December 23, 2022 | By Brady Chapman, Kevin Mehi, Chad Eggerman
The Government of Saskatchewan has been discussing its release of a provincial carbon offset framework for several years. Until very recently, the Government of Saskatchewan has suggested, and stakeholders have been anticipating, that the emissions offset program would be similar to what has existed in Alberta for some time. However, Saskatchewan’s recent 2022 throne speech (“Throne Speech”) suggests otherwise, with the Government of Saskatchewan now stating that its program will focus entirely on voluntary offset markets.
- How did we get here?
As far back as 2007, farmers in Saskatchewan (without any offset-specific Federal, Provincial, or Municipal government regulation in place) created carbon offsets from zero- or no-till agricultural practices. Zero- or no-till agricultural processes involve avoiding significant disturbance of the soil in successive crop years by foregoing plowing or cultivation which keeps carbon sequestered in the subsurface soil deposits. These zero- or no-till offsets were aggregated, mainly by aggregators from Alberta, and then sold on exchanges such as the now defunct Chicago Climate Exchange (CCX) which ceased trading carbon credits in 2010 due to inactivity. Between 2003 to 2010, the CCX acted as a voluntary, legally binding GHG reduction and trading system for emission sources and offset projects in North America and Brazil. Procido LLP lawyers have advised on transactions on the CCX more than a decade ago. Although in retrospect, clearly ahead of its time, the CCX might be considered the precursor for the voluntary offset markets which we will consider in more detail below.
Jump ahead to 2017 – the Government of Saskatchewan released “Prairie Resilience”, a policy document outlining the province’s climate change strategy where it committed to the development of an emissions offset regime. In 2019, the Ministry of Environment undertook consultation with stakeholders, releasing both an Offset Framework Discussion Paper and Engagement Summary Report. The Government of Saskatchewan committed, at that time, to the implementation of an offset program beginning in 2020, with offsets to be transacted in Saskatchewan beginning in 2021.
Due to the COVID-19 pandemic, the Government of Saskatchewan subsequently announced that it would delay the implementation of its program until 2022. As of the date of this blog post, it appears that the roll-out of any offset program will not occur until sometime in 2023 at the earliest.
- What’s changed?
As noted above, the Government of Saskatchewan had previously suggested that Saskatchewan’s offset regime would likely mirror the regime used in Alberta.[1] Until recently, stakeholders were even advised that the Government of Saskatchewan was actively preparing a carbon registry and drafting three offset quantification protocols related to landfill gas capture and combustion, aerobic composting, and enhanced oil recovery.
In the Throne Speech, the Government of Saskatchewan reiterated its intention to unveil a made-in-Saskatchewan carbon offset program. However, its rhetoric about what such a program will look like has changed. The Government of Saskatchewan appears to be abandoning any alignment with Alberta’s emission offset program (which focuses on the production of compliance offsets) and instead is proposing to focus on the production of voluntary offsets by producers and companies in Saskatchewan.
In particular, the Throne Speech proposed that Saskatchewan’s offset program will allow for the generation of “voluntary carbon offset credits to producers and companies whose commodities have lower greenhouse gas emissions than global averages”. The Government of Saskatchewan further notes that “[t]hese offset credits can then be used by Saskatchewan producers and companies as part of their own efforts to voluntarily reduce emissions or can be traded to others for similar purposes.”
Unlike compliance offsets, voluntary offsets cannot typically be used by large emitters for emission compliance under an Output Based Pricing System (“OBPS”). Rather, voluntary offset projects are created based on offset quantification protocols developed and governed by private third parties. Voluntary offsets are often purchased by private companies to offset their own emissions to meet their own internal environmental emissions targets, often informed by a companies’ environmental, social and governance targets. For example, a bank or retailer might purchase enough voluntary offsets to claim that their company is “net-zero”. Consumers might also purchase voluntary offsets to offset their own emissions.
- Why does it matter?
This change in approach is important for both large emitters who may have been hoping to rely on compliance offsets for their emissions compliance under Saskatchewan’s OBPS and project developers looking to produce offsets from projects in Saskatchewan as a potential source of revenue.
