Canadian Greenhouse Gas Offset Credit System Regulations: SOR/2022-111

Canada Gazette, Part II, Volume 156, Number 12

Registration
SOR/2022-111 May 20, 2022

GREENHOUSE GAS POLLUTION PRICING ACT
ENVIRONMENTAL VIOLATIONS ADMINISTRATIVE MONETARY PENALTIES ACT

P.C. 2022-529 May 19, 2022

Her Excellency the Governor General in Council, on the recommendation of the Minister of the Environment, makes the annexed Canadian Greenhouse Gas Offset Credit System Regulations pursuant to

Canadian Greenhouse Gas Offset Credit System Regulations

Interpretation

Definitions

1 (1) The following definitions apply in these Regulations.

Act
means the Greenhouse Gas Pollution Pricing Act. (Loi)
authorized official
means
  • (a) in respect of a proponent who is an individual, that individual or another individual who is authorized to act on their behalf;
  • (b) in respect of a proponent that is a corporation, an officer of the corporation who is authorized to act on its behalf; and
  • (c) in respect of a proponent that is another entity, an individual who is authorized to act on its behalf. (agent autorisé)
Compendium of Federal Offset Protocols
means the document, entitled Compendium of Federal Offset Protocols, that contains the protocols developed by the Department of the Environment and that is published by that Department on its website. (Recueil des protocoles fédéraux)
crediting period
means, with respect to a project, the period determined in section 5 or the period set out in the protocol during which offset credits can be generated. (période de comptabilisation)
environmental integrity account
means the account opened and maintained by the Minister in the tracking system to maintain the integrity of the offset credit system. (compte d’intégrité environnementale)
hybrid tonne-year
in relation to a quantification method, means the quantification method under which the determination of the quantity of GHGs removed from the atmosphere is based on the climate benefit from the reduced radiative forcing that results from withholding carbon from the atmosphere over the crediting period of the project, taking into account the obligation set out in subsection 22(2) that a proponent monitor the quantity of GHGs emitted and GHGs removed from the atmosphere with respect to a project for a given period. (hybride tonne-année)
ISO Standard 14064-2
means the standard ISO 14064-2:2019 entitled Greenhouse gases – Part 2 – Specification with guidance at the project level for quantification, monitoring and reporting greenhouse gas emission reductions or removal enhancements, published by the International Organization for Standardization. (norme ISO 14064-2)
ISO Standard 14064-3
means the standard ISO 14064-3:2019 entitled Greenhouse Gases – Part 3 – Specification with guidance for the verification and validation of greenhouse gas statements, published by the International Organization for Standardization. (norme ISO 14064-3)
project
means a project that prevents GHGs from being emitted or that removes GHGs from the atmosphere. (projet)
proponent
means the person responsible for a project. (promoteur)
protocol
means a protocol for a given project type that includes requirements for project implementation and methods for quantifying the GHGs emitted or removed from the atmosphere for that project type and that is included in the Compendium of Federal Offset Protocols. (protocole)
reservoir
has the same meaning as GHG reservoir in ISO Standard 14064-2. (réservoir)
reversal
means, with respect to a project, the release into the atmosphere of GHGs removed from the atmosphere by that project. (renversement)
sink
has the meaning assigned by the definition GHG sink in ISO Standard 14064-2. (puits)
source
has the meaning assigned by the definition GHG source in ISO Standard 14064-2. (source)
start date
means, with respect to a project, the date that activities undertaken as part of the project begin, as determined in accordance with the applicable protocol. (date de début)
tonne-tonne
in relation to a quantification method, means the quantification method under which the determination of the quantity of GHGs removed from the atmosphere is based on the number of tonnes of CO2 sequestered during the reporting period, taking into account the obligation set out in subsection 22(1), that the proponent must monitor the quantity of GHGs emitted and GHGs removed from the atmosphere with respect to the project for 100 years. (tonne-tonne)
tonne-year
in relation to a quantification method, means the quantification method under which the determination of the quantity of GHGs removed from the atmosphere is based on the climate benefit from the reduced radiative forcing that results from withholding carbon from the atmosphere over a reporting period and for which the proponent is not required to monitor the quantity of GHGs emitted and GHGs removed from the atmosphere with respect to the project. (tonne-année)
verification body
means a third party who is authorized under section 23 to conduct a verification. (organisme de vérification)

Incorporation by reference

(2) Unless otherwise indicated, a reference to any document incorporated by reference into these Regulations is incorporated as amended from time to time.

Accreditation

(3) Despite subsection (2), if ISO Standard 14065:2020 entitled General principles and requirements for bodies validating and verifying environmental information, published by the International Organization for Standardization, is amended, the previous version of the document may be complied with for a period of four years after the day on which the amended version is published.

Aggregation of projects

(4) Unless otherwise specified, the provisions in these Regulations apply, with any modifications that the circumstances require, to aggregations of projects.

Purpose

Purpose

2 These Regulations establish an offset credit system for projects that reduce GHGs either by preventing GHGs from being emitted or by removing GHGs from the atmosphere and to which a protocol applies.

Overview

Elements of the System

3 These Regulations provide for

Application

Project characteristics

4 (1) These Regulations apply to a proponent of a project

Reductions — additional

(2) For the purposes of paragraph (1)(c), reductions are additional if those reductions

Reductions — unique

(3) For the purposes of paragraph (1)(c), reductions are unique if those reductions are not credited under another offset program or another GHG reduction mechanism.

Non-application

(4) These Regulations do not apply to projects that have a start date before January 1, 2017.

Crediting Period

Crediting period

5 (1) Unless otherwise provided in the applicable protocol, the period in respect of which a project can generate offset credits is

Beginning of period

(2) Subject to subsection (5), the crediting period begins on the day on which the project is registered or on the project start date, whichever is later.

Exception — beginning of period

(3) Despite subsection (2), in the case of a project that is of an agricultural nature, if required in the protocol, the crediting period begins on the date of the start of the growing season. However, that date cannot be earlier than the day on which the project is registered or the project start date, whichever is later.

Exception — length of period

(4) In the case of a project that was registered in a GHG offset credit system other than the one set out in these Regulations, the crediting period is decreased by subtracting the period that begins on the registration date in the other system and ends on the day on which the project is no longer registered in that other system.

Aggregation of projects

(5) Subject to subsection (6), the crediting period for an aggregation of projects, registered in accordance with subsection 9(1), begins on the day on which the aggregation is registered or on the earliest project start date of any of the projects in the aggregation at the time of registration, whichever is later. However, if one of the projects in the aggregation starts after that day, the project cannot generate credits until that project’s start date.

Addition of projects

(6) If a project is added to an aggregation under subsection 9(4) or if a project that is part of an aggregation is transferred to another aggregation under subsection 9(5), its crediting period begins on the day on which it is added or transferred, as the case may be, or on its project start date, whichever is later, and ends on the day on which the crediting period for the aggregation ends.

Protocol

Registration of a project

6 (1) When a project is registered, the protocol or, if several versions of a protocol are included in the Compendium of Federal Offset Protocols, the most recent version of the protocol, is the one that applies for the duration of the crediting period.

Renewal of crediting period

(2) If, at the time of a renewal of a crediting period, several versions of a protocol are included in the Compendium of Federal Offset Protocols, the most recent version of the protocol is the one that applies to the project for the duration of the crediting period.

Proponent’s choice

(3) Despite subsections (1) and (2), if a new version of a protocol is issued during a project’s crediting period, a proponent may opt to have the new version apply to their project. However, only one version of a protocol may apply during the period covered by a project report.

Withdrawal

(4) Despite subsections (1) and (2), if, at the time the application for registration of a project or the request for renewal of the crediting period is submitted, the protocol for the given project type is withdrawn, the application or request must be refused.

Process for Offset Credit Issuance

Requirements

General requirements

7 To be issued offset credits by the Minister, the proponent of a project must

Project Registration

Conditions of registration

8 (1) Subject to section 9, a project, of a type for which a protocol has been included in the Compendium of Federal Offset Protocols, may be registered in the offset credit system if its proponent submits an application for registration to the Minister that includes the information set out in Schedule 1 and the following conditions are met:

Exception — provincial protocol

(2) Despite paragraph (1)(i), in the case where a provincial offset credit protocol, established under an offset credit program for that province, applies to the activities undertaken as part of a project, the project may be registered if:

Declaration

(3) The application for registration must be accompanied by a declaration, dated and signed by the proponent or their authorized official, stating that the information contained in the application is accurate and complete.

Project in more than one province

(4) If a project is situated in more than one province, the proponent must register, as distinct projects, the portions of the project situated in each province.

Request to open account

(5) The proponent, in accordance with subsection 186(1) of the Act, must submit a request to open a GHG Offset Credit System account in the tracking system if they do not already have such an account.

Aggregation of projects

9 (1) A proponent may register an aggregation of projects, made up of a group of projects of a type for which a protocol has been included in the Compendium of Federal Offset Protocols and that have not previously been registered under these Regulations or a group of projects that are already registered as part of an aggregation under these Regulations, if the following conditions are met:

Registration application

(2) The application for registration of an aggregation of projects must be submitted to the Minister and include the information referred to in Schedule 2.

Declaration

(3) The application for registration must be accompanied by a declaration, dated and signed by the proponent or their authorized official, stating that the information contained in the application is accurate and complete.

Addition of a project

(4) A proponent may add a project, that has not previously been registered under these Regulations, to an aggregation of projects if the conditions set out in paragraphs (1)(a) to (e) and (g) are met and if they submit an application to the Minister, including the declaration referred to in subsection (3), containing the information referred to in subsection (2) for the project, with the information specified in paragraphs 4(c) and (d) of Schedule 2 updated to account for the addition of the new project.

Transfer of a project

(5) A project in an aggregation may only be transferred to another aggregation if the date on which the project’s crediting period began is on or after the date on which the crediting period of the aggregation to which the project is being added began.

Withdrawal of a project

(6) If a project is withdrawn from an aggregation of projects, the proponent must notify the Minister in writing and specify the date the project was withdrawn from the aggregation.

Application deadline

10 (1) The application for registration must be submitted

Exception — project registered in another system

(2) Despite paragraph (1)(a), if the project is registered in a GHG offset credit system, other than a system administered by the federal or a provincial government, at the time the applicable protocol is included in the Compendium of Federal Offset Protocols, the application may be submitted more than 18 months after the protocol is included in the Compendium of Federal Offset Protocols but no later than 10 years after the project start date.

Registration by the Minister

11 Subject to subsection 6(4), if a proponent meets the conditions set out in section 8 or 9, the Minister must register the project or the aggregation of projects, open the GHG Offset Credit System account in the tracking system, if applicable, and notify the proponent.

Change to boundaries

12 The proponent may only modify the coordinates and geographic boundaries of the site where activities are undertaken as part of the project that were provided in the application for registration

GHG Offset Credit System Account

Maintaining account

13 (1) A proponent must maintain their GHG Offset Credit System account until the later of

Closing of account

(2) The Minister may, under subsection 186(3) of the Act, close a GHG Offset Credit System account that has been inactive for more than seven years if the Minister notifies the holder of the account of the Minister’s intention to do so and the holder does not request that the account remain open within 60 days after the date the notice was received.

Revocation of credits

(3) If the GHG Offset Credit System account contains offset credits, those credits are revoked prior to the account being closed under subsection (2).

Cancellation

Cancellation

14 (1) The Minister may cancel the registration of a project if

Notice

(2) The Minister must provide notice of the Minister’s intention to cancel the registration under subsection (1) to the proponent at least 30 days before cancelling that registration, to provide time for the proponent to provide representations.

Decision

(3) The Minister must, after the period set out in subsection (2), confirm or revise his decision and notify the proponent.

