perverse disincentives to regulate, the government may allow all landfill gas projects to proceed on a “normalized” baseline nationally. This is good news for project proponents in more proactive jurisdictions, but may raise concerns over the environmental integrity of these offset credits.

The release of the draft documents provides some reassurance that a greenhouse gas regulatory system is developing. However, the federal government has clearly indicated that changes may be necessary to ensure compatibility with a future U.S. system and the bourgeoning global market.

More information, including links to the draft documents, can be found on Environment Canada’s website, www.ec.gc.ca

Laura Zizzo, J.D., is a lawyer with her own practice in Toronto, Ontario focused on climate change law and policy. She can be reached at laura@laurazizzo.com


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