1. IMPLEMENTATION ISSUES FOR THE CREATION OF OFFSETS IN THE AGRICULTURE AND FORESTRY SECTORS FOR USE IN A POTENTIAL CANADIAN DOMESTIC EMISSION TRADING SYSTEM
Forestry & Agriculture Greenhouse Gas Modeling Forum Workshop #2: GHG Mitigation (October , Shepherdstowm WV)
Judith Hull (Climate Change Secretariat) Tony Lempriere (Canadian Forest Service)

2. SCOPE OF PRESENTATION ________________________________________
POTENTIAL DET SYSTEM
OFFSET SYSTEM
rationale for including offsets
general description of potential offset system
key implementation issues
linking offset system, DET system & national GHG inventory

3. OVERVIEW OF POTENTIAL DET REGIME _________________________________________
Federal Discussion Paper (Option 4 example) - government allocates 279 MT of emission permits each year to the covered sectors
equivalent to 85% of anticipated 2010 emissions from large emitting industrial sectors (42% coverage)
facilities within the covered sector required to have permits equivalent to its emissions
key issue – developing a mechanism to allocate permits to facilities
Industry has argued for an approach that takes into account growth
and emission intensity prospects of individual sectors.

4. Possible allocation formula
output–based gratis allocation
emission intensity factor x scale-back factor x output (one coefficient per sector/sub-sector) (facility specific)
emission intensity factor – emissions intensity achievable at ‘reasonable cost’
scale-back factor – ‘tightens’ requirements if projected emissions exceed the notional 279 MT cap

5. . Compliance – reconciliation and true-up
emissions > permit allocation - Kyoto units/offset credits are transferred from Canada’s account to entity account
emissions < permit allocation - Kyoto units/offset credits are transferred from entity account to Canada’s account
estimated 20 MT /year of offset credits during the First Commitment Period

6. Advantages of output-based system
lessens disincentive to expand output
maintains incentive to reduce emissions per unit of output
removes problems related to new entrants, shut down
deals fairly with firms that took early action to reduce intensities
Concerns with output-based system
challenge to implement (industry classes, measure output, permits/unit of output factor (emissions intensity x scale-back)
opposition to scale-back factor
could lower incentive for structural adjustment to lower emissions economy
risk to government from over allocation

7. OFFSET SYSTEM – RATIONALE FOR INCLUSION __________________________________________
promotes investment in emission saving activities (and structural change) from sources not covered by the DET system (Offset activities are often difficult to regulate or incent through other programmes due to lack of information, uniqueness, etc.)
allows DET entities to achieve compliance at lower cost
keeps investment dollars in Canada
could result in environmental co-benefits
key sources currently being considered for offsets - landfill gas capture and flaring, agriculture and forestry reductions & removals

8. DESCRIPTION OF POTENTIAL OFFSET SYSTEM _____________________________________________________
baseline-and-credit system
voluntary system – cannot be regulated
regulation establishing the DET system sets out the criteria and assigns the body(ies) for creation of a commodity that is acceptable for DET system compliance (offset credit)
criteria – real (beyond business as usual (BAU), net of leakage), measurable, verifiable, surplus (beyond what is required), additional/incremental
body – possibly a federal / provincial government department / agency or in the private sector

9. process – register acceptable offset projects & certify emission reductions/removals achieved in from these projects
could ensure offsets contribute to improving GHG inventory - applying more stringent DET targets - setting more stringent baseline for creation of offset - requiring a contribution to the environment (discount) - government buying offsets and canceling (not using) them
offset credits could be traded domestically (fully fungible)
design work building on real project experience from Canadian pilots – Greenhouse Gas Emission Reduction Trading (GERT) pilot and Pilot Emission Reduction and Trading (PERT) project

10. KEY IMPLEMENTATION ISSUES __________________________________________
(1) activities to include
use inclusion list (e.g., only activities with accepted baseline methodologies) or leave open?
include emission reductions/removals from BAU activities?
include activities where baseline setting is very problematic (e.g., avoided emissions from deforestation and forest management)?
include activites covered by other incentive programmes?
(2) approach for boundaries & baselines
system project-based? entity- based? management unit?
appropriate boundary for assessing leakage?
appropriate baseline - static / dynamic? samples / continuous monitoring / models? assumptions (company plans, government policy & economic factors relevant to baselines)?

11. (3) basic requirements for offset creation
core criteria - real, measurable, verifiable, surplus, additional(?)
other criteria - contribution to conservation and sustainable use of biodiversity?
criteria related to Protocol – minimum forest size affected? conform to international definitions?
consistent with existing land use regulations?
(4) project design standards
assessment for leakage (boundary, method, rigour)?
identification and mitigation of risks (mitigation reports, solutions)?

12. (5) measurement, monitoring standards & enforcement
measurement, monitoring standards – who develops?
reduce uncertainty?
enforcement of standards – who develops? enforces? pays?
certification systems required?
(6) accounting rules
implications of using a different approach to quantify offsets and prepare our national accounting (e.g., using approaches like long-term averaging though the Protocol allows only actual carbon stock changes)?
permanence – length of time carbon must remain sequestered? accounting for possibility of net carbon emissions during the project or after it ends?

13. (7) project reviews expertise required?
institutional requirements – Offset Office?
review process – balances rigour with review costs?

14. LINKING OFFSET SYSTEM, DET SYSTEM & NATIONAL GHG INVENTORY ____________________________________________
offset credits would be defined in the DET regulation as an acceptable DET compliance commodity
bottom-up (project level) and top-down (national inventory) reconciliation of data is not required & will not be undertaken
linkages between a point source inventory used to build the national inventory and a DET system - revolves around technical data monitoring & reporting issues - avoid two reporting systems for point source emission data - ensure data is reported in a way that it can be incorporated in the national inventory