Consequences for sequestration project

15 (1) If the registration of a sequestration project using either the tonne-tonne or the hybrid tonne-year quantification method is cancelled, the Minister may

Manner of remittance

(2) Subject to subsection (3), the compliance units remitted to the Minister for the purposes of subparagraph (1)(b)(i), in accordance with subsection 181(2) of the Act, must

Surplus credits

(3) If a proponent is required to remit compliance units, the proponent may remit surplus credits if those surplus credits were issued to a covered facility located in a province listed in Part 2 of Schedule 1 to the Act during the calendar year in which the Minister notified the proponent under subparagraph (1)(b)(i) of the number of compliance units to be remitted.

Renewal of Crediting Period

Manner of renewal

16 (1) A proponent may request that the Minister renew the crediting period in respect of a project or an aggregation of projects by submitting an application to renew at least nine months but no more than 18 months before the end of the crediting period.

Information to submit

(2) The application must include the information referred to in paragraphs 2(d), (f) to (k) and (n) to (s) of Schedule 1 or paragraphs 3(e) to (j) and (m) to (r) and 4(a) of Schedule 2, as the case may be, and any other change to the information referred to in those Schedules since the registration application or the last renewal request, including a description of any measures and monitoring activities implemented following changes to the reversal risk management plan.

Conditions of renewal

(3) Subject to subsection 6(4), the Minister must renew the crediting period if the conditions of registration set out in section 8 or 9 are met at the time of the renewal. The Minister must notify the proponent of his decision, including his reasons for that decision, in that regard at least three months before the end of the crediting period.

Most recent version of protocol

(4) The most recent version of the protocol applies to the renewal for the purposes of subsections (2) and (3).

Beginning of new crediting period

(5) The new crediting period begins on the day after the day on which the most recent crediting period ended.

Limit on renewals

(6) The crediting period can be renewed for

General Requirements

Information management system

17 A proponent must implement a data and information management system to collect, manage and store data and information related to their project in a way that ensures the integrity, completeness, accuracy and validity of the data and information.

Measuring devices

18 A proponent must ensure that any measuring device used to determine a quantity that is related to the preparation of a project report is

Quantification

19 (1) A proponent must quantify the GHGs emitted and the GHGs removed from the atmosphere for the sources, sinks and reservoirs that must be taken into account for the baseline scenario and the project scenario, in accordance with the applicable protocol. For the purposes of the quantification, the applicable global warming potentials set out in Schedule 3 to the Act and the applicable emission factors and reference values set out in the document Emission Factors and Reference Values, published in 2022 by the Department of the Environment, are to be used.

Exclusion

(2) Despite subsection (1), GHGs emitted or removed from the atmosphere are not included in the quantification if the GHGs were from sources, sinks and reservoirs that were subject to provincial or federal pricing mechanisms or the emissions or removals from sources, sinks and reservoirs that were required by law or the result of a legal requirement unless, with respect to a source, the quantity of GHGs emitted increased due to the project.

Project Report

Content — sequestration project

20 (1) Subject to subsection (3) and (5), a project report submitted by a proponent for a sequestration project must include, the information listed in Schedule 3 as well as the GHG reductions generated by the project — the quantity of tonnes of GHGs that the project prevented from being emitted or that it removed from the atmosphere — expressed in CO2e tonnes, for each calendar year covered by the report, determined by the following formula:

(Ai − Bi) Ci
where
Ai
is the aggregate of all of the GHGs emitted and the GHGs removed from the atmosphere from the sources, sinks and reservoirs included in the project scenario, quantified in accordance with the protocol, for the calendar year “i”, as set out in the report under paragraph 2(i) of Schedule 3,
Bi
is the aggregate of all of the GHGs emitted and the GHGs removed from the atmosphere from the sources, sinks and reservoirs included in the baseline scenario, quantified in accordance with the protocol, for the calendar year “i”, as set out in the report under paragraph 2(h) of Schedule 3,
Ci
is the value that corresponds to the leakage discount factor, as set out in the report under paragraph 2(g) of Schedule 3, if the protocol requires that the value be applied to the difference between the amount determined for A and the amount determined for B for calendar year “i”, and
i
is the ith calendar year, where “i” goes from 1 to n and where n is the number of calendar years covered by the report.

Content — Non-sequestration project

(2) Subject to subsection (3), the project report submitted, for a project other than a sequestration project, by the proponent for the period covered by the report must include the information listed in Schedule 3 and the GHG reductions generated by the project, expressed in CO2e tonnes, for each calendar year covered by the report, determined by the following formula

(Bi − Ai) Ci
where
Bi
is the aggregate of all of the GHGs emitted and the GHGs removed from the atmosphere from the sources, sinks and reservoirs included in the protocol for the baseline scenario, quantified in accordance with the protocol, for calendar year “i”, as set out in the report pursuant paragraph 2(h) of Schedule 3,
Ai
is the aggregate of all of the GHG emitted and the GHGs removed from the atmosphere from the sources, sinks and reservoirs included in the protocol for the project scenario, quantified in accordance with the protocol, for calendar year “i”, as set out in the report pursuant paragraph 2(i) of Schedule 3,
Ci
is the value that corresponds to the leakage discount factor, as set out in the report pursuant to paragraph 2(g) of Schedule 3, if the protocol requires that the value be applied to the difference between variable A and variable B for calendar year “i”, and
i
is the ith calendar year, where “i” goes from 1 to n and where n is the number of calendar years covered by the report.

Aggregation of projects

(3) With respect to an aggregation of projects, a project report submitted by a proponent must include, the information listed in Schedule 4 and the following information:

Emissions preceding registration

(4) For the purposes of subsections (1) to (3), if a project’s start date is before the day it is registered under these Regulations, the GHGs emitted from any source included in the applicable protocol for the project scenario, during the period beginning on the project start date and ending on the day before the day the project is registered, must be included, in accordance with the protocol, in the quantity determined for A.

Net increase in emissions

(5) If in the initial project report submitted by the proponent for a sequestration project or an aggregation of sequestration projects, the difference between the quantity determined for A and the quantity determined for B in subsection (1) or paragraph (3)(a) indicates a net increase in GHG emissions that is not caused by a reversal, that increase must be carried forward to the next period covered by a project report in order to be subtracted in accordance with subsection 29(2), from the total reported quantity of GHG reductions generated by the project for the first calendar year covered by the report, and, if the result of the subtraction indicates a net increase in GHG emissions, the same for the subsequent calendar years covered by the report.

Declaration

(6) The project report must be accompanied by a declaration, dated and signed by the proponent or their authorized official, stating that the information contained in the report is accurate and complete.

Report submission

(7) The project reports, accompanied by verification reports, that must be submitted by the proponent are the following:

Extension of submission deadline

(8) Despite paragraphs 7(f) and (7)(b), if a reversal occurs within 18 months of the deadline by which a project report must be submitted, the deadline is extended by 6 months after the date the reversal report is submitted.

Choice with respect to verification

(9) Despite subsection (7) and paragraphs 7(e) and (f), a proponent of a project other than a sequestration project may choose not to have a project report, other than an initial project report, verified if they opt not to have offset credits issued to them for the reporting period covered by the report.

No discontinuity

(10) There can be no discontinuity between the periods covered by the project reports submitted by the proponent.

Correction of errors or omissions

(11) If a verifier identifies errors or omissions in a project report during their verification, the proponent must correct those errors or omissions, if possible, and identify those corrections in the project report.

Reversal Risk Management Plan

Establishment of plan

21 (1) The proponent of a sequestration project for which the tonne-tonne or hybrid tonne-year quantification method is used must establish, in accordance with the protocol, a reversal risk management plan that identifies and assesses reversal risks associated with the project and describes any measures and monitoring activities to mitigate those risks.

Implementation of plan

(2) The proponent of a sequestration project referred to in subsection (1) must implement the reversal risk management plan for the duration of the project’s crediting period and, in the case of a sequestration project for which the tonne-tonne quantification method is used, continue to implement that plan for a period of 100 years following the end of the crediting period.

Updating the plan

(3) A proponent may update their reversal risk management plan but must not cease implementing existing reversal risk mitigation measures. The proponent may only add new reversal risk mitigation measures or increase the stringency of existing measures.

Monitoring

Tonne-tonne quantification method

22 (1) The proponent of a sequestration project for which a tonne-tonne quantification method is used must, in accordance with the protocol, monitor the quantity of GHGs emitted or GHGs removed from the atmosphere with respect to the project and submit to the Minister a monitoring report, accompanied by a verification report, with each project report submitted during the crediting period and every 6 years for 100 years after the end of the last crediting period for that project.

Hybrid tonne-year quantification method

(2) The proponent of a sequestration project for which a hybrid tonne-year quantification method is used must, in accordance with the protocol, monitor the quantity of GHGs emitted or GHGs removed from the atmosphere with respect to the project and submit to the Minister a monitoring report, accompanied by a verification report, with each project report submitted during the project’s crediting period.

Content of monitoring report

(3) The monitoring report must include

Verification

Verification body

23 To be authorized to conduct a verification for the purposes of these Regulations, a third party must

Verification standard

24 (1) A verification body must conduct verifications in accordance with ISO Standard 14064-3 by applying methods that allow it to make a determination to a reasonable level of assurance, as defined in that Standard as to whether, in its opinion,

Material discrepancy — project report or corrected project report

(2) For the purpose of the verification of the project report or corrected project report, a material discrepancy exists if

Material discrepancy — aggregation

(3) In the case of an aggregation of projects, to determine if the errors and omissions for the aggregation constitute a material discrepancy in accordance with subsection (2), the quantity of GHG reductions referred to in paragraphs (2)(a) or (b) corresponds to the sum referred in paragraph 20(3)(c) reported in the project report submitted for the aggregation.

Material discrepancy — reversal report

(4) For the purposes of these Regulations, the errors or omissions in a reversal report constitute a material discrepancy if

Conflict of interest

25 The proponent must ensure that no real or potential conflict of interest exists between any party involved in the project and the verification body, including members of the verification team and any individual or corporate entity associated with the verification body, that threatens to or compromises the verification body’s impartiality and that cannot be effectively managed.

Limits — verification body

26 (1) A proponent must not have their project report verified by a verification body if

Exception — corrected project report

(2) Despite subsection (1), a proponent may have a corrected project report verified by the same verification body that verified the project report being corrected.

Site visit

27 (1) With respect to a project that is not in an aggregation, the proponent of a project must ensure that the project site is visited by a verification body in the following situations:

Aggregation

(2) With respect to a project in an aggregation, the proponent of an aggregation of projects must ensure that the site of a project in the aggregation is visited by a verification body for the purposes of verifying a project report in any of the following situations:

Monitoring report

(3) The proponent must ensure that the site of a sequestration project for which the tonne-tonne quantification method is used is visited by a verification body as part of the verification of any monitoring report submitted after the end of the last crediting period.

Other visits

(4) If buildings that are used for legal, administrative or management purposes are not located where project activities are carried out and data or information necessary for verifying a report submitted under these Regulations is kept in those buildings, the proponent must ensure that the verification body visits those buildings.

