There has been a lot of criticism lately about the use of carbon offsets in Canada’s Output-Based Pricing System (OBPS). Much of it is misplaced, ignoring the advances made in using offset credits to reduce emissions effectively and sustainably. With a few minor improvements, Canada’s use of offset credits could be a significant part of the country’s efforts to meet its Paris Agreement commitments.
The OBPS is the federal government’s answer to reducing greenhouse gas emissions in the industrial sector. It places an annual “cap” on a company or facility’s industrial emissions. Those that exceed the cap must pay a penalty for their excess emissions, or buy credits from companies that have reduced emissions below their own cap.
The new Greenhouse Gas Offset Credit System Regulations, tabled in February, add a variable what will enable large emitters to partially reduce their emissions liabilities by investing in carbon offsets. The federal government describes these offsets as a “voluntary activity [that] goes beyond ‘business as usual’ practices.” In other words, it cannot be an action already required by regulation or law.
The new regulations mean that companies can choose to buy offset credits by investing in a project that reduces emissions somewhere else, rather than in their own facility. They would do this if investing in an offset project is cheaper than paying the penalty or buying another company’s credits.
Examples would include replacing fossil fuel-derived energy with energy from renewable sources where the cost of the renewable option is much higher than the fossil fuel option, or destroying methane emissions from wastewater where there is no economic benefit from doing so.
Critics argue that the new procedures will allow companies to avoid making significant emissions reductions of their own, preferring to shop around for cheaper credits produced by unregulated projects elsewhere in order to meet their cap.
There is concern that this will introduce huge uncertainties in Canada’s emissions reporting, increasing the risk that these purchased emission reductions will be a “dangerous distraction from real efforts to reduce emissions.”
This debate over the use of offsets is not new, and there is indeed some striking evidence of how offset credits have been misrepresented and mismanaged in the past.
The Clean Development Mechanism (CDM), the granddaddy of international efforts to create project-based carbon credits, was criticized in its early days for approving projects that were not “additional” — that is, they were projects for which the emissions reductions would have occurred even without the CDM. Developers could finance wind energy projects in, say, China, by selling the resulting carbon credits even though the projects were viable without CDM financing, so they were really just what the Canadian government’s new regulations would call “business as usual practices.”
One response to this concern was to simply de-register the offending projects. However, another has been to develop more rigorous procedures to verify project additionality. New international crediting programs have been introduced that provide more stringent criteria for offset projects, such as the Gold Standard (GS) and the Verified Carbon Standard (VCS).
Another criticism of offsets is that projects promising to produce lots of emission reductions can suddenly encounter technical problems or changes in operating conditions which reduce the number of reductions they can generate. Land-use and forest management projects are often singled out for this kind of criticism, because it is difficult to accurately measure their ability to store carbon over very long crediting periods. Significantly, three of the four project types allowed by Canada’s new regulations are of this kind.
However, these issues are covered by the more robust protocols developed by GS and VCS, which require stringent periodic review and verification of these projects.
Forestry and land-use projects are also now able to consult specialized guides for measuring carbon “sinks,” new methodologies focused on improved land-use and forest management, and accepted procedures for using forest management for offset credits, such as B.C.’s forest carbon offsets policy. Recently, VCS has developed new protocols for measuring improvements in soil carbon, one of the four permitted offset projects allowed by Canada’s OBPS (and one of the most difficult to measure).
Besides these more rigorous measures for project approval, the OBPS now includes an environmental integrity account, into which offset project developers will be asked to place three per cent of credits earned, as insurance against any “risk factors” in the award of credits. This insurance is a positive move to increase public confidence in the use of carbon offsets, but since a three per cent risk tax is almost certainly insufficient to counter the potential impact of major offset abuse, it should be substantially increased.
The proposed Canadian procedures will also include a “credit and tracking system … to share key information through a public registry” of offset projects. This would provide an opportunity to review offset projects before they are approved, and to monitor their progress after approval.
Unfortunately, the information provided in such registries is often obscure and highly technical, particularly if based on international approval protocols like GS and VCS. If interested members of the Canadian public are to access and effectively scrutinize the decisions leading to the registration of offset projects, the information should be presented in a form that is transparent and easily understood without having to take a course in carbon finance or climate change science. A non-technical summary of the project should be included in the registry.
Finally, there is now an international effort to standardize procedures for approving offset projects, known as the “Oxford Principles for Net Zero Aligned Carbon Offsetting.” These stipulate that companies should prioritize their own emissions reductions and use offsets only where necessary, ensure environmental integrity through use of the most rigorous protocols available, and maintain full transparency that includes public access to pertinent information on offset projects.
Canada’s new offset procedures could adopt the Oxford Principles as a framework for reviewing offset applications. This would provide greater international credibility and serve as a quality benchmark for Canada’s offset projects, something the OBPS is currently lacking.
Critics of project offsets are right to be concerned about their use in the OBPS, given how offsets have been employed in the past, but these concerns have already been addressed by the international community. What remains is to ensure Canada’s use of offsets is consistent with international standards, that information about offset projects is accessible to the public, and that they are fully transparent in their implementation.
ABOUT THE AUTHOR
Geoff Stiles is an Ottawa-based international consultant in energy efficiency, renewable energy and carbon finance with more than 30 years’ experience in these fields, including 23 years spent living and working in Southern Africa. He is the lead author of two recent reports on renewable energy and energy efficiency in Southern Africa for REN21, and a co-author of the Comprehensive Guide to Carbon Tax in South Africa, to be published by LexisNexis in July 2021.
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