Saskatchewan’s announcement that the federal government has approved its provincial OBPS program for all large emitters comes on the heels of the comments made in the Throne Speech about its plans for an offset program. Without the production of a compliance offset program like Alberta, large emitters required to comply under the Saskatchewan OBPS will likely not be able to purchase offsets for their emission compliance. Practically, a lack of compliance offsets in Saskatchewan may result in slightly higher costs for compliance under the Saskatchewan OBPS compared to Alberta (where compliance offsets are typically sold to large emitters for a price that is slightly less than the cost of emissions under the OBPS).
The lack of a compliance offset regime may also discourage large emitters from investing in other projects with offset production potentials for its own use. For example, in Alberta, an oil sands company might develop or invest in a wind or solar project in order to produce its own compliance offsets from such renewable projects (or, if such a project is developed through a special purpose vehicle, purchase all compliance offsets produced from such renewable projects for a nominal amount) to be used for the emissions compliance at their emitting facilities.
Project developers in Saskatchewan who normally include offsets as a revenue stream in their project financial models should begin looking to opportunities in the voluntary market, such as through Verra or Gold Standard, rather than waiting for the release of Saskatchewan’s offset program. It is unclear at this point what Saskatchewan’s voluntary offset program will include.
- What’s the rationale?
It is unclear why the Government of Saskatchewan is moving away from a regulated compliance offset program.
Under a compliance offset program such as Alberta, offsets can only be produced from non-business-as-usual activities under an approved protocol. Once a practice becomes business-as-usual in Alberta, the associated offset protocol will be withdrawn for such activity. For example, Alberta previously had an offset protocol that permitted the production of offsets from zero-or-low tilling agricultural practices. This popular protocol was recently withdrawn when such practices were deemed business-as-usual in Alberta.
The Government of Saskatchewan appears to reject the approach taken in Alberta, suggesting instead that its producers and companies should be judged not based on its provincial counterparts, but the carbon intensity of similar commodities from other jurisdictions. The Government of Saskatchewan may think that focusing on only voluntary offsets will allow it to avoid making decisions about what should or should not be considered an offset protocol in order to not upset subsets of its population or certain industries. For example, since the Government of Saskatchewan announced its plans for a made-in-Saskatchewan offset program, agricultural groups have been advocating for the inclusion of a zero-to-no tilling offset protocol in Saskatchewan (similar to the now repealed protocol in Alberta) that would allow Saskatchewan farmers to benefit in the same way that Alberta farmers did for a number of years.
In short, based on what has been released, the Government of Saskatchewan is appearing to promote voluntary offsets as a means to create a carbon border adjustment for commodities being exported from Saskatchewan. There are a few concerns with this approach; most notably how such voluntary offsets are produced. A quantification protocol under a voluntary standard is still required before Saskatchewan producers or companies can produce offsets from their operations. The Government of Saskatchewan is suggesting that the assessment to be used in such quantification protocols should be based on the emission intensity of the operations of Saskatchewan compared to elsewhere in the world. It is unclear how the Government of Saskatchewan’s voluntary offset program will assist producers and companies with this major hurdle of developing or amending technical quantification protocols under voluntary standards to achieve the Government of Saskatchewan’s ultimate goal.
- How can we help?
Legal emissions regimes vary across Canada. Our firm is deeply familiar with emissions regimes and continue to follow the development of these regimes across Canada. We can assist your business in understanding how emission regimes apply to your operations and what opportunities you may have to purchase offsets or establish an offset project as an additional revenue stream.
Do not hesitate to contact a member of our team to learn more about what services we offer.
As a final comment, Procido LLP acknowledges many of the criticisms regarding the production and use of offsets for emissions compliance. If you want to learn about whether offsets are right for your business, we would be pleased to offer advice on some of the benefits and respond to the criticisms of offsets more broadly.
Disclaimer
This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice. Contact Procido LLP (www.procido.com) to if you require legal advice on the topic discussed in this article.
[1] For context, Alberta’s emissions offset regime allows offset developers to produce offsets based on offset projects established under designated offset quantification protocols. These protocols allow projects in Alberta to quantify their offsets, and these offsets can then be acquired and/or used by large emitters in Alberta as a way to account for their emissions under Alberta’s output-based pricing system (“OBPS”). Since offsets produced under Alberta’s offset program are used by large emitters in Alberta for compliance under Alberta’s OBPS, such offsets are often referred to as compliance offsets.