Content of verification report

28 A verification report must be prepared by a verification body and contain the information set out in Schedule 5.

Issuance of Offset Credits

Criteria for issuance of offset credits

29 (1) The Minister must issue offset credits to a proponent for the period covered by a project report, in the amount determined in accordance with subsection (2), if the requirements of section 7 are met and

Calculation of offset credits

(2) The number of offset credits that the Minister must issue in respect of a project for each calendar year covered by the report is determined by the following formula:

Ai – Bi – Ci – Di
where
Ai
is the total reported quantity of GHG reductions determined in accordance with subsection 20(1) or (2) or paragraph 20(3)(a) or (b), as the case may be, for calendar year “i”, expressed in CO2e tonnes;
Bi
is the product of the description of A and percentage of credits the proponent agrees to forgo, for calendar year “i”, with respect to the project, pertaining to direct financial incentives in accordance with an agreement;
Ci
is for calendar year “i”, equal to the product of the result of the following formula and either, for a sequestration project for which the tonne-tonne or hybrid tonne-year quantification method is used, the sum of 3% and the percentage set out in the protocol that corresponds to the reversal risk mitigation measures and monitoring activities implemented for the project for that calendar year, or, for any other project, 3%:
Ai – (Bi + Di)
Di
 
is the net increase in GHGs that was carried forward in accordance with subsection 20(5) for calendar year “i”; and
i
is the ith calendar year, where “i” goes from 1 to n and where n is the number of calendar years covered by the report.

Rounding

(3) For the purposes of subsection (2), any result calculated under that subsection is to be rounded to the nearest whole number and, if the number is equidistant between two whole consecutive numbers, to the higher number.

Notification

30 The Minister must notify the proponent of the number of offset credits being issued for each calendar year in the period covered by the report.

Environmental integrity account

31 (1) The Minister must deposit, for a given calendar year, the number of offset credits equal to the amount determined for C in subsection 29(2) into the environmental integrity account for that calendar year.

Restriction

(2) Offset credits in the environmental integrity account may not be sold or transferred. The credits may only be revoked in accordance with these Regulations.

Errors and Omissions

Errors or omissions — identified by proponent

32 (1) If, within eight years after submitting a project report, a proponent becomes aware of an error or omission in the report, the proponent must notify the Minister in writing as soon as feasible.

Notice from proponent

(2) The notice must include

Corrected project report

(3) The proponent must submit to the Minister

Contents of corrected report

(4) The corrected project report must include the information referred to in subsection 20(1), (2) or (3) with respect to the period covered by the report and, under a heading, the following information:

Declaration

(5) The corrected project report must be accompanied by a declaration, dated and signed by the proponent or their authorized official, stating that the information contained in the report is accurate and complete.

Errors or omissions — identified by Minister

33 If, within eight years after a project report has been submitted under these Regulations, the Minister is of the opinion that there is an error or omission that requires a corrected report to be submitted, the Minister must require the proponent to submit

Under-issuance

34 If a corrected project report indicates that an under-issuance of offset credits was issued for a calendar year, the Minister must issue to the proponent the number of offset credits for that calendar year that is equal to the difference referred to in paragraph 32(4)(d) for that calendar year and deposit a corresponding number of credits into the environmental integrity account.

Over-issuance

35 (1) If a corrected project report indicates that there was an over-issuance of offset credits, the proponent must remit to the Minister, with the corrected report, the number of offset credits that is equal to the difference referred to in paragraph 32(4)(d).

Manner of compensation

(2) If the proponent does not remit the number of offset credits required under subsection (1), the Minister may

Environmental integrity account

(3) The Minister may, for the purposes of section 180 of the Act, revoke a number of offset credits in the environmental integrity account that is equal to the number of offset credits deposited into that account as a result of the error or omission.

Manner of remittance

(4) Subject to subsection (5), the compliance units remitted to the Minister for the purposes of subparagraph (2)(b)(i), in accordance with subsection 181(2) of the Act, must

Surplus credits

(5) If a proponent is required to remit compliance units, the proponent may remit surplus credits if those surplus credits were issued to a covered facility located in a province listed in Part 2 of Schedule 1 to the Act in the calendar year during which the Minister notified the proponent under subparagraph (2)(b)(i) of the requirement to remit compliance units.

Suspension — error or omission

36 (1) For the purposes of subsection 180(1) of the Act, if the Minister is of the opinion, based on a notice referred to in subsection 32(2) or in accordance with section 33, that an error or omission resulted in the over-issuance of offset credits, the Minister may suspend offset credits for the applicable project in the proponent’s GHG Offset Credit System account.

Notice of suspension

(2) The Minister must, without delay, notify the proponent of the suspension of the credits, the reasons for the suspension and the date on which it takes effect.

Lifting of suspension

(3) The Minister must lift the suspension if the number of compliance units remitted or revoked, or payments made under section 35, compensate for the amount of the over-issuance.

Reversals

Proponent’s notice of reversal

37 (1) If a proponent of a sequestration project — other than a sequestration project for which the tonne-year quantification method is used — becomes aware of a reversal, they must, without delay, notify the Minister in writing, and include the following information with the notice:

Reversal report

(2) The proponent must, within 18 months after the date of the notice, submit to the Minister a reversal report, together with a verification report, that includes the following information:

Aggregation of projects

(3) For the purposes of an aggregation of projects, the reversal report referred to in subsection (2) must contain the following information:

Declaration

(4) The reversal report must be accompanied by a declaration, dated and signed by the proponent or their authorized official, stating that the information contained in the report is accurate and complete.

Suspension of offset credits

38 If, for the purposes of subsection 180(1) of the Act, the Minister suspends offset credits in the proponent’s GHG Offset Credit System account — either because the Minister has received notice from a proponent that a reversal has occurred or because he or she has reasonable grounds to suspect that a reversal has occurred —, the Minister must notify the proponent of the suspension and its effective date.

Information to the Minister

39 (1) If the Minister suspends offset credits in the proponent’s GHG Offset Credit System account because the Minister has reasonable grounds to suspect that a reversal has occurred, the proponent must, within 60 days after the date the notice referred to in section 38 is received, submit to the Minister the information referred to in subsection 37(1) and, if the proponent contests that a reversal has occurred, submit the list of reversal risk mitigation measures and monitoring activities that were implemented since the submission of the last monitoring report and a declaration by the proponent that the reversal risk management plan was implemented and that no reversal occurred.

Minister’s decision

(2) The Minister must notify the proponent of the Minister’s decision with respect to whether or not a reversal has occurred.

Reversal report

(3) If the Minister determines that a reversal has occurred, the proponent must, within 18 months after the date of the notice referred to in subsection (2) is received, submit to the Minister the reversal report set out in subsection 37(2) and the declaration specified in subsection 37(4), together with a verification report.

Evaluation of reversal

40 (1) Following receipt of the reversal report, the Minister must determine whether the cause of the reversal was within the control of the proponent and whether there was a failure to implement a reversal risk management plan.

Voluntary reversal

(2) If the Minister determines that the cause of the reversal was within the control of the proponent or there was a failure to implement a reversal risk management plan, the Minister may

Manner of remittance

(3) Subject to subsection (4), the compliance units remitted to the Minister under subparagraph (2)(b)(i), in accordance with subsection 181(2) of the Act, must

Surplus credits

(4) In the case where a proponent is required to remit compliance units, the proponent may remit surplus credits if those surplus credits were issued to a covered facility located in a province listed in Part 2 of Schedule 1 to the Act in the calendar year the Minister notified the proponent under subparagraph (2)(b)(i) of the requirement to remit compliance units.

Involuntary reversal

(5) If the Minister determines that the cause of the reversal was not within the proponent’s control and there was no failure to implement the reversal risk management plan, the Minister may

General

Electronic submission

41 (1) Any information that is required to be provided to the Minister under these Regulations must be submitted electronically in the form and format specified by the Minister and must bear the electronic signature of the proponent or of their authorized official.

Provision on paper

(2) If the Minister has not specified an electronic form and format or if it is not feasible to submit the information in accordance with subsection (1) because of circumstances beyond the control of the proponent or their authorized official, the information must be submitted on paper, signed by the proponent or their authorized official, in the form and format specified by the Minister. However, if no form and format has been so specified, it may be in any form and format.

Notification following change

42 (1) A proponent must notify the Minister, in writing, within 30 days following the date after a change to any of the following:

Pre-notification of change

(2) A proponent must notify the Minister, in writing, no less than 30 days before the day on which they make a change to any reversal risk mitigation measure or monitoring activity undertaken to mitigate those risks.

Application for transfer

43 (1) A request for the transfer of a project registration to another person must be submitted to the Minister by the proponent of the project and must include

Information to be provided

(2) The person to whom the transfer is being made, or their authorized official, must submit to the Minister

Declaration

(3) The person to whom the transfer is being made or their authorized official must submit to the Minister a declaration, dated and signed by that person or their authorized official, stating that the information they have provided is accurate and complete.

Information

44 The proponent must provide the Minister with the following information with any remittance or payment in lieu of remitting compliance units, referred to in paragraph 15(1)(b), subsection 35(1), paragraph 35(2)(b) or paragraph 40(2)(b):

Content of record

45 (1) A proponent must keep a record of the following information for each project for which they are responsible:

Location of records

(2) The records must be kept and retained at the proponent’s principal place of business in Canada or, on notification to the Minister, at any other place in Canada where they can be inspected.

Retention of records

(3) For the purposes of subsection 187(5) of the Act, the records specified in subsection (1) must be retained either

Available to the public

46 Subject to sections 254 and 255 of the Act, the Minister may make available to the public the following information with respect to a project:

Amendments to the Output-Based Pricing System Regulations

47 Section 76 of the Output-Based Pricing System Regulations footnote 1 is replaced by the following:

Accounts for participants

76 For the purposes of subsection 186(1) of the Act, any person, other than a person responsible for a covered facility or a proponent within the meaning of subsection 1(1) of the Canadian Greenhouse Gas Offset Credit System Regulations, who wishes to open an account in the tracking system must notify the Minister in writing.

48 Subsection 77(1) of the Regulations is replaced by the following:

Notice of closure

77 (1) If an account, other than a GHG Offset Credit System account as defined in the Canadian Greenhouse Gas Offset Credit System Regulations, has been inactive for more than seven years, the Minister may give 60 days’ notice to the holder of the account of the Minister’s intent to close the account.

Amendments to the Environmental Violations Administrative Monetary Penalties Regulations

49 Part 7 of Schedule 1 to the Environmental Violations Administrative Monetary Penalties Regulations footnote 2 is amended by adding the following after Division 2:

DIVISION 3

Canadian Greenhouse Gas Offset Credit System Regulations
Item

Column 1

Provision

Column 2

Violation Type
1 9(6) D
2 13(1) D
3 17 D
4 18 D
5 20 D
6 25 E
7 26(1) E
8 27 D
9 32 D
10 35(1) E
11 35(2)(b) E
12 35(4) D
13 35(5) D
14 37 E
15 39(1) D
16 39(3) E
17 40(2)(b) E
18 40(3) D
19 40(4) D
20 41 D
21 42 D
22 43(1) E
23 43(2) D
24 43(3) D
25 44 D
26 45 D

Coming into Force

Registration

50 These Regulations come into force on the day on which they are registered.

SCHEDULE 1

(Subsections 8(1), 16(2) and paragraphs 42(1)(a) and 43(1)(c) and (2)(b))

Information to Include in Application for Registration

1 The following information with respect to the proponent:

2 Information with respect to the project:

SCHEDULE 2

(Subsections 9(2) and (4) and 16(2) and paragraphs 42(1)(a) and 43(1)(c) and (2)(b))

Information to Include in an Application for Registration of an Aggregation

1 Information with respect to the proponent:

2 Information with respect to the person carrying out the project activities for each project in the aggregation:

3 Information with respect to each project in the aggregation:

4 Information with respect to the aggregation:

SCHEDULE 3

(Subsections 20(1) and (2))

Content of the Project Report

1 Information with respect to the proponent

2 Information with respect to the project:

3 A statement that environmental and social safeguards, as set out in the protocol, have been implemented to minimize the potential negative outcomes of the project and a description of the implemented measures.

Canada Gazette, Part II, Volume 156, Number 12

4 If the proponent is choosing not to have a project report verified in accordance with subsection 20(9), a statement that they have chosen not to have the project report verified and they have agree to not have offset credits issued for the period covered by that report.

