Carbon Countdown: Canada Announces Draft Federal Offset Protocol on Direct Air Carbon Dioxide Capture and Geological Storage

Carbon Countdown: Canada Announces Draft Federal Offset Protocol on Direct Air Carbon Dioxide Capture and Geological Storage

Environment and Climate Change Canada (“ECCC”) has published a preliminary draft of the new federal offset protocol (“Draft Protocol”) for Direct Air Carbon Dioxide Capture and Geological Storage (“DACCS”) projects.

The Draft Protocol is aimed at DACCS projects that capture carbon dioxide (“CO₂”) directly from the atmosphere using chemical, mechanical and/or electrochemical processes, and inject it underground for storage in subsurface geological formations. These projects remove CO₂ from the atmosphere, thereby reducing greenhouse gases (“GHG”).  The Draft Protocol, developed in accordance with the principles of GHG Standard ISO 14064-2:2019, aims to ensure that GHG removals resulting from DACCS projects are real, additional, quantified, verified, unique and permanent. Once finalized, proponents who develop and operate DACCS projects will be able to generate carbon offset credits under the federal Canadian Greenhouse Gas Offset Credit System Regulations (the “Regulations”).

Background

Project activities that are eligible to generate federal carbon offset credits in Canada are those listed in a published federal offset protocol. The federal government has currently published three federal offset protocols: (i) the Landfill Methane Recovery and Destruction Protocol, applicable everywhere in Canada except British Columbia, Alberta and Quebec; (ii) the Reducing Greenhouse Gas Emissions from Refrigeration Systems, applicable nationwide; and (iii) the Improved Forest management on Private Land protocol, applicable in all provinces and territories except British Columbia.

These offset protocols incentivize emission reductions across sectors and establish standardized methodologies for generating federally recognized carbon offset credits, which entities can sell or use to meet regulatory obligations under Canada’s federal carbon pricing system, including in those provinces which operate under the federal Output-Based Pricing System, and/or capitalize on additional revenue streams.

The Draft Protocol is currently open for public comment until March 28, 2025. Once finalized, it will become just the fourth federal offset protocol in Canada.

Eligibility

To generate federal offset credits under the Draft Protocol, a project proponent must follow the established methodology and meet certain requirements, in addition to the requirements established in the Regulations. Key requirements set out in the Draft Protocol include:

• Baseline Conditions: The project site’s capture facility must not have previously captured CO₂.
• Start Date: The project’s capture facility must have begun operating on or after January 1, 2022.
• Eligible Jurisdiction: The project site must be in a single province or territory of Canada and located in a province or territory that has sufficient environmental laws and enforcement governing the permanent storage of captured CO₂. At this time, only Alberta, British Columbia and Saskatchewan have been designated as such provinces.
• Aggregation: Aggregation of two or more DACCS projects is not eligible under the Draft Protocol. The project site must include only one capture facility (meaning the equipment and supporting buildings for direct air CO₂ capture), and one injection infrastructure (meaning the injection well(s) and supporting equipment and buildings) with an associated storage reservoir.
• Additionality: Any GHG removal resulting from the Project must not occur because of other federal, provincial or territorial law or regulations, or other legally-binding mandates. If GHG removals become legally required after a project is registered, the GHG removal of a registered project will no longer be credited starting on the date on which the law or the legal requirement comes into force. Further, GHG reductions will not be eligible for federal offset credits under this program if they result from reducing or displacing fuels subject to a regulatory charge on fuel or another pricing mechanism for GHG emissions.
• Project Conditions: CO₂ captured and stored must come directly from the atmosphere. CO₂ captured at the capture facility within the project site must not have been injected into any storage reservoir or used for purposes other than CO2 geological storage prior to the project start date. The injection of captured CO2 into the storage reservoir within the project site cannot be for the purpose of enhanced oil recovery.
• Avoiding the displacement of renewable energy: If renewable energy is used for a project, the renewable energy must be generated specifically for the project and must not be displaced or removed from the grid or pre-existing end users. If renewable energy is procured for the project, it must be produced in the project’s province or territory. If renewable energy is supplied through the grid, the project and energy production facility must be connected to the same grid within the project’s province or territory. Any proponent who procures renewable energy for a project must ensure it has exclusive claim to its environmental attributes and that they are not being claimed by another entity.

Risk Management

The goal of the Draft Protocol is to develop permanent solutions for the capture and geological storage of CO₂ where such activities are further incentivised with the opportunity to generate carbon offset credits. However, there is a risk of CO₂ releasing from the storage reservoir into the atmosphere or subsurface migration outside of the storage reservoir. Depending on the magnitude and timing of a release, it can cause a voluntary (an activity or action under the control or responsibility of the project proponent or a failure in the implementation of a reversal risk management plan) or involuntary (outside of the project proponent’s control or responsibility, like seismic activity) reversal of an offset credit. In order to prevent such releases, project proponents must both identify reversal risks throughout the lifetime of the project as well as monitor the permanence of GHG removals within the project site. As projects are developed under this program, project proponents will need to be vigilant in ensuring that the risk of reversal is minimized.

Key Takeaways

The Draft Protocol, once finalized, will be just the fourth federal offset protocol established by the federal government. For proponents interested in or currently involved in DACCS projects, the Draft Protocol will provide certainty in how these projects can successfully create federal carbon offset credits and lend increased legitimacy to this sector of carbon capture. Investors, stakeholders, buyers and traders of federal offset credits developed from DACCS projects under the Draft Protocol will have assurance from Canada’s federal government as to the legitimacy and quality of these projects and the related offset credits.

While certain aspects of the Draft Protocol may change following the public comment period, what remains clear is Canada’s belief in the ability of DACCS projects to serve as yet another tool for Canada to meet its net-zero GHG target.

McMillan is committed to helping clients navigate advancements in the carbon market landscape and has previously published a series of articles on carbon capture, utilization and storage and carbon pricing markets globally.  Project proponents, investors and stakeholders are encouraged to contact the authors of this bulletin to learn how we can better support your understanding of carbon pricing, federal offset programs and emerging carbon credit related opportunities.

By Sharon Singh, Talia Gordner, Martin Thiboutot, Claire Lingley and Anica Villamayor (Articling Student)

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

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