January 6, 2022 | By: Avneet Nehel, Brady Chapman, Chad Eggerman
In May 2022 the Federal government passed regulations to generate Federal offset credits called Canada’s Greenhouse Gas (GHG) Offset Credit System pursuant to the Federal Greenhouse Gas Pollution Pricing Act (the “GGPPA”) and Federal Environmental Violations Administrative Monetary Penalties Act. The Canadian Greenhouse Gas Offset Credit System Regulations (the “GHG Offset Regulations”) established under Part 2 of the GGPPA, were published in the Canada Gazette, Part II on June 8th, 2022. The GHG Offset Regulations apply across Canada. The complete GHG Offset Regulations can be found here <https://www.laws-lois.justice.gc.ca/eng/regulations/SOR-2022-111/index.html>.
The GHG Offset Regulations enable creation of offset credits if the project registers and implements reduction of GHG using a published federal GHG offset protocol. These offset credits can be sold and used by entities either by compliance under the Federal Output Based Pricing System (“OBPS”) or by using the offset credits to meet a voluntary climate target or commitment. The GHG Offset Regulations also propose to facilitate the participation of Indigenous projects.
The Federal government has stated that the GHG protocols will be changed on an ongoing basis outside the GHG Offset Regulations. The Federal government has for now identified five projects which are prioritized under the protocol development:
- Reducing GHG emissions from refrigeration systems
- Landfill methane recovery and destruction
- Improved forest management
- Enhanced soil organic carbon
- Livestock feed management
The only Federal offset protocol published as of the date of this article is the Landfill Methane Recovery and Destruction (Version 1.0) available here: https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/output-based-pricing-system/federal-greenhouse-gas-offset-system/compendium-protocols/landfill-methane-recovery-destruction.html.
The GHG Offset Regulations apply to projects included in the protocols that aim to reduce GHG emissions and requires that reductions under the protocol are real and quantified. The project needs to have reductions:
- which would not have been generated in absence of the project; or
- were not required by law or legal requirement; and
- are not from sources that are subject to federal or provincial pricing mechanism for GHG emissions.
The reductions also need to be unique to a GHG protocol and not be credited in any other offset program. The proponent also needs to make a project report and have it verified under the provisions of section 20 to 32 of the GHG Offset regulations to qualify. The protocol also has a crediting period of 30, 20 and 10 years.
To qualify under the GHG Offset Regulations the proponent must be a Canadian resident or be a business in Canada. The GHG Offset Regulations also require that no other provincial offset protocol should cover the same activities as under the Federal protocol where the proponent project is situated. There is an exception to this. The project may still be allowed if a provincial protocol was published after the Federal protocol, and the application is submitted within six months of registration with the provincial program.
If the project operates in an area that includes more than one province, the proponent must register each portion of the project in each province.
The application must also include information related to direct financial incentives received for a project, description of project, title of protocol that applies to the project, activities to be carried out, project location, and start date, GHG that will be reduced and a list of all GHG sources, sinks or reservoirs that are part of the project.
A project must be registered within 18 months of the protocol becoming applicable if the project started before the protocol. The project is eligible if it started up to a maximum of 10 years before the protocol, but not earlier than January 1, 2017. If the project started on or after the protocol came into effect, the deadline to submit application is 18 months after the start date.
The GHG Offset Regulations also provide for the authority to cancel a project if the regulatory requirements are not met. The project can also be transferred if the receiving proponent meets the eligibility criteria and consent from both parties is submitted to the Minister.
The GHG Offset Regulations require reporting, monitoring, verification and record keeping of the project. An initial project report is submitted after 12 months from the start date and a verification report within 6 months from the first year of the crediting period. Subsequent reports are submitted within 6 months of the end date of the last reporting period. The reporting period is set by the proponent and can be a maximum of 6 years from the year of initial report for sequestration projects and 3 years for other project types. The GHG Offset Regulations also require reports on reversals and errors or omissions.
The GHG Offset Regulations also require an environmental integrity account. Each calendar year a percentage of offset credits are deposited into this account. This acts as insurance in case of reversal of GHG reductions due to reasons beyond the control of the proponent or when a proponent fails to comply with the GHG Offset Regulations. The Minister also has the power to suspend or revoke offset credits under certain conditions, for example, due to an error or omission or due to voluntary reversal.
The GHG Offset Regulations have authorized enforcement officers to issue administrative monetary penalties for violations of the provisions under the Environmental Violations Administrative Monetary Penalties Regulations. A new division titled Canadian Greenhouse Gas Offset Credit System Regulations, under part 7 of the regulations has been added to authorize officials.
In a recent update in November 2022, the federal government has amended schedule 3 and 4 of the regulations. Provinces and territories may implement their own carbon pricing systems provided these systems meet the criteria of the federal benchmark. For provinces that do not have their own carbon pricing system, the federal pollution pricing backstop system will apply. The federal OBPS, contains a regulatory charge on fossil fuels and a regulatory trading system for industrial facilities at high risk of competitiveness impacts and carbon leakage resulting from carbon pricing. The federal backstop system applies in full in Yukon, Nunavut, and Manitoba; and partially in Alberta (fuel charge), Saskatchewan (fuel charge), Ontario (fuel charge), and Prince Edward Island (OBPS).
The facilities that are subject to the Federal OBPS have to provide compensation for GHG emissions that exceed their facility emission limit. The compensation can be provided by the following:
- excess emissions charge payments to the Receiver of General for Canada;
- In case of a covered facility that uses compliance units, each representing one tonne of CO2e, which includes:
- surplus credits issued by the Minister or acquired through trading with other covered facilities;
- eligible provincial or territorial offset credits formally recognized by the Minister under the OBPS Regulations as compliance units; and
- offset credits issued by the Minister under the GHG Offset Regulations;
- In case of a covered facility that uses a combination of excess emissions charge payments and compliance units to provide compensation.
Starting from 2022 compliance period, a minimum of a 25% compensation obligation must be provided by each facility through payments of an excess emissions charge. If the GHG emissions of a covered facility are under the emissions limit, the Minister will issue surplus credit to the facility, who can then either sell or use these credits to meet future obligations.
Also, there has been an amendment to the excess emissions charge starting 2023. The excess emissions charge will increase to $65 per tonne of CO2e in 2023 and thereafter increase each calendar year by $15, resulting in excess emission charge of $170 per tonne of CO2e for 2030 and beyond.
2023 will be a very important year as the GHG Offset Regulations are operationalized and we look forward to keeping you updated and continuing to work with our current clients in this space and welcoming new clients who are interested in participating in, or transacting pursuant to the GHG Offset Regulations.
Our energy group is deeply familiar with clean energy initiatives including GHG Offset Regulations and continues to follow the development of these regulations across Canada. We can assist you in how these regulations affect your business and what opportunities they may present.
Do not hesitate to contact a member of our team to learn more about what services we offer.
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) if you require legal advice on the topic discussed in this article.