SCHEDULE 4

(Subsection 20(3))

Content of the Report for an Aggregation of Projects

1 Information with respect to the proponent

2 Information with respect to the person carrying out the project activities for each project in the aggregation:

3 Information with respect to each project in the aggregation:

4 With respect to each project, a statement that environmental and social safeguards, as set out in the protocol, have been implemented to minimize the potential negative outcomes of the project and a description of the implemented measures.

5 If the proponent is choosing not to have a project report verified in accordance with subsection 20(9) of the Regulations, a statement that they have chosen not to have the project report verified and that they agree to not have offset credits issued for the period covered by the report.

6 Information with respect to the aggregation:

SCHEDULE 5

(Subparagraph 24(1)(b)(iii) and section 28)

Content of the Verification Report

1 The following information for the verification of all reports:

2 In the case of a verification of a project report or corrected project report, the following information:

3 In the case of a verification of a reversal report, the following information:

4 In the case of a verification of a monitoring report, the following information:

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

Greenhouse gas (GHG) emissions are primary contributors to climate change. A number of measures to reduce domestic GHG emissions have been implemented, including the federal carbon pollution pricing backstop system, in order to help Canada meet its 2030 GHG emissions reduction target under the Paris Agreement and achieve its goal of net-zero GHG emissions by 2050. However, carbon pollution pricing measures do not cover all sources of GHG emissions in Canada.

The Greenhouse Gas Pollution Pricing Act (the Act) received royal assent on June 21, 2018.footnote 3 The Act provides the legal framework and enabling authorities for the federal carbon pollution pricing backstop system in Canada. This system consists of two parts: a regulatory charge on fossil fuels (the fuel charge) and an output-based pricing system (OBPS) for industrial facilities that is enabled by means of the Output-Based Pricing System Regulations (the OBPS Regulations). In general, facilities subject to the OBPS (covered facilities) do not pay the fuel charge on fuels that they purchase for use at their facilities but instead are required to provide compensation on an annual basis for any GHG emissions exceeding their respective emissions limit. Federal offset credits are one of three types of compliance units specified under the Act that covered facilities may remit to compensate for excess emissions.

The potential to generate federal offset credits will incentivize activities leading to reductions in GHG emissions either by preventing GHGs from being emitted or by removing GHGs from the atmosphere (referred to collectively as “GHG reductions”) that are not required by law or covered by other measures related to carbon pollution pricing. Under the Act, regulations are necessary to create a federal GHG offset credit system (federal offset system) and authorize the Minister of the Environment (the Minister) to issue offset credits. Without such regulations, proponents are not able to generate federal offset credits and earn revenue by selling them. Without the ability to generate and sell credits, proponents may not have a sufficient economic incentive to carry out activities that generate additional GHG reductions. In addition, in the absence of regulations that establish a federal offset system, facilities in the federal OBPS have fewer options to meet their compensation obligations under the Act and the OBPS Regulations.

Background

The Government of Canada has committed to taking action on climate change and is working in partnership with the international community. In December 2015, the international community, including Canada, adopted the Paris Agreement, an accord intended to reduce GHG emissions to limit the rise in global average temperature to less than two degrees Celsius (2 °C) above pre-industrial levels and to aim to limit the temperature increase to 1.5 °C. As part of its commitments made under the Paris Agreement, Canada pledged to reduce national GHG emissions by 30% below 2005 levels by 2030.

On July 12, 2021, the Minister formally submitted Canada’s enhanced nationally determined contribution (NDC) to the United Nations, committing Canada to reduce national GHG emissions by 40% to 45% below 2005 levels by 2030. The Government of Canada has also committed to achieving net-zero GHG emissions by 2050 in its strengthened climate plan called A Healthy Environment and a Healthy Economy. To meet these commitments, the federal government is implementing a series of measures, including continuing to put a price on carbon pollution.

After engagement with provincial and territorial governments and Indigenous organizations in the winter of 2021, the Government of Canada confirmed that the minimum price on carbon pollution will increase by $15 per tonne each year starting in 2023 through to 2030. In August 2021, the Government of Canada also updated the minimum national stringency requirements for all pricing systems (the federal benchmark) for the 2023–2030 period. The goal is to make sure that all carbon pollution pricing systems across Canada are comparable in terms of stringency and effectiveness.footnote 4

Output-Based Pricing System Regulations

To ensure that carbon pollution pricing applies to a broad set of emission sources across Canada at a similar level of stringency, the federal government has implemented a federal carbon pollution pricing system in provinces and territories that requested it or do not have a carbon pollution pricing system that meets the federal benchmark (referred to as “backstop jurisdictions”).

The OBPS Regulations took effect on January 1, 2019, in Ontario, New Brunswick, Manitoba and Prince Edward Island, and partially in Saskatchewan.footnote 5 In Yukon and Nunavut, the OBPS Regulations took effect on July 1, 2019. The federal OBPS covers facilities carrying out certain industrial activities in backstop jurisdictions that emit 50 kilotonnes (kt) or more of carbon dioxide equivalent (CO2e) per year. In addition, facilities located in backstop jurisdictions that emit 10 kt or more of CO2e per year, and that either undertake an industrial activity identified by the OBPS Regulations or operate in an industrial sector considered to be at significant risk of competitiveness impacts and carbon leakage as a result of carbon pricing, may choose to opt into the OBPS.footnote 6

Under the OBPS, covered facilities are required to compensate for GHG emissions that exceed an annual facility emissions limit. Covered facilities under the federal OBPS have a number of options regarding how they choose to provide compensation for excess emissions. First, they may make excess emissions charge payments to the Receiver General for Canada.footnote 7 Second, they may use compliance units, each representing one tonne of CO2e, which include (i) surplus credits issued by the Minister to covered facilities or that have been acquired through trade from other covered facilities; (ii) eligible provincial or territorial offset credits formally recognized by the Minister under the OBPS Regulations as compliance units; and (iii) offset credits issued by the Minister. Covered facilities may also use a combination of excess emissions charge payments and compliance units to provide compensation.

Objective

The primary objective of the Canadian Greenhouse Gas Offset Credit System Regulations (the Regulations or the final Regulations) is to enable the use of federal offset credits for compliance under the federal OBPS, to help covered facilities reduce compliance costs and maintain competitiveness and mitigate risks of carbon leakage.footnote 8 Federal offset credits can also be purchased and used by individuals or organizations not covered by the OBPS Regulations for other purposes including corporate net-zero commitments, and meeting the conditions of Impact Assessment approval. Governments can also purchase and utilize offset credits to green their operations.

The establishment of a federal offset system will also further extend the carbon pollution price signal and incentivize activities that lead to GHG reductions that are not required under existing laws or covered by carbon pollution pricing systems. The Regulations will broaden the reach of the federal carbon pollution price signal that is set out in the Act by allowing the Minister to issue offset credits to proponents for GHG reductions from projects that meet eligibility criteria and that are implemented in accordance with the Regulations and federal offset protocols (protocols that apply to the project activities).

Description

The Regulations are made primarily under sections 192 and 195 of the Act and establish a federal offset system administered by the Department of the Environment (the Department).footnote 9 While participation in the federal offset system is voluntary, it does require that eligibility criteria be satisfied and that a project be registered. Proponents must comply with all requirements in the Regulations and the applicable protocol. These Regulations set out the conditions for registering a project in the system, and the requirements for proponents, for the issuance of offset credits, as well as for keeping and maintaining records.

In order to be issued federal offset credits, proponents are required to have registered their projects in accordance with specified conditions, have a GHG Offset Credit System Account in the tracking system, and implement a project that generates GHG reductions that are real, additional, quantified, verified, unique and permanent. They must also prepare project reports in conformance with reporting requirements, have the reports verified by an accredited verification body, and submit the project reports accompanied by the verification reports. If applicable, a corrected project report must be submitted and a reversal risk management plan must be implemented to mitigate the risk of GHG reversal. In addition, GHG reductions from projects that require the implementation of a risk management plan must be monitored, and monitoring reports must be verified and submitted. Proponents must also satisfy any obligations under the Act if the Minister determines that any compliance units were issued in error or are no longer valid.

For the purpose of these Regulations, GHG reductions achieved by a project are additional if they

Federal offset protocols

The Regulations incorporate by reference federal offset protocols that are included in the Compendium of Federal Offset Protocols (the Compendium), a document published by the Department on its website. Federal offset protocols will be developed on an ongoing basis outside of the Regulations and will be added to the Compendium when they are finalized by the Department. A protocol may be updated; in this case, the new version of the protocol will be added to the Compendium.

The Regulations apply to a proponent of a project with an applicable protocol that sets out a consistent approach for quantifying GHG reductions for a given project type. This approach includes establishing a baseline for offset project activities to measure the GHG reductions generated by the project that are additional to those resulting from baseline activities. The Regulations require that proponents register their projects based on the conditions of the applicable protocol. They also require that proponents carry out project activities and quantify GHG reductions in accordance with the applicable protocol in order to generate federal offset credits.

The Department has identified and prioritized the five project types described below for its initial protocol development, which began in early 2021:

The project baseline is the business-as-usual scenario against which the outcome of project activities must be measured and from which federal offset credits could be generated. A project activity must reduce or remove GHGs in relation to the project baseline for it to generate GHG reductions that are considered additional to the baseline. Each protocol will also contain requirements related to implementation activities. Based on the project type and quantification method used, the protocol may include further requirements for monitoring, record keeping, reporting, and reversal risk assessment and management. The federal protocol used to register or renew the project may be used for the duration of the crediting period. After an update to a protocol, proponents may opt to have the new version of that protocol apply to their project for the remainder of their crediting period; however, one version of a protocol applies during a reporting period. Proponents using the new version of a protocol must ensure their project meets all requirements of the new version and must specify any updates to registration information in the project report.

Offset protocols may allow for different types of quantification methods for sequestration projects. The proposed Regulations only allowed for tonne-tonne quantification of GHG reductions achieved by a project, relative to a baseline scenario. Under this method, the quantity of GHGs removed from the atmosphere is based on the number of tonnes of CO2 sequestered during the reporting period, taking into account that the proponent must regularly and periodically monitor the quantity of GHGs emitted and the quantity of GHGs removed from the atmosphere with respect to the project for 100 years after the end of the last crediting period for the project.

The Regulations enable the use of tonne-year and hybrid tonne-year quantification methods in addition to the tonne-tonne quantification method.

Application

The Regulations apply to proponents of projects to which a protocol applies. Project activities must aim to prevent GHG emissions or remove GHGs from the atmosphere, and generate real, additional, quantified, verified, unique and permanent GHG reductions. To generate offset credits in the system, GHG reductions achieved by project activities must be additional to a business-as-usual scenario (baseline) defined by the applicable protocol, must not be required by law or the result of a legal requirement, and must come from sources, sinks and reservoirs that are not already subject to provincial or federal carbon pricing mechanisms for GHG emissions.

The Regulations do not apply to projects that started before January 1, 2017, to align with the approximate date of the announcement of the federal carbon pollution pricing approach. Projects implemented before this date are considered to have been undertaken for reasons other than participation in the federal offset system.

While the federal offset system is national in scope, protocols are applicable in all provinces and territories in Canada, except for jurisdictions where the same project activity is covered by an active protocol in a provincial or territorial offset program.

Crediting period

The Regulations specify the length of the periods during which offset projects are eligible to generate credits, as well as the number of times or maximum duration over which crediting periods may be renewed. Unless otherwise provided in the applicable protocol, the crediting period is set at 30 years for forestry sequestration projects, 20 years for other sequestration projects, and 10 years for all other project types. Crediting periods for forestry sequestration projects may be renewed for a maximum period of 100 years, while crediting periods for all other project types may be renewed up to two times, provided that all regulatory requirements continue to be met. The most recent version of the protocol at the time of the renewal is the one that applies to that crediting period.

