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Cap and Trade: MOECC Releases Offset Credits Regulatory Proposal

On November 15, 2016, the Ontario Ministry of the Environment and Climate Change ("MOECC") published the Compliance Offset Credits Regulatory Proposal (the "Proposal") on the carbon offset program that is being developed to complement the province's cap and trade system.

Under Ontario's cap and trade program, which will commence on January 1, 2017, facilities and natural gas distributors with greenhouse gas (“GHG”) emissions of 25,000 tonnes per year or more, fuel suppliers that sell more than 200 litres of fuel per year and electricity importers ("Mandatory Participants") will be required to either reduce their emissions or meet mandated cap and trade compliance obligations through other regulatory mechanisms. Offset credits are a compliance instrument that is being contemplated by MOECC under the current cap and trade regulation.

The Proposal summarizes the creation and issuance of offset credits that can be used to meet compliance obligations as well as the criteria, process and administrative requirements for the registration of offset initiatives. Under the Proposal, Mandatory Participants can use offset credits to meet up to 8% of their compliance obligations.

Core Aspects of the Offset Credits Program

1. Who can participate?

The Proposal provides for two types of participants in the offset credits scheme:

  1. Offset Initiative Operators — those who will implement offset projects to remove, reduce or avoid GHG emissions that are not already covered by the cap and trade program and will apply for offset credits; and
  2. Offset Initiative Sponsors — those who will register an initiative, submit annual reports, and assume responsibility for the verification of offset credits. The Offset Initiative Sponsor can be either the Offset Initiative Operator or its authorized agent, and must be either a resident of or entity with a presence in Ontario. The Offset Initiative Sponsor will be required to register with the Compliance Instrument Tracking System Service (“CITSS”), a tracking system for emissions allowances and offset credits.

2. What is an Offset Credit?

Each offset credit will represent one tonne of carbon dioxide equivalent (CO 2 e) reduced, avoided or removed from the atmosphere as a result of an Offset Initiative Operator's initiative.

3. What is an Offset Initiative?

Offset initiatives are the activities that cause a reduction, removal or avoidance in GHGs and that are eligible for registration and application for offset credits. Some examples of offset initiatives include a tree planting project or an organic waste management system that minimizes the production of methane.

Under the proposal, there are two main types of initiatives: sequestration and non-sequestration. Sequestration initiatives involve the long-term capture and storage of GHGs in a manner that removes them from the atmosphere. Non-sequestration initiatives involve GHG reduction or avoidance and therefore help diminish the release of GHGs into the atmosphere in the first place.

In order for an Offset Initiative Operator to receive offset credits, the offset initiative in question must meet essential regulatory criteria to be real, additional, permanent, quantified, independently verified, enforceable and unique. The Proposal indicates that the criteria for the creation of an offset will include:

  1. Ownership of Project and Authority to Claim Offset Credits — An Offset Initiative Sponsor must identify the legal ownership of the GHG offset initiative.
  2. Real — The Offset Initiative Sponsor must document that the source(s) exist and provide confirmation that the activities resulting in the reductions, avoidances or removals took place.
  3. Quantification — Emission reductions, avoidances or removals must be measured or modeled in a reliable and repeatable manner, applying the principle of conservativeness.
  4. Leakage — Leakage exists where the efforts to reduce emissions by an offset initiative may increase emissions in another location. Whether qualitative or quantitative, an offset initiative's claimed tonnage may be reduced to compensate for the amount of the leakage.
  5. Additional — Offsets will only be created and distributed for the portion of greenhouse gas emission reductions, avoidances or removals that would not have happened under a baseline scenario.
  6. Permanent — The reductions, avoidances or removals may not be reversible.
  7. Verifiable — A GHG reduction, removal, or avoidance, or assertion thereof, must be well documented and transparent such that it lends itself to an objective review by a qualified verifier.

The initiatives can take place anywhere in Canada and any initiative that began on or after January 1, 2007 is eligible.

Once approved, a non-sequestration offset credit initiative will have a maximum continuous crediting period (the maximum number of years for which an initiative is eligible for offset credits) of 10 years, and a sequestration offset credit initiative will have a maximum continuous crediting period of 30 years; both subject to renewal.

Although the initiatives expire upon termination of the maximum crediting period, the offset credits created from the initiative will never expire. Instead, they will remain valid until retired by a registered participant (either to meet a compliance obligation or by a market participant choosing to do so).

4. Offset Protocols

The MOECC is developing 13 new offset protocols which outline the processes that offset project developers must follow in order to create offsets for specific types of projects. These protocols must be followed to quantify GHG reductions, avoidances or removals and be eligible to apply for offset credit creation.

Three of the protocols — based on existing Québec protocols — are being developed for implementation in early 2017. These protocols relate to the capture and destruction of mine methane, landfill gas and ozone-depleting substances. The remaining ten protocols relate largely to the agriculture and forestry sector, and are set to be put in place by 2017/2018. New protocols may also be approved by the Minister on an ongoing basis.

5. Reporting and Verification

Within 18 months after the offset initiative begins, the Offset Initiative Sponsor must submit its first offset initiative report to the Offset Registrar. The report must detail the first 12 months of reductions, avoidances and removals. Such reports must then be submitted annually in order for the initiative to remain eligible. In addition, a Verification Report — prepared by a verification organization accredited under ISO 14065 — must be submitted along with the Initiative Data Report if the Offset Initiative Sponsor wishes to request credits.

6. Offset Initiative Registry

The MOECC will establish a public, online Offsets Registry for initiatives that are eligible to apply for Ontario offset credits. The Offset Initiative Sponsors will submit initiative descriptions through the Offsets Registry, in addition to all required forms and reports. In order to promote transparency and accessibility, the public will be granted access to all documents submitted.

7. Use of Credits

Once credits have been issued for an offset initiative, the credits are deposited into the Offset Initiative Sponsor's CITSS account and can be sold to Mandatory Participants to meet their compliance obligations. As part of its regulatory impact statement, the MOECC stated that use of offset credits "... offers emitters flexibility and potentially lower cost options in meeting their compliance obligations by allowing markets to determine the most cost-effective emissions reduction opportunities, while encouraging emission reductions, innovation, and technology development for sources and sinks not covered by the cap and trade regulation".

Mechanisms will be in place to address issues that arise with respect to the permanence of offset credits, including unintentional and intentional reversals, error, and fraud (if such error or fraud is found, the MOECC will remove credits from an Offset Initiative Sponsor's CITSS account). In certain instances, the Offset Initiative Sponsor will also be required to replace credits.

In order to insulate the market against risk, the MOECC will keep a “Buffer Account”, holding a portion of credits from both sequestration and non-sequestration initiatives. The credits allocated to this account will be used by the MOECC in instances where there has been a sequestration reversal or a credit is otherwise invalidated and not replaced by the Offset Initiative Sponsor.

Next Steps

The MOECC is soliciting comments on the proposal for 45 days, up to December 30th, 2016. Comments can be submitted online via the Environmental Registry.

All feedback will be considered and incorporated into the Cap and Trade Program Regulation (O. Reg 144/16), which will put the offset credits system in place.

As a founding member of the Western Climate Initiative, Inc. (“WCI”), a not-for-profit organization set up to help member states and provinces execute their cap and trade programs, Ontario intends to link its cap and trade program with fellow WCI members Québec and California. The MOECC has stated that it intends to use many guidelines and protocols consistent with those used by these partners. It is yet to be known whether offset credits acquired under the Ontario cap and trade program will be transferable for use in other WCI jurisdictions or by other WCI participants.

Please feel free to contact any of the authors listed below for more information.

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