MOECC Releases Regulatory Proposal for Offset Program

On November 15, the Ontario Ministry of the Environment and Climate Change (MOECC) released a discussion paper on the emissions offset program being proposed in connection with the province’s greenhouse gas (GHG) cap-and-trade system. The discussion paper, Compliance Offset Credits Regulatory Proposal, sets out the key criteria, process and rules for participation in the offset program. Under the program, offset credits may be awarded to certain eligible initiatives outside of the capped sectors that voluntarily reduce, avoid or remove GHG emissions. Capped participants can use offset credits to meet up to 8% of their cap-and-trade compliance obligations.

What You Need To Know

• The MOECC is accepting comments on the proposal until December 30. Feedback will be incorporated into amendments to the cap-and-trade regulation (O. Reg. 144/16), which are expected to be released by the end of 2016.
• The proposal does not yet include offset protocols,  which are the government-approved methodologies for eligible offset initiatives. That said, Ontario is prioritizing the development of three protocols already in use in Québec involving the capture and destruction of certain methane and ozone-depleting substances. Ontario is also working with Québec to develop 10 additional protocols, most of which will relate to projects in the agricultural and forestry sectors. Under most of these protocols, eligible offset initiatives may take place anywhere in Canada.
• The offset program would include a buffer account, through which the MOECC will hold back a certain percentage of offset credits to insure against the risk that issued offset credits are later invalidated. This approach has been adopted in Québec, but differs from California’s “buyer liability” regime.

Highlights of the Proposed Offset Program

Offset Program Participants

Registered participants in Ontario’s cap-and-trade program will be able to buy and sell offset credits. Capped participants with a compliance obligation will also be able to use offset credits to cover up to 8% of their compliance obligation. The following two types of participants will also play a key role in the offset program.

• Offset Initiative Operators: entities responsible for carrying out the eligible offset initiative and applying for offset credits.
• Offset Initiative Sponsors: entities that will make certain applications and submissions to the Ontario offsets registry with respect to an offset initiative, and that will assume responsibility for the reporting and verification necessary for offset credits. An Offset Initiative Sponsor can be either the Offset Initiative Operator or its authorized agent, such as an aggregator acting on behalf of a group of Offset Initiative Operators.

Ontario Offset Protocols

An offset protocol is a set of procedures and requirements for carrying out and quantifying the emission reductions, avoidances or removals achieved by a certain offset project type. To qualify for offset credits, an initiative must comply with an approved protocol.

The MOECC is currently developing 13 offset protocols. Three of these are being prioritized; they are based on existing Québec protocols involving the destruction of ozone-depleting substances from insulating foam or refrigerants, and methane destruction in connection with covered manure storage, landfills, active coal mines and ventilation air. According to the MOECC, the remaining 10 protocols will mostly relate to offset projects in the agriculture and forestry sectors. These protocols will be released for public review and comment prior to implementation in Ontario.

Offset Initiative Start Date and Crediting Periods

Under the current proposal, offset initiatives that began on or after January 1, 2007 may be eligible to create offset credits for use in Ontario’s cap-and-trade program.

Crediting periods, which are the number of years for which offset credits will be issued for an eligible initiative, will be identified in the offset protocols. That said, the discussion paper proposes the following maximum limits on duration: (i) no more than 10 consecutive years for an initiative that does not involve GHG sequestration; and (ii) no more than 30 consecutive years for a sequestration initiative. An Offset Initiative Sponsor may apply to renew a crediting period provided that the offset initiative continues to meet the applicable regulatory requirements, including those set out in the applicable offset protocol.

Offset Credit Criteria

The MOECC’s proposed offset credit criteria are consistent with the Western Climate Initiative model, which has been adopted in California and Québec. To qualify for offset credits, an Offset Initiative Sponsor must identify the legal ownership of the offset initiative, and demonstrate that the emission reductions, avoidances or removals are real, permanent, additional, quantified, verified, enforceable and unique. In terms of verification, independent third parties must provide reasonable assurance that the reported reductions, avoidances or removals comply with the applicable regulatory requirements, including the offset protocol, and are free of material misstatement.

Buffer Account

For a non-sequestration initiative that has qualified under the program, offset credits corresponding to 3% of the emission reductions, avoidances or removals in the relevant reporting period will be held by the MOECC in a buffer account. The MOECC will draw from this account to replace any issued offset credits that are later reversed or invalidated, essentially insuring the market against this risk. For sequestration initiatives, the percentage of offset credits to be held in the buffer account will be identified in the applicable offset protocol. A government-run buffer account has also been adopted in Québec. In contrast, California has a “buyer liability” rule, which requires the buyers of emissions offsets to replace any issued credits that are later reversed or invalidated.

Conclusion

In addition to these issues, the MOECC’s discussion paper outlines various other elements of the offset program, including the compliance instrument tracking system service, offset registry, offset creation procedure and other administrative and compliance requirements.  

Comments on the discussion paper can be submitted to the MOECC online through the Environmental Registry by December 30, 2016.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

All rights reserved.