For projects that were registered in another offset system and that transition into the federal offset system, the duration over which the project was registered in the other system will be deducted from the crediting period in the federal offset system.

Conditions of registration

The Regulations specify the conditions that must be met for a project to be registered. These include conditions on the proponent, the project and the activities that would be undertaken to reduce GHGs, and other conditions for registration. For example, activities undertaken as part of the project to generate GHG reductions must be set out in the applicable protocol, and the project may not be registered under another offset credit program.

A proponent must also have exclusive entitlement to credits issued for the GHG reductions resulting from the project. This means that a proponent receiving a direct financial incentive from a funding program would be eligible to register the project in the federal offset system as long as exclusive entitlement to the credits generated remains with the proponent under the funding agreement.

A proponent must include in their registration application a certification that is dated and signed by the proponent or by their authorized official, stating that the information contained in the application is accurate and complete.

Information to include in an application for registration

The Regulations set out the information that a proponent must provide when submitting an application to register an offset project. Key content to be provided in registration applications includes information of any direct financial incentives received in respect of the project, a description of the project, including the title of the protocol that applies to the project, the activities to be carried out, and the project location and start date (or the anticipated start date), GHGs that are to be reduced or removed, and a list of the GHG sources, sinks and reservoirs that are part of the baseline and project scenarios.

Registration application deadline

The Regulations establish the deadline for submitting a registration application. If the project start date is before the date that the applicable protocol is included in the Compendium, the deadline for submitting a registration application is 18 months after the date the protocol is included in the Compendium, and no more than 10 years after the project start date, but not earlier than January 1, 2017. If the project start date is on or after the date on which the applicable protocol is included in the Compendium, the deadline for submitting a registration application is 18 months after the project start date.

Aggregated projects

The Regulations allow a proponent to aggregate, or group, two or more projects into one project if they are the proponent for all the projects in the aggregation. Projects may be part of the aggregation if they are located in the same province, and if they use the same protocol, the same version of that protocol, and the same quantification method. The number of projects in the aggregation must not exceed the maximum number of projects set out in the applicable protocol. To register two or more offset projects as an aggregated project, the same information required for stand-alone projects must be provided for each project included in the aggregation. A statement must also be provided indicating that the proponent is authorized, by each person carrying out the activities of each project in the aggregation, to register the project as part of the aggregation and to receive credits for the GHG reductions generated by the project.

Cancellation and project transfer

The Regulations identify the circumstances in which the Minister may cancel the registration of a project. These circumstances may arise when regulatory requirements are no longer met, in certain situations related to GHG reversals, upon request of the proponent, or when a proponent fails to replace offset credits if the Minister has determined that compliance units were issued in error or are no longer valid under the Act.

The Regulations also provide conditions for transferring the registration of a project from one proponent to another. The proponent to whom the project is transferred needs to meet the eligibility criteria, and both parties need to provide written consent for the transfer as part of the application for transfer to be submitted to the Minister.

Reporting requirements

The Regulations establish requirements for reporting, monitoring, verification, and record-keeping. In terms of reporting, the Regulations establish the frequency and content for reports that proponents must submit to be eligible for issuance of federal offset credits.

A proponent must submit an initial project report with respect to the 12 months after the start date of the first crediting period, along with a verification report, to the Department no more than 6 months after the first year of the crediting period. Subsequent project reports must be submitted no later than 6 months after the end of the reporting period. The reporting period is determined by the proponent and could be a maximum of six years after the end of the period covered in the last project report for sequestration projects, or a maximum of three years after the end of the period covered in the last project report for all other project types. The Regulations also mandate the reporting of reversals and of errors or omissions.

Furthermore, sequestration projects that use the tonne-tonne and the hybrid tonne-year quantification method must prepare a reversal risk management plan and submit monitoring reports along with a verification report, at the same time as project reports during the crediting period. In monitoring reports, the proponent will include a description of the risk mitigation measures and monitoring activities that were implemented as well as a declaration stating that, during the period covered by the report, the risk mitigation plan was duly implemented and that no GHG reversal occurred.

If hybrid tonne-year quantification is used, the period during which the proponent is required to submit monitoring reports is the duration of the crediting period. If a tonne-tonne quantification method is used, the proponent will need to submit monitoring reports during the crediting period and every six years during the 100 years that follow the end of the last crediting period for that project.

Credit issuance

Proponents are required to have their project report verified to a reasonable level of assurance by a third party accredited to the ISO 14065 standard by the Standards Council of Canada, the ANSI National Accreditation Board (ANAB) or any other accreditation organization that has a memorandum of understanding with the Department and that is a member of the International Accreditation Forum. Project reports must be submitted together with a verification report.

The project report must include the total quantity of GHGs (expressed in CO2e tonnes) that the project prevents from being emitted, or that it removed from the atmosphere for each calendar year in the reporting period (total GHG reductions). The protocol that applies to the project sets out the methods to quantify the GHGs emitted and the GHGs removed from the atmosphere from both the baseline and the project scenarios. The total quantity of GHG reductions is the difference between the quantity of GHGs in the baseline scenario and the quantity of GHGs in the project scenario for each calendar year in the reporting period. If applicable, a leakage discount factor is applied to this value.

The number of offset credits that the Minister issues for a given calendar year within a reporting period will correspond to the total quantity of GHG reductions stated in the project report, minus

Federal offset credits are deposited into a proponent’s GHG Offset Credit System Account with the vintage years of credits corresponding to the calendar years in which the GHG reductions occurred.

Environmental integrity account

The Regulations establish an environmental integrity account into which the Minister will deposit a percentage of the offset credits generated by a project for each calendar year. This account comprises a pool of credits acting as a form of insurance for the environmental integrity of the federal offset system. When there is a reversal of GHG reductions determined to be out of the proponent’s control (i.e. an involuntary reversal), the Minister will revoke a corresponding number of offset credits deposited by the Minister into the environmental integrity account. This account may also be used to replace offset credits when proponents fail to comply with replacement requirements. For sequestration projects using tonne-tonne or hybrid tonne-year GHG quantification methods, the percentage of credits deposited in the environmental integrity account will be the sum of 3% and the percentage set out in the applicable protocol (based on risk factors). The percentage of credits deposited in this account is 3% for all other project types.

Suspension and revocation

The Regulations also provide the circumstances in which the Minister may suspend credits in the proponent’s account in respect of a project, such as when a reversal occurs or when an error in a report is identified. They also provide the circumstances in which the Minister may revoke credits, such as when there is a voluntary reversal or when an error or omission leads to an over issuance of offset credits. Proponents may be required to replace offset credits that are found to be no longer valid due to voluntary reversals, or to errors or omissions.

If credits are suspended because the Minister has received notice from the proponent that a reversal has occurred or has reasonable grounds to suspect a reversal has occurred, the Minister must notify the proponent of the suspension and its effective date. If the Minister suspends credits in the proponent’s account because the Minister has reasonable grounds to suspect a reversal has occurred, the proponent must submit information to the Minister within 60 days of the date of the notice. If the proponent contests that a reversal has occurred, the proponent must submit information regarding how reversal risk mitigation measures were implemented since the submission of the last monitoring report, along with a declaration that the reversal risk management plan was implemented and that no reversal occurred.

Consequential amendments

The Regulations make consequential amendments to the OBPS Regulations to modify provisions related to the opening and closing of accounts in the credit and tracking system by any person other than a person responsible for a covered facility. These amendments clarify that requirements for proponents regarding accounts in the tracking system are included in the Regulations, rather than the OBPS Regulations.

Administrative monetary penalties

The Regulations also make a related amendment to the Environmental Violations Administrative Monetary Penalties Regulations to add a new Division to Part 7 of these regulations entitled Canadian Greenhouse Gas Offset Credit System Regulations. This addition will enable the designation of certain provisions of the Regulations. This will in turn authorize enforcement officers to issue administrative monetary penalties for violations of these provisions that are designated under the Environmental Violations Administrative Monetary Penalties Regulations.

Regulatory development

Consultation

Summary of consultation prior to prepublication in the Canada Gazette

Since 2018, the Department held over 230 hours of consultations with stakeholders and provincial partners including webinars, teleconference, videoconferences, technical discussions and bilateral meetings. The Department also received over 160 submissions as part of formal engagement processes. Representatives from industry, provincial and territorial governments, organizations representing Indigenous peoples, current and potential offset project proponents, representatives from OBPS covered facilities, academics and individuals participated in these consultations.

In May 2018, the Department published a discussion paper on compliance options under the federal OBPS. This paper signalled the potential recognition and use of credits generated from projects in existing provincial offset programs as compliance units in the federal OBPS.footnote 10 In June 2019, the Department published a discussion paper providing additional details and options on the design of a federal offset system.footnote 11 In July 2020, the Department published an additional discussion paper outlining key policy elements that were refined based on the feedback received on the previous paper and that provided additional details and design considerations for the federal offset system, with a focus on protocol development and priority project types to be considered first for protocol development.footnote 12

Stakeholders were generally supportive of the development of a federal offset system. Most comments related to ensuring the need for a robust system with high environmental integrity, while at the same time allowing for broad participation and timely development and implementation of the system and of protocols. A more detailed summary of the comments received and the responses to comments on these discussion papers is available in the Regulatory Impact Analysis Statement (RIAS) published in the Canada Gazette, Part I, which accompanied the publication of the proposed Regulations.

Consultation following prepublication in the Canada Gazette

The proposed Greenhouse Gas Offset Credit System Regulations (Canada) [the proposed Regulations] were published in the Canada Gazette, Part I, on March 6, 2021, followed by a 60-day comment period ending on May 5, 2021. At the same time, the Department published a link to the proposed Regulations on the Government of Canada’s Federal GHG Offset System webpage to make them broadly available to interested parties. The Department also signalled this release on social media platforms and through email to a wide range of interested parties — including representatives of the provincial and territorial governments, project developers, Indigenous groups and organizations, industry associations and their members, and environmental non-governmental organizations (ENGOs) — to inform interested parties of the formal consultation process.

On March 19, 2021, the Department hosted a general consultation session (webinar) in English and French with over 230 participants. The goal of this session was to provide an overview of the regulatory proposal and answer questions to help inform possible written submissions. Participants offered their general support for the Regulations during the webinar. The Department closed the session by responding to questions from participants and inviting them to submit their written comments. Bilateral meetings were also held to discuss specific comments and questions.

The Department received a total of 124 written submissions from a range of stakeholders during the 60-day comment period. Overall, there was broad support from stakeholders for the federal offset system and recognition of the role of offsets in meeting net zero objectives. ENGOs and individuals emphasized the importance of environmental integrity in the system and expressed concerns regarding overreliance on offsets by industrial emitters to meet their compliance obligations. Some stakeholders requested changes to the proposed regulatory text to improve the clarity of some definitions and other administrative provisions.

Many stakeholders expressed support for fungibility of offset credits and linkages with provincial and territorial systems and expressed concerns related to long-term monitoring requirements affecting the viability of sequestration projects, notably in the agriculture sector. Stakeholders also expressed views on start date rules, with agriculture sector stakeholders continuing to oppose January 1, 2017, as the earliest eligible project start date, and ENGOs expressing a preference for the earliest eligible start date to be later. Provincial and territorial governments generally supported the complementary approach for provincial/territorial and the federal offset system, under which a federal protocol would not apply if a protocol under a provincial or territorial offset program covering the same activity already applies.

