Regulatory Framework for Air Emissions--GHG Compliance Mechanisms

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					Regulatory Framework for Air Emissions: GHG Compliance Mechanisms
Consultation with Non-governmental Organizations Ottawa December 11, 2007.

• Provide an overview of comments received from May-June consultation Update on progress in developing GHG compliance mechanisms
– – – – Emission Trading Offset system Certified Emission Reductions Credit for Early Action


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Emissions Trading

GHG Emission Trading - Overview
• The objective of an emission trading system is two-fold:
– – Reduce overall compliance costs; i.e. allows firms with high costs of emissions abatement to fund lower-cost emission-reduction projects at other firms Encourage emission reductions outside of regulated activities


Type of credits that can be traded:
– – – – Surplus credits for regulated entities that do better than their target Domestic offset credits for voluntary reductions/removals Certain types of Certified Emission Reductions Early action credits (likely to be tradable)

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What we heard (May-June consultations)
• Key comments on the mechanics of the emissions trading system
– Broad industry support for emissions trading but concern about market liquidity – Support for linking with emission trading systems in other countries but some noted difficulties for Canada to link intensity-based system to other systems based on cap-and-trade – Financial industry advocates minimal government involvement in the market – Some industry stakeholders advocate government oversight of the market, including education and training – Some stakeholders suggest government should ensure that there is a clear price signal and concern that compliance options do not create price distortion – Industry and IETA urge establishing National Registry on an urgent basis – ENGOs, First Nations, Montreal Climate Exchange preference for cap-andtrade system for GHGs

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Where we are we now
• Request for Information on National Registries and Domestic Tracking Systems posted in July. Information received helped support the development of the National Registry Request for Proposal (RFP) RFP for Canada's National Registry posted on MERX 2007-11-08 closing date 200712-19
– – Existing registry software and support for initialization with the UNFCCC International Transaction Log Modifications of the registry software will be required to meet Canadian requirements such as Common Look and Feel for the Internet and operation in both official languages


• •

Initial work to define the functional requirements of the Domestic Compliance Unit Tracking System has started. Continuing to explore linkages with regulatory-based trading systems where compliance units represent real, verified emission reductions (e.g. US systems including Western Regional Climate Action Initiative and Regional Greenhouse Gas Initiative)

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System Overview

(GHGs & Air Pollutants)

National Registry

(GHG & Air Pollutants)

Kyoto Compliance

Domestic Compliance

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Offset System

GHG Offset System - Overview
• The Offset System is designed to help Canada meet its goal of a 20% reduction in GHG emissions from 2006 levels by 2020 • The Offset System will
– Provide a compliance mechanism for industry by allowing regulatees to use offset credits to meet their compliance obligation – Provide an incentive for voluntary emission reductions outside of regulated activities by issuing credits for GHG emission reductions/removals that meet system requirements

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Principles for the GHG Offset System
• Design principles
– Environmental Benefits – offset projects should achieve GHG reductions / removals and a net environmental benefit
– Maximum Scope – to the extent practical, the system should promote projects in all sectors and of all project types – Administratively Simple – to the extent possible, the system should be simple and cost-effective to administer and the burden for participants should be minimized

– Build on Experience from Canadian pilots and other jurisdictions

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What we heard (May-June consultation)
• Support for Offset System but some concern about potential shortage of offset credits • Support for “broad as possible” Offset System • Support for provision of offset rules and launch of the system as soon as possible • Support for transparency & public review • Some support for validation by private sector with government oversight • Support for requiring projects to be incremental and to demonstrate environmental benefits • Concern about fairness across provinces/territories – use of provincial legislation to define “business as usual” could result in patchwork of opportunities

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Where we are now
• Design features
– – – – – – Basic design features Scope Incremental criterion Adverse impacts on air pollutants Project types Sink projects

• Governance
– – – – Approach to reviewing offset projects Program delivery Possible role of private sector Timing of implementation

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Basic design features
• The GHG Offset System should:
– start prior to implementation of the GHG industrial regulations
• to provide a head start for projects to generate tradable GHG reductions units

– be transparent
• to facilitate the assessment of environmental integrity and entitlement

