Carbon pollution pricing: options for a Federal Greenhouse Gas Offset System, chapter 17

To ensure environmental integrity, it is necessary to ensure that each offset credit issued by Environment and Climate Change Canada represents a real greenhouse gas (GHG) reduction. Therefore, when errors are identified in a Project Report after credits were issued or credits were found to no longer be valid, it is important to either revoke the offset credit issued in error or that is no longer valid, or require its replacement by the remittance of another valid compliance unit. Liability for offset credit validity will fall on Project Proponents rather than Output-Based Pricing System (OBPS) facilities or other buyers. This seller liability structure is explained further below.

Any Project Proponent will have to notify Environment and Climate Change Canada as soon as possible after the discovery of an error about the information contained within a Project Report or when there is suspicion that offset credits have been issued in error or are no longer valid.

Suspension and revocation of federal Offset Credits

As proposed in the regulatory proposal for the OBPS, credits held by the project proponent that are suspected of having been issued in error or of being no longer valid will be suspended. To limit liability of buyers, suspension and revocation will only apply to Federal Offset Credits that are held by the Project Proponent, and replacement will apply in the case where the Project Proponent no longer holds the Offset Credits.

The Offset Credits will only be subject to revocation or replacement if an issue is identified within 8 years from the date in which the Offset Credit was issued.

Regulations will specify that suspension of credits may occur if a Minister has reasonable grounds to believe that the offset Project Proponent did not conform to any and all regulations related to the project activities of the offset project. The Project Proponent will have an opportunity to make representations prior to the final decision of the Minister. If the reasons for the suspension are well founded, the Minister will revoke the suspended offset credit. Otherwise, the suspension of the Federal offset credits would be lifted.

Replacement of federal Offset Credits

If offset credits are issued in error or are no longer valid and are no longer held by the Project proponent, the Project Proponent will be required to replace credits under section 181 of the Greenhouse Gas Pollution Pricing Act. The Minister would issue a notice requiring a number of compliance units to be remitted within a timeline. As per subsection 181(3), the Project Proponent will have the choice of remitting compliance units in the quantity requested or paying the applicable excess emissions charge.

Reversals of GHGs sequestered through offset projects

A reversal occurs if the GHGs stored in a reservoir or sink, and for which offset credits have been issued, are later released (back) into the atmosphere. Carbon stored in forests or agricultural soil sinks is vulnerable to reversal by natural disturbances such as pest outbreaks or wildfires or anthropogenic practices such as forest harvesting, or soil cultivation. Reversals can occur at any time during a project. Reversal risks will need to be considered and rules established to ensure effective monitoring systems are in place, risk mitigation approaches are considered and contingency plans are established.

In the event that the GHG reversal is the result of intentional actions or negligence by a Project Proponent or any other relevant party responsible for maintaining the permanence of the sequestered GHGs, this reversal will affect the validity of Offset Credits. In this case, rules related to the suspension and revocation or replacement of Offset Credits issued in error or no longer valid (as described above) would apply.

An unintentional reversal may occur for sequestered GHGs through no fault of the Project Proponent. To deal with the potential of unintentional reversals (particularly for biological sequestration projects), the Federal GHG Offset System Regulations would specify requirements to ensure environmental integrity. This may include specific reporting and verification requirements, and possibly the application of a discount factor or establishment of an Environmental Integrity Account.

Environment and Climate Change Canada is considering the establishment of Environmental Integrity Accounts. An Environmental Integrity Account helps to limit seller liability, thereby creating attractive conditions for offset project development and enabling wider offset usage for more emitters. In the event of an unintentional reversal, the corresponding number of offset credits in an Environmental Integrity Account would be cancelled to account for Offset Credits that have been issued to an offset project in which a reversal took place.

The Federal GHG Offset System Regulations may specify the quantity of generated offset credits retained by the Program Authority in the Environmental Integrity Account. To maintain the environmental integrity of the Federal GHG Offset System and to account for the fact that reversals can be unintentional, the Environmental Integrity Account could be used in lieu of the suspension and revocation or replacement requirement described above.

As an example, Environment and Climate Change Canada will retain a percentage of all improved forest management offset credits. If a forest fire causes the release of GHG emissions from an improved forest management offset project, Environment and Climate Change Canada will cancel offset credits held in the Environmental Integrity Account that represents the quantity of GHG reversals. Environment and Climate Change Canada will not require a Project Proponent to replace offset credits that were reversed unintentionally.