A large number of comments were received on the development of protocols. Both potential proponents and credit buyers emphasized the importance of timely protocol development to support generation of credit supply. Many stakeholders welcomed opportunities for engagement in the protocol development process and suggested additional project types to prioritize and/or to consider for future protocol development, including for direct air capture, carbon capture and storage and several project types in the agriculture sector. Industrial stakeholders opposed offset use limits included in the OBPS Regulations while ENGOs suggested that use limits were too low and expressed a preference for the forestry sector to be covered by the OBPS rather than be included in the scope of the federal offset system.

The Department has provided detailed explanations to stakeholders and, where appropriate, has made modifications to the regulatory text. The following paragraphs summarize the significant issues raised by interested parties and the Department’s consideration and analysis of these issues leading to the finalization of the Regulations.

Enabling non-biological sequestration projects

Comment: The proposed Regulations would set rules to enable protocols for biological sequestration projects to generate credits but not other sequestration project types that also remove and permanently store carbon dioxide (CO2).footnote 13 Given that non-biological sequestration project types, including direct air capture with carbon capture and storage, may also have a role to play in helping to achieve net-zero targets, project developers, industry stakeholders, non-profit organizations and individuals requested that non-biological sequestration project types be considered for protocol development, and that the final Regulations allow for the development of these project types.

Response: The Department recognizes direct air capture with carbon capture and storage projects as an emerging project type and agrees that non-biological sequestration projects may play an important role in climate change mitigation objectives. Direct air capture was the new project type most requested by stakeholders. The final Regulations allow for the development of protocols for non-biological sequestration projects by adjusting the regulatory text to refer to sequestration projects rather than biological sequestration projects.

Concerns over the 100-year monitoring period

Comment: The proposed Regulations provide for the use of the tonne-tonne GHG quantification method for all sequestration projects. Under the tonne-tonne approach, credits are issued for GHG removals for the year in which they occur. The proponent is required to implement a reversal risk management plan, and monitor for reversals of sequestered carbon during the crediting period, as well as for 100 years after credit issuance. This is because, in order to be considered permanent, each tonne of CO2e removed from the atmosphere must stay removed for at least 100 years.

Many stakeholders across all stakeholder groups expressed concerns around long-term monitoring requirements impacting the viability of biological sequestration projects, particularly for the agriculture sector, where committing to land-use practices over a 100-year permanence period was noted as being impractical due to changes in land use or ownership, or farmland rental. A subset of stakeholders suggested the consideration of alternative quantification methods, including allowing tonne-year GHG accounting as an approach to address such concerns without affecting the environmental integrity of the system.

Response: Acknowledging implementation challenges raised by stakeholders, the final Regulations enable proponents to use the tonne-year and hybrid tonne-year quantification methods for sequestration projects if provided for in the applicable federal protocol.

Enabling the use of the tonne-year and the hybrid tonne-year quantification methods for sequestration projects, in addition to the tonne-tonne quantification method, will allow for the inclusion of project activities in the federal offset system where 100-year permanence could be difficult to achieve. Instead of requiring a proponent to monitor for permanence over a 100-year period after the end of the last crediting period for a sequestration project, these supplemental quantification methods consider the climate benefit of withholding carbon from the atmosphere annually over a reporting period. While fewer credits would be issued over a single reporting period to projects using these alternative methods, relative to the tonne-tonne quantification method that requires monitoring over a 100-year period, they may be attractive for some proponents, particularly those in the agricultural sector, where committing to specific land-use and agricultural practices for 100 years may be viewed as unrealistic.

Frequency of monitoring reports

Comment: A wide range of stakeholders expressed concern that annual submission of monitoring reports for sequestration projects during crediting and monitoring periods would pose undue administrative burden and noted that sequestration projects do not materially change year over year.

Response: Under the final Regulations, the frequency of monitoring report submissions has been reduced, to align with the submission of project reports. The final Regulations also change the frequency of monitoring reports after the crediting period ends, for sequestration projects using the tonne-tonne quantification method, from annually to every six years.

Adjustments to start dates

Comment: Many agricultural sector stakeholders requested the removal of the January 1, 2017, as the earliest project eligibility start date, to acknowledge contributions by the sector to reduce emissions. ENGOs proposed moving the earliest eligible project start date later, to January 1, 2022. Some stakeholders requested removing the rolling start date requirement, under which projects would not be eligible if they had started more than five years before their registration application date.

Response: A key objective of the Regulations is to incentivize activities that lead to GHG reductions that are not required under existing laws or covered by carbon pollution pricing systems. If activities were undertaken years before the program was announced, they were likely not implemented due to the additional incentive provided by the federal offset system. The Department has consistently signalled, since the release of the discussion paper in 2018 entitled “Carbon pricing: compliance options under the federal output-based pricing system”, that January 1, 2017, will be the earliest possible project start date for the federal offset system. This aligns with the approximate date of the announcement of the federal approach to pricing carbon pollution. Projects implemented before this date are considered to have been undertaken for reasons other than participation in the federal offset system and are not considered to be additional. For this reason, January 1, 2017, is maintained as the earliest eligible project start date.

Regarding the rolling start date, the Department has added flexibility in the final Regulations by increasing the allowable time between the project start date and the registration application date to a maximum of 10 years. This 10-year period corresponds to the duration of the crediting period for non-sequestration projects under the Regulations.

Crediting period

Comment: A number of industrial stakeholders and one individual requested that the duration of the crediting period for non-sequestration projects be extended from 8 years to 10 years to align this rule with other compliance offset credit systems and the crediting period under the proposed Clean Fuel Regulations. Some industrial stakeholders suggested removing the limits to crediting period renewal.

Response: The Department agrees with the reasons for extending the maximum duration of a crediting period for non-sequestration projects, and as such this period is increased to 10 years. The Regulations enable the renewal of a crediting period under certain conditions, including that the most recent version of the protocol will apply for the new crediting period. To ensure that project activities continue to be additional, crediting period renewal will be limited to two times for non-sequestration projects, and to a period covering up to 100 years for sequestration projects related to forestry.

Unique program registration

Comment: Some stakeholders, mostly from the oil and gas sector, suggested removing the eligibility criteria that would prevent a project registered in another offset program or receiving credits for the same GHG reductions from another program to register in the federal system. More specifically, these stakeholders suggested that the Department should enable a project to generate credits under both the proposed Clean Fuel Regulations and the Regulations.

Response: The federal offset system is being established based on key principles, including the principle to achieve real, additional, quantified, verified, unique and permanent GHG reductions. If the Department were to make the requested change, it would result in double crediting of reductions, and offset credits generated would not represent unique reductions. The Department has maintained this eligibility requirement to ensure the environmental integrity of the system.

Requirement to report on environmental and social safeguards, and Indigenous engagement

Comment: While the proposed Regulations would allow for protocols to include requirements related to safeguards to mitigate environmental risks, reporting on how a project meets those requirements was not included in the requirements for project reports. The Department received requests, notably from ENGOs, to require proponents to include a description of how environmental safeguards are met in the implementation of a project in project reports. Some ENGOs also commented that the Regulations should include requirements for Indigenous engagement in project development and free, prior and informed consent to protect Indigenous rights.

Response: The final Regulations require proponents to include a statement in their project report that environmental and social safeguards, as set out in the applicable protocol, have been implemented to minimize the potential negative outcomes of the project. Proponents will also be required to provide a description of the safeguards that they have implemented. The Department recognizes the importance of Indigenous engagement and is committed to encouraging Indigenous participation in the federal offset system.

Site visits

Comment: Stakeholders raised concerns related to the cost of site visit requirements for verification reports. Some proposed enabling the use of remote sensing or satellite imagery technologies, which are less costly than in-person visits.

Response: The Department acknowledges that remote sensing technologies may be helpful and reduce costs; however, relying only on these tools would provide less information than in-person visits, which enable verifiers to view equipment and records and ask questions to staff working onsite. As such, the requirements for in-person site visits, as proposed, have been maintained in the final Regulations.

Environmental integrity account

Comment: A wide range of interested parties supported the inclusion of an environmental integrity account to replace offset credits affected by involuntary reversals and those that proponents fail to replace following errors or omissions or voluntary reversals. Some project developers suggested that credits in the environmental integrity account be used to replace credits found to be invalid due to voluntary reversals.

Response: Using credits in the environmental integrity account to compensate for voluntary reversals, which are within a proponent’s control, could jeopardize the environmental integrity of the federal offset system. The approach presented in the proposed Regulations is thus maintained. In particular, this account may be used to replace offset credits that become invalid due to an involuntary reversal. As a last recourse, it may also be used when proponents fail to comply with replacement requirements.

Modern treaty obligations and Indigenous engagement and consultation

Pursuant to the Cabinet Directive on the Federal Approach to Modern Treaty Implementation, an assessment of modern treaty implications was conducted. The assessment determined that because participation in the federal offset system is optional, it does not have a direct impact on modern treaty rights.

The Regulations facilitate potential economic development opportunities through the generation of tradable offset credits from projects that meet regulatory requirements and follow protocols. Land-based projects that, for example, improve forest management may contribute to environmental protection, conservation and increased biodiversity in treaty areas. The Department is engaging with Indigenous participants on protocol development to enable Indigenous perspectives to be reflected in offset protocols developed by the Minister.

Four Indigenous organizations provided feedback in response to the discussion paper published in 2018 requesting future Indigenous engagement, primarily on protocol development, and expressing the desire for the eligibility of projects with start dates earlier than 2017. Three Indigenous organizations provided feedback in response to the discussion paper published in 2020 requesting future Indigenous engagement, enquiring about potential project impacts on Indigenous rights, and providing support for the prioritization of certain project types with respect to the development of protocols. The Department offered individual briefings on the discussion papers to three senior bilateral tables and held teleconferences with representatives from the Assembly of First Nations in 2019 and 2020. The development of the federal offset system was also discussed with representatives of the Métis National Council via teleconference in 2019 and 2020.footnote 14

Two Indigenous organizations and several stakeholders made submissions concerning the proposed Regulations indicating that Indigenous peoples should be engaged in the development of the federal offset system and that opportunities to benefit from it should be increased, including through support for capacity building for Indigenous communities and organizations. Comments included concerns that the proposed offset system would not recognize the role of Indigenous communities in climate mitigation, including conservation and stewardship of landscapes that represent existing carbon stocks not currently subject to loss or conversion. Several submissions indicated that offset projects should have the free, prior and informed consent of Indigenous communities.

The Department is exploring ways to build the capacity of Indigenous communities and organizations to participate in offset projects, and to involve Indigenous peoples in the development of offset protocols. Offset protocol design will also include consideration of how to reduce barriers and increase opportunities for participation by Indigenous communities and organizations.

Instrument choice

Regulations made by the Governor in Council to establish an offset credit system are necessary to authorize the Minister to issue federal offset credits, which may provide sufficient economic incentive for proponents in Canada to carry out additional activities that remove GHGs from the atmosphere or prevent them from being emitted. Furthermore, the Regulations provide facilities in the federal OBPS with the option of acquiring and using these offset credits as compensation for their excess emissions, thus enabling this compliance option set out in the Act.

The approach establishes a federal offset system by means of the Regulations, authorizing the Minister to issue offset credits and allowing eligible proponents in Canada to receive these credits for certain project-based activities. The federal offset system also allows facilities in the federal OBPS to acquire these credits through private trading and use them as compliance units to compensate for GHG emissions that exceed their respective facility emissions limit. This offset system therefore increases the number of options available to covered facilities to meet their compensation obligations under the Act, thereby increasing compliance flexibility and potentially resulting in reduced costs for these facilities.

The federal offset system could not be implemented without regulations made by the Governor in Council; therefore, other instruments, such as voluntary codes of practice, were not considered.

