The Emerging Canadian Carbon Market: New Fundamentals and Opportunities 


Summer 2009 - (Lang Michener LLP Environment, Energy and Emissions Trading Brief Summer 2009 . )

Lang Michener LLP Environment, Energy and Emissions Trading Brief Summer 2009

Steps have recently been taken by the Ontario government to implement a cap and trade system in Ontario, and by the Canadian federal government to facilitate trading of offset credits for greenhouse gas ("GHG") emissions.

Ontario introduced enabling legislation on May 27, 2009 (Bill 185) to amend the Environmental Protection Act (Ontario) to allow the provincial government to establish a cap and trade system to reduce GHG emissions and encourage technological innovation. The government has made a climate change commitment to reduce GHG emissions by 6% (below 1990 levels) by 2014 and 15% by 2020. The enabling legislation leaves all of the details of the future cap and trade system to be determined by regulation. The legislation anticipates that the Ontario system will be integrated with cap and trade systems under development in other jurisdictions, including British Columbia and Quebec. (Those provinces, like Ontario, are members of the Western Climate Initiative.) There may eventually be a North American–wide cap and trade system for trading emission allowances and offset credits. Draft legislation, known as the Waxman-Markey Bill, was introduced in the U.S. Congress on March 31, 2009 and contemplates a U.S. national cap and trade system.

It is expected that, if passed, the Ontario legislation will allow the government to set annual maximum limits (i.e. caps) on the absolute level of GHG emissions permitted by emitters in prescribed industries, perhaps as early as January 1, 2010. Those industries will likely include base metals, cement, chemical, electricity generation, lime, natural gas, petroleum refining, pulp and paper and steel. Allowances which permit emitters the right to emit GHGs may be granted free of charge, or auctioned, or both. Emitters may be able to earn or purchase domestic and international offset credits from projects that demonstrate reduction or elimination of GHG emissions. It is expected that allowances and offsets will be both tradable and bankable.

On June 10, 2009 the federal government released two discussion papers that set out proposed rules and requirements for generating GHG offset credits. As mentioned above, trading of GHG offsets is just one component of a comprehensive cap and trade system. The federal government has not yet endorsed a national cap and trade system; rather it is monitoring developments in the U.S. and will likely unveil other parts of the Canadian federal program only as developments occur in the U.S., so that Canadian industries will not be disadvantaged.

The two discussion papers are quite detailed. They describe an offset system to be administered by the Canadian government under the Canadian Environmental Protection Act, 1999. GHG reductions achieved after January 1, 2011 will be eligible for offset credits if all eligibility criteria are satisfied. To be eligible, domestic projects must meet specified criteria and be registered. Protocols for quantifying a project's reductions in GHG emissions must be approved and must be based on ISO principles. Project proponents will be required to systematically report GHG reductions and ensure that an accredited third-party verification body has provided assurance on the claimed reductions. The offset credits will be tradable and bankable. A tracking system will be established to track the offset credits from issuance to retirement. The offset system will also adopt specific rules for offset credits attributable to biological sink projects (such as reforestation, reduced deforestation and agriculture).

It is early days in the development of a carbon market in Canada. There is already an over-the-counter market for voluntary emission reductions ("VERs") or carbon offsets traded as futures on the Montreal Climate Exchange. Canadian policymakers also have the benefit of learning from the experience in Europe, where the European Union Emissions Trading System ("EU-ETS") has been functioning since 2003. The EU-ETS has been described as a "learning by doing" system, and changes were adopted in December, 2008 to shift the European model from a grant-based system for allocating emission allowances to more of an auction-based system. Like the cap and trade systems under discussion in North America, the objective of the EU-ETS is to establish a price for carbon that influences investment decisions by all emitters, and incentivises abatement and reduction of carbon emissions. In Canada, there is now a lot of activity, but both the fundamentals and the opportunities of the emerging carbon market remain to be determined.