– be developed / implemented under CEPA
• voluntary program under s.322

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• The Government could establish mandatory criteria or create a comprehensive list of the types of projects that can create offset credits • Possible criteria for defining the scope include; for example
– Emission reductions by activities that are covered by federal and/or provincialterritorial GHG regulations cannot earn offset credits – Offset credits can only be issued for sources and sinks included in Canada‟s accounting under the Kyoto Protocol (possible exception of Forest Management)

• The Government could phase-in the system so to give first priority to those project types for which guidance is best developed and which are most likely to generate high reductions soon

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Incremental Criterion
• Possible definition of „incremental‟:
– Projects having achieved their initial GHG reductions on or after a specified date – Credits will be issued for reductions occurring after a specified date – Reductions must be beyond „business-as usual‟ – Reductions must be „surplus‟ to legal requirements (e.g.; federal, provincial/territorial, regional and/or local) – Reductions must be beyond what is expected from receipt of other incentives (e.g.; federal and or provincial, climate change and/or other incentives)

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Adverse Impacts on Air Pollutants
• Some types of GHG reduction projects will increase emissions of the air pollutants that will be regulated under the Framework Until the air pollutant regulations are in force, the Offset System could
– Require assessment of air pollutant impacts during the development of “guidance” for each project type – Establish a mitigation strategy where emissions are significant and mitigation is practical


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Project-types: likely to be among first recognized • • • • • Landfill Gas Afforestation / Reforestation Soil Management Renewable Electricity Generation (Non-Emitting Biodigesters (methane generated from livestock waste)

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Project-types: requiring further work
• • • • • • • Energy Efficiency and Demand Side Management Forest Management Carbon Capture and Storage Transportation Biofuels Agriculture Forestry

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Project-types: likely excluded
• Project-types that reduce „fixed process emissions‟ covered by the regulations • Information and capacity building programs • Other project-types not included in Canada's accounting under the Kyoto Protocol, for example
– Wetlands – Harvested wood products – Projects that achieve emission reductions outside of Canada

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Sink Projects
• In sink projects, the stored CO2 could be released back to the atmosphere (known as a “reversal”) To manage this risk, proponents could have two options:
1) Permanent credits with required credit replacement in the event of a reversal 2) Temporary credits that represent storage for one year and used only to defer a regulatory obligation for one year


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Approach to reviewing individual offset projects
Option 1: Consider any project against the eligibility criteria
• • • Allows innovative project types to be incorporated into the program Requires significant time and resources to review each new project Reactive so not able to focus resources on projects that will achieve greater reductions

Option 2: Consider a project only after guidance documents for that project-type have been pre-approved by Government
• • • Reduces admin burden on Government and participation cost of project developers when guidance for the project-type is pre-approved Allows initial focus on those project-types expected to have greatest reductions Could delay access of new technologies into the system

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Program delivery
Program delivery includes two main components: • Preparation of guidance material for project-types • Project Review
– Registration of individual projects
• Requires validation that the project meets the requirements in the guidance document for the relevant project-type

– Verification of the quantity of GHG emissions reduced by the project
• By recognised third-party verification bodies paid for by project proponents – System for certification of verifiers and accreditation of verification bodies being developed by Standards Council of Canada and Eco Canada

– Certification of emission reductions and issuance of credits

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Model 1 – Implementation within Government
• • No fees for first 18 months until have enough experience to provide relatively accurate estimates of government costs to charge under the User Fee Act Possible fees
2. 3.

Initial review fee relatively small – provides a disincentive for submitting incomplete documents Validation fee – covers cost of review to ensure project meets the eligibility criteria Certification fee – covers cost to review documentation to ensure requirements for credit issuance have been met


Concurrently, assess the most appropriate delivery model (e.g. keep within government with cost recovery or move outside government)


– – – – Facilitates rapid implementation of the program Allows for refinement of rules, procedures and fees based on experience Allows time to assess the pros and cons of alternative delivery models Clear accountability for results Government would bear all costs for first 18 months as no user fees would be applied during that period



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Model 2 – “Alternative Service Delivery”
• Alternative Service Delivery could include
– Special operating agency – Departmental corporation – Crown corporation

• More analysis needed to determine most appropriate Alternative Service Delivery model • Pro
– Could provide appropriate balance between accountability and direct government control

• Con
– Would require a lot more time to be implemented than Model 1.