Regulatory analysis

Benefits and costs

This analysis assesses the impacts (benefits and costs) of establishing a federal offset system under the Act. It compares a baseline scenario in which the Governor in Council has not made the Regulations to a regulatory scenario in which the Governor in Council makes the Regulations that establish an offset credit system and authorize the Minister to issue offset credits.

A facility in the OBPS has options with respect to how it chooses to meet its compensation obligation under the Act if it emits a quantity of GHGs above its facility emissions limit. First, a covered facility may make an excess emissions charge payment to the Minister. Second, it may use compliance units, which include (i) surplus credits that it has earned or acquired through trade from other covered facilities; (ii) eligible provincial or territorial offset credits that are formally recognized by the Minister under the OBPS Regulations as compliance units; and (iii) federal offset credits. A covered facility may also use a combination of excess emissions charge payments and compliance units to provide compensation for excess emissions. Under the baseline scenario, however, federal offset credits are not available because, in the absence of the Regulations, the Minister would not have the authority to issue them.

Under the regulatory scenario, the Minister could issue offset credits as a type of compliance unit specified under the Act. Covered facilities are able to purchase these compliance units for use in the federal OBPS. While federal offset credits are primarily intended for use by covered facilities under the federal OBPS, they can be acquired and used by other interested parties to offset their emissions. Regulated entities in a provincial or territorial carbon pollution pricing system may be able to use federal offset credits to offset GHG emissions, provided that the use of these credits is permitted within the provincial or territorial system, and there is an intergovernmental agreement in place at the operational level stipulating that credits may only be used once. Federal offset credits can be purchased and used by individuals or organizations not covered by the OBPS Regulations for other purposes, such as corporate net-zero commitments, meeting conditions of Impact Assessment approval, greening government, and used by other parties, including provincial or territorial governments, towards emission reduction targets.

Expected impacts

The Regulations could lead to reductions in the compensation costs faced by covered facilities, as the availability of federal offset credits may increase the total quantity of compliance units available in the federal OBPS. Covered facilities will be able to purchase these offset credits and use them as compliance units to provide compensation for emissions in excess of their respective facility emissions limit. Trade in offset credits will be negotiated between proponents and interested buyers including, but not limited to, covered facilities. The terms of offset credit trades will be agreed upon between sellers and buyers outside of the Department’s system that tracks the issuance of compliance units. Third parties, such as carbon trade exchanges or brokerage services, may play a role in facilitating transactions and may reduce the transaction costs associated with trading activity.footnote 15 Lower prices for offset credits may result from the negotiation of contracts for bulk quantities of credits or agreements to buy or sell credits at predetermined prices at a specified time in the future (futures contracts).

This analysis assumes that proponents will only choose to develop their projects under the Regulations if they anticipate, prior to project implementation, to profit from the sale of federal offset credits, which are expected to trade for prices below the excess emissions charge in their last year of eligibility. Otherwise, it is anticipated that a covered facility with a compensation obligation will choose to simply pay the excess emissions charge and not purchase offset credits since there may also be transaction costs associated with trading activity, such as the costs involved in negotiating and formalizing purchase agreements.

It is difficult to accurately forecast, prior to regulatory implementation, the number and types of offset projects that will be undertaken across Canada. There are various factors beyond the incentive of the pricing of GHG emissions that may influence whether a prospective proponent decides to develop an offset project (e.g. the eligibility of projects, willingness to adopt new practices, committing to land management practices over the long term, or the potential to advance projects through alternative funding programs instead of the federal offset system). Therefore, the Department has not conducted quantitative modelling of impacts prior to the coming into force of the Regulations. This analysis instead assesses the expected impacts attributable to the Regulations qualitatively, given the difficulty in forecasting impacts, and the projected reductions in costs for a similar or lower level of emissions, which are described below.

Impacts for proponents

If the eligibility criteria are satisfied and a project is registered, proponents must comply with all requirements in the Regulations and the applicable protocol. Proponents will have to continue to satisfy the eligibility criteria for the duration of the project, as well as implement their projects in accordance with the Regulations and applicable federal protocols, and prepare and submit project reports, among others, that are verified. The Minister will issue offset credits to a proponent for GHG reductions achieved by a registered offset project for a given reporting period if the issuance criteria in the Regulations are met. Proponents will assume costs in generating these credits. Upfront costs could include those associated with feasibility studies, business development, acquiring capital and labour, and legal services. Costs associated with verification will include costs incurred for periodic site visits by representatives from accredited third-party verification bodies. There could also be ongoing costs associated with monitoring the permanence of GHG reductions, depending on the type of project.

Given that proponents will elect to participate in the federal offset system, it is assumed they will only do so to earn profits (net financial gains) from the sale of their offset credits to covered facilities to be used in the OBPS as compliance units or to other interested parties. Specifically, the total revenue that a proponent will obtain from the sale of offset credits is expected to exceed the total costs incurred from the generation of these credits.

Reducing administrative costs for proponents while maintaining the environmental integrity of the federal offset system was a key consideration in the design of the Regulations. Each proponent will only have to open one account in the credit and tracking system, even if they are managing multiple projects, which will simplify administrative tasks. Flexible reporting periods will allow a proponent to choose the frequency of their requests for offset credit issuance, subject to the applicable maximum reporting period, helping to reduce reporting and verification costs.

In addition, the Regulations allow a proponent to register two or more projects located in the same province that use the same federal protocol version and quantification method as an aggregation of projects. Aggregating projects could help streamline registration, monitoring, reporting and verification, and thereby help reduce total costs and increase the economic feasibility of some projects.

The Regulations place accountability for the validity of credits on the seller, requiring that a proponent replace any credit that is found to be no longer valid. The buyers of federal offset credits are not responsible for the validity of the GHG reductions associated with offset credits they hold or have used. Eliminating the risk of credit invalidity for buyers is anticipated to improve the marketability of these credits.

However, in the event of an involuntary reversal of GHG reductions, such as a forest fire caused by a lightning strike at a forestry project, the proponent would not be obligated to replace invalid credits if they undertook the applicable measures in their reversal risk management plan. In such cases, the Department would revoke a quantity of offset credits deposited by the Minister into the environmental integrity account, as part of every credit issuance, equal to the number of invalid credits. This account will thus serve as a type of credit insurance, which could have a positive effect on the Department’s ability to ensure the environmental integrity of the federal offset system.

Finally, registration and participation in the federal offset system will not affect any other legal requirements faced by proponents, including those that may apply due to the nature of the project.

Impacts for facilities in the federal OBPS

The establishment of the federal offset system is projected to lead to impacts in the federal OBPS. Specifically, covered facilities will be able to acquire federal offset credits through private trading and use these credits as compensation for their excess emissions. Each offset credit may be used either

It is assumed that each covered facility acquiring and providing federal offset credits as compensation will expect to realize a net financial gain through its actions. Overall, the Regulations are anticipated to lead to lower total costs associated with carbon pollution pricing if offset credits are used in this way in the federal OBPS.

With respect to the first case above, this analysis assumes that a covered facility will acquire offset credits through private trading for a price per credit that is below the cost of measures that the facility could undertake to reduce excess emissions by one CO2e tonne. It is expected that this option will be chosen by a covered facility only if it lowers the overall costs that the facility assumes, or expects to assume, as a result of carbon pollution pricing.

However, this option could lead to the deferral of some strategic or technological improvements that the facility may have carried out in the baseline scenario to reduce its excess emissions. It is also possible that a covered facility could find it profitable to acquire offset credits through private trading, increase its level of production, and provide these credits as compensation to offset its excess emissions associated with the increased level of production.

The key assumption underlying the second case above is that a facility in the federal OBPS may be able to acquire offset credits through private trading for a price per credit that is below the charge associated with one CO2e tonne of excess emissions (i.e. the excess emissions charge). Net financial gains could be achieved by providing federal offset credits acquired through trade to the Minister as compensation, rather than making the equivalent excess emissions charge payment or providing another type of compliance unit as compensation. It is assumed that a covered facility will opt for this compensation option only if it lowers the overall costs that the facility incurs due to carbon pollution pricing relative to the baseline scenario.

The supply of federal offset credits could potentially decrease the price of surplus credits (compliance units) that are traded. In this case, there would be a decrease in the incentive for a covered facility to reduce its emissions to or below its facility emissions limit relative to the baseline scenario.

There are several constraints limiting the quantity of federal offset credits that a covered facility could acquire and provide to the Minister as compensation for excess emissions under the Act. In terms of market constraints, purchases of federal offset credits by covered facilities will be influenced in large part by the aggregate supply of, and the aggregate demand for, such credits. In terms of regulatory constraints, covered facilities in the federal OBPS could only use offset credits as compensation if the credits were issued by the Minister for GHG reductions that occurred no more than eight calendar years before the remittance of the credits. The Regulations do not set a period after which federal offset credits expire. Also, the OBPS Regulations indicate that, starting with the 2022 compliance period, a minimum of 25% of the compensation for excess emissions required under the Act must be provided by means of an excess emissions charge payment.

GHG emissions and other environmental outcomes

The federal offset system will further extend the federal carbon pollution price signal to incentivize activities leading to GHG reductions that are not required by law, the result of a legal requirement, or subject to provincial or federal pricing mechanisms for GHG emissions. The activities of proponents are expected to lead to real and additional GHG reductions in relation to the project baseline set out by or calculated in accordance with the applicable federal protocol.

Prior to regulatory implementation, it is challenging to forecast the extent to which the Regulations will lead to net GHG reductions — that is, additional GHG reductions relative to baseline emission levels in the absence of the federal offset system. The demand for federal offset credits is expected to come from multiple sources for different uses. Some uses of offset credits could result in no net GHG reductions, if the GHG reductions linked to credit generation are used to offset emissions that are additional to baseline emission levels. For example, covered facilities in the federal OBPS will have the option to use federal offset credits to provide compensation for excess emissions, instead of carrying out more costly measures to reduce these emissions.

Federal offset credits could also be considered as a measure to mitigate GHG emissions from a project undergoing an impact assessment by the Impact Assessment Agency of Canada. The use of federal offset credits could be included as a condition in the Minister’s decision statement related to the assessment. Other uses of federal offset credits could result in net GHG reductions, if the GHG reductions associated with credit generation are used to offset emissions that are included in baseline emission levels. For instance, governments, businesses and individuals could use these credits to meet voluntary targets, such as net-zero GHG emission targets, or they could choose to voluntarily cancel offset credits for the benefit of the environment.

Projects implemented under the Regulations may result in environmental outcomes other than GHG reductions. Biodiversity and land conservation co-benefits from nature-based project activities could possibly occur. For example, potential projects could improve biodiversity and habitat quality through improved forest management or by planting trees on degraded forested land. Other potential projects could improve agriculture systems by adopting sustainable land management activities that enhance soil carbon sequestration on agricultural lands and improve soil health.

Government costs

The federal government costs associated with the implementation of the Regulations are estimated to be $9.6 million from 2022 to 2031 (present value using 2021 Canadian dollars and a 3% discount rate). This estimate includes the costs for the administration of the federal GHG offset system, compliance promotion, expanding the system that tracks the issuance of compliance units, publishing and translating documents, enforcement activities, and the development of five federal offset protocols. The Department will also incur costs for new administrative activities, such as managing a help desk and general enquiries service for proponents and other users of the federal offset system, evaluating offset project applications and report submissions from proponents, and tracking offset credits issued by the Minister.

Small business lens

The federal offset system will provide proponents with the option to apply to register their projects that meet the requirements of the Regulations and the applicable protocol, in order to generate offset credits that may be sold, banked for future sale, or voluntarily cancelled to help meet corporate sustainability or emission reduction objectives. It is possible that some proponents may be considered small businesses. However, it is assumed that any proponent participating in the offset system is doing so in order to earn revenue from the sale of offset credits that they expect, prior to project implementation, to exceed the costs associated with their participation in the system. Therefore, it is anticipated that any small business choosing to comply with the regulatory requirements will realize a net gain from doing so.

Reducing administrative burden for proponents, including small businesses, while maintaining the environmental integrity of the federal offset system, was a key consideration in the design of the Regulations. As previously mentioned, each proponent will only have to open one account in the credit and tracking system, even if they are managing multiple projects, which will simplify administrative tasks. In addition, flexible reporting periods will allow a proponent to choose the frequency of their requests for offset credit issuance, subject to the applicable maximum reporting period, helping to reduce reporting and verification costs.

Given that the Department has made efforts to reduce administrative burden for all proponents where possible, while taking the necessary steps to ensure that federal offset credits generated by projects are real, additional, quantified, verified, unique and permanent, no further regulatory flexibility for small businesses was considered.

One-for-one rule

The one-for-one rule applies, since the Regulations will result in an incremental increase in administrative burden on business, and because a new regulatory title is introduced (“title in”).

Although the participation in the offset system is not compulsory, proponents who participate will incur administrative costs in order to generate federal offset credits, as well as to comply with regulatory requirements and with the protocol that applies to their project. There will be one-time administrative costs, including costs to complete the registration application and to set up systems to collect and manage data from the project. There will also be recurring costs during the project crediting period. These include costs to prepare project reports and to contract third parties to verify the reports.

The administrative burden associated with the Regulations over a 10-year period will be affected by several factors, such as the number of proponents that choose to register in the federal offset system, and variation in administrative costs across projects. Such variation could be related to the relative remoteness (location) of a project, the number of projects included in an aggregation (for aggregated projects), and decisions made by proponents regarding how often to submit project reports within the flexible reporting periods established by the Regulations. The number of proponents in the system will in turn be influenced by which federal offset protocols are developed and published (and the timing of protocol publication), as well as by the supply of and demand for federal offset credits and the impacts of these factors on credit prices and investment in federal offset projects. The number of proponents in the system may also be influenced by the level of social, economic or other barriers to participation, such as unwillingness to adopt new farming practices or commit to land management practices over the long term. Based on a set of assumptions for a projected case in which five federal offset protocols would be released prior to 2030, the Regulations are estimated to introduce an administrative burden of approximately $70,000 in annualized average costs to all regulated parties over the first 10 years of administrative cost impacts.footnote 16,footnote 17

Given the range of factors that may affect participation in the federal offset system, this cost estimate is shown for illustrative purposes only. It is based on one set of possible assumptions and does not represent any view of the Department with respect to the expected size of the federal offset credit market or the anticipated number of participants in the system. Lastly, this cost estimate should not be used to infer a potential level of revenue that a given project proponent might expect to earn by participating in the federal offset system.

Regulatory cooperation and alignment

Canada is working in partnership with the international community to implement the Paris Agreement, in support of the goal of limiting the rise in global average temperature to less than 2 °C and pursing efforts to limit the temperature increase to 1.5 °C. As part of its commitments made under the Paris Agreement, Canada pledged to reduce national GHG emissions by 40% to 45% below 2005 levels by 2030. The Government of Canada has also committed to achieving net-zero GHG emissions by 2050.footnote 18 To meet these commitments, the federal government is implementing a series of measures, including continuing to put a price on carbon pollution.

The Regulations will support implementation of the federal OBPS, which is a component of Canada’s carbon pollution pricing approach. The design of the Regulations is consistent with the Pan-Canadian Greenhouse Gas Offsets Framework, which was developed collaboratively by the federal, provincial and territorial governments between 2016 and 2018, and published by the Canadian Council of Ministers of the Environment in 2019.footnote 19 In general, and where appropriate, alignment with existing offset systems in Canadian jurisdictions (British Columbia, Alberta and Quebec) was pursued. However, the Regulations include some unique requirements to reflect the national context and specific objectives of the federal system, such as allowing for the development of offset projects nationwide, while seeking to minimize overlap between federal, provincial and territorial systems.

Several provincial governments have established, or are in the process of establishing (e.g. Saskatchewan), offset systems to support their carbon pollution pricing programs and policies. The federal offset system is intended to complement these systems. Federal offset protocols will not apply to any new project in a province or territory with an offset system that has a protocol for the same project activity. In the event that a provincial or territorial offset system does not have a current protocol for a project activity that is covered by a federal offset protocol, the proponent could apply to register in the federal offset system using that federal protocol. Where a province or territory subsequently develops a protocol for the same project activity,

Finally, the Department may choose to adapt protocols from existing offset systems in British Columbia, Alberta and Quebec, as well as from other offset systems, for application across Canada.

Strategic environmental assessment

The Department conducted strategic environmental assessments (SEAs) in 2017, 2018, 2019, and 2021 for elements of its carbon pollution pricing policies. The Regulations will contribute to the implementation of the pan-Canadian approach to pricing carbon pollution through the establishment of the federal offset system, which would extend the pricing signal to activities not directly subject to carbon pollution pricing. The offset system would create further incentives for GHG reductions across Canada, and additional economic opportunities.

A SEA conducted on the federal carbon pricing pollution system noted that the system, which includes a robust offset program, may result in important, positive environmental effects, reduce GHG emissions and energy use and support the implementation of the Government of Canada’s strengthened climate plan, A Healthy Environment and a Healthy Economy, by promoting the adoption of clean technology and the transition to a low-carbon economy. Furthermore, the SEA concluded that the system aligns with the Government of Canada’s 2022-2026 Federal Sustainable Development Strategy, particularly with multiple Sustainable Development Goals (SDGs): Good health and well-being (SDG 3); Affordable and clean energy (SDG 7); Industry, innovation and infrastructure (SDG 9); Sustainable cities and communities (SDG 11); Responsible consumption and production (SDG 12); Climate action (SDG 13); and Partnerships for the goals (SDG 17). As such, the Regulations will contribute to efforts to meet Canada’s new, more ambitious emissions target of 2030 and achieve net-zero GHG emissions by 2050.

Gender-based analysis plus

The federal offset system will create opportunities for proponents to undertake projects in economic sectors that are not currently covered by carbon pollution pricing such as agriculture, forestry and waste management. It is anticipated that proponents will be incentivized to generate offset credits and carry out projects under the Regulations. There may be opportunities for economic development, employment, and ecological benefits through the development of offset projects by Indigenous peoples in Canada. The Department intends to undertake work to support capacity-building within Indigenous organizations and communities to facilitate their participation in the federal offset system.

The Regulations are not expected to have a direct impact on any one socio-economic group. However, there may be downstream gender-based analysis plus (GBA+) impacts associated with implementation of the Regulations, depending on the extent to which proponents elect to participate in the federal offset system. For example, offset project development may nonetheless indirectly provide greater employment opportunities for men and older workers, and in certain geographic regions, because of the demographics and location of agriculture, forestry, and waste management activities. These activities represent the focus of protocol development. For example, Statistics Canada estimates that, from 2019 to 2021, males accounted for 68% of agriculture workers and 82% of forestry workers in Canada, while individuals who are 55 years old and over represented 37% of employment in the agriculture and forestry sectors combined, compared to 22% of employment in all sectors nationwide.footnote 20

Implementation, compliance and enforcement, and service standards

Implementation

The Regulations come into force on the day on which they are registered. For any registration application made before or on December 31, 2027, a proponent will be eligible to register a project in the federal offset system provided that it started on January 1, 2017, or later and meets the conditions for registration. The proponent will need to provide required information in the registration application and implement the project in accordance with the Regulations and the applicable protocol. Starting in 2028, a proponent will be eligible to register an offset project that started no more than 10 years before the date of its registration. If a project starts before an approved protocol is available, it must be registered within 18 months after the date the protocol is included in the Compendium and no more than 10 years after the project start date. Conversely, if a project starts after a federal protocol is included in the Compendium, it must be registered within 18 months after the project start date. Offset credits will only be issued by the Minister to a proponent for GHG reductions achieved by a registered offset project if the issuance criteria in the Regulations are met.

The Department plans to develop and update protocols on an ongoing basis. The first project types identified as priorities are informed by input received from interested parties during the consultation period that followed the publication of the discussion paper in July 2020 relating to considerations for protocol development.footnote 12 As mentioned above in the “Description” section, the Department publishes the Compendium on its website, which contains the protocols that the Department develops. At this time, the Compendium includes the Landfill Methane Recovery and Destruction Protocol. Additional protocols will be added to the Compendium over time as they are developed and published.

A proponent will be required to submit a project report that has been verified by an accredited verification body, as set out in the Regulations, when requesting that the Minister issue offset credits for GHG reductions achieved by a project for a specific reporting period. Each project report will need to contain information demonstrating compliance with the relevant protocol and be accompanied by a report from an accredited verification body specifying that the quantity of GHG reductions stated in the report was calculated in accordance with the Regulations. Verified reports will be reviewed by departmental officials prior to the issuance of offset credits by the Minister. Proponents will be required to correct any errors or omissions in project reports within eight years of their submission to the Minister, and replace any credits issued due to reporting errors or omissions or following a voluntary reversal.

The Department has expanded the credit and tracking system used for the OBPS to accommodate registration and reporting for offset projects, as well as issuance and tracking of offset credits. The tracking system includes a trading platform for account holders to help connect buyers and sellers. However, purchases of offset credits will be made through bilateral transactions outside of the credit and tracking system; for example, directly with a project proponent, or through a broker or other market participant with an account in the system. A public view of the tracking system will be made available to share key information on registered projects and the status of offset credits issued.

Compliance promotion and other activities related to implementation will focus on registration and reporting obligations and occur through web-based and printed material, webinars and information sessions. To facilitate proponents’ understanding of regulatory requirements and provide timely responses to enquires, the Department has set up a dedicated email address and phone number for enquiries related to use of the credit and tracking system.footnote 21

Compliance and enforcement, and service standards

When assessing compliance with the Regulations, enforcement officers will apply the principles found in the compliance and enforcement policies developed by the Department. These policies set out the range of possible enforcement responses to alleged violations. If an enforcement officer discovers an alleged violation following an inspection or investigation, the officer would choose the appropriate enforcement action based on the policies.

To support enforcement, consequential amendments are included in the Regulations. Consequential amendments to the Environmental Violations Administrative Monetary Penalties Regulations add a new Division to Part 7 of these regulations entitled “Canadian Greenhouse Gas Offset Credit System Regulations” and designate certain provisions of the Regulations in order to authorize enforcement officers to issue administrative monetary penalties for violations of these provisions. The baseline penalty amount applicable to a violation varies depending on the type of violation and category of the violator. Each designated violation is classified according to the regulatory significance of the violation.

In the administration of the offset system, the Department will respond to enquiries from the regulated community related to project registration, regulatory reporting and offset credit issuance in a timely manner, taking the complexity and completeness of the request into account. The Department will publish guidance material to support submissions of registration applications and regulatory reports, and to assist proponents in using the credit and tracking system for offset projects and credits. This guidance material includes a description of the information to provide, along with the templates and steps to be followed by proponents. The Department will also provide an accompanying guidance document for each protocol, to provide additional details on the types of information required to demonstrate the various project eligibility criteria in the protocol are met.

Contacts

Judy Meltzer
Director General
Carbon Markets Bureau
Environmental Protection Branch
Department of the Environment
351 Saint-Joseph Boulevard
Gatineau, Quebec
K1A 0H3
Email: tarificationducarbone-carbonpricing@ec.gc.ca

Matthew Watkinson
Director
Regulatory Analysis and Valuation Division
Economic Analysis Directorate
Strategic Policy Branch
Department of the Environment
200 Sacré-Cœur Boulevard
Gatineau, Quebec
K1A 0H3
Email: RAVD.DARV@ec.gc.ca