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Possible private sector role • Depending on the delivery model selected, private sector could have a substantial role, including
– – – – – Developing guidance documents for project-types Validating that proposed projects are eligible Implementing projects Verifying real emission reductions Providing infrastructure and services for the trading of credits; e.g. brokers, exchanges, lawyers, etc.

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Timing of implementation
• Offset System could be in place by mid-2008 (first sector regulations to be gazetted by Fall 2008)
• • • Approval of the guidance documents for „first wave‟ offset project-types could be as soon as Fall 2008 Individual projects could begin to register in Winter 2009 First credits could be issued by Spring 2009 (potentially earlier for certain larger-scale projects)

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Certified Emission Reductions (CERs)

Certified Emission Reductions - Overview
• Clean Development Mechanism (CDM) is a flexibility mechanism under the Kyoto Protocol whereby Annex 1 Parties can earn Certified Emission Reductions (CERs) by participating in emission reduction projects in developing countries • For domestic compliance
– Eligible CERs will be determined by Government – Use limited to 10% of a regulated entity‟s target

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What we heard (May-June consultations)
• Clean Development Mechanism (CERs)
– – – – Broad industry support for including CDM credits Remove limit on CERs Do not restrict by project type or by country of origin Concerns about ability to use CERs after 2012 (if Canada is not in compliance with Kyoto Protocol) – Some industry requests for inclusion of Joint Implementation credits

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Where are we now
• Currently reviewing
– Integrity of the CERs
• to provide recommendations to Ministers

– Administrative complexity of identifying eligible CERs - for both
• the implementation of the program • market functioning

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Credit for Early Action

Credit for Early Action - Overview
“There would be a one-time allocation of credits to those firms covered by the proposed regulations that took verified action to reduce their greenhouse gas emissions between 1992 and 2006.” • There will be a one time application and one time allocation of credits • Maximum of 15 Mt CO2e of early action credits could be allocated, with no more than 5 Mt to be used in any one year (2010-2012)

• Maximum of one early action „credit‟ for each tonne of eligible emission reductions
– If oversubscribed – pro rata allocation to all eligible applicants – If undersubscribed – remainder not issued

• One early action credit could be used to offset a compliance obligation of one tonne CO2e

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What we heard (May-June consultations)
• Broad support for the concept of rewarding early actors
– Industry and provinces would like to see the 15 Mt limit increased – ENGOs strongly oppose increasing 15 Mt limit without tightening GHG targets

• Eligibility Criteria
– Need to consider difficulty in providing evidence from 1992 – Apply only to activities covered by GHG reductions – Electricity sector supports including offsets and clean power projects

• Allocation process must be transparent, equitable • Characteristics
– Industry, some provinces say early action credits should be bankable, tradable – Some ENGOs do not support banking/trading of early action credits
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Alternate proposals for early actors
• Forest Products Association of Canada
– Base assessment on verified production and emissions data (not project level); – Reward only those facilities that achieve “significant” reductions.

• Canadian Chemical Producers’ Association
– Early reductions achieved should be subtracted from the 18% reduction target and treated as new facilities thereafter (i.e., required to achieve 2% reductions each year from 2007); – “Incremental” should not be defined as over and above what made business sense.

• Pembina Institute and Toxics Watch Society of Alberta
– Use 1990 baseline for target-setting; or – Divide 15 Mt equally, in proportion to actual emission reductions, within energyconsuming industries, either by corporation or by sub-sector. – Upstream oil and gas and electricity generation sectors should be excluded given large emissions increases.
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Where we are we now
• Finalizing key design elements:
– Eligibility criteria; e.g. how do you assess „incrementality‟? – Determining eligible reductions; i.e. how to calculate total qualifying GHG reductions for a project? – Managing the way early action credits can be used; i.e. 5 Mt/yr

• Program rules will be complete in early 2008.

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Contact Information:
Judith Hull Director, Trading Regimes Division Tel: (613) 995-4593

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