Offsets Vital in Meeting Emission Reduction Targets

A critical factor in cutting Alberta's and Canada's greenhouse gas (GHG) emissions will be the ability to buy and sell emission-reduction offsets.  An important pillar of this emerging carbon market is a system of offsets - an incentive-based mechanism to accelerate innovation and more action across the broader economy.  After a half dozen years of development by a diverse group of stakeholders, the groundwork has been laid for Canadian, and Alberta-based offset systems that are now coming to fruition.

"If you're looking to address climate change, offsets are an important mechanism for allowing unregulated sectors to help meet emission reduction targets," says Tony Irwin of Vancouver-based IRM Consulting, who has played a key role in the development of Canada's offset system. Indeed, more than 20 per cent of Canada's greenhouse gas emissions are not energy related. They thus would not be included under a carbon tax or an emissions trading scheme but could play a big role in emission reductions as offsets.

Offsets are reductions or removals (i.e. carbon storage) of emissions in activities not covered by federal or provincial regulations.  These activities include certain farming, forestry and other projects that go beyond "business as usual" practices.  The resulting emission reductions or removals from such projects will allow individuals, businesses and organizations to earn credits, which can then be sold to regulated industrial emitters (LFEs). These emitters are sectors that contribute significantly to GHG emissions - such as oil and gas producers, coal-fired electricity plants and mining and manufacturing industries like pulp and paper and chemical production - and that will be legally required to reduce their emissions; these reductions can include the buying of offset credits.

"The key to offsets is they provide a cost-effective option for LFEs to comply with real emission reductions," says Karen Gorecki, a policy consultant for Climate Change Central (C3).  "In Alberta, the average life on capital in large industrial facilities is 15 years or more.  It costs a lot of money to replace or retrofit a facility before its useful life has passed. It makes more sense for companies to make emission reductions through buying offsets from others, elsewhere, in between capital stock turnover."

Offsets are simply actions and technologies put into practice by non-regulated sectors of the economy, invested in by companies, resulting in lower overall GHGs, she adds. "Because climate change is a global phenomenon, it doesn't matter where in the world GHGs are reduced, as long as actual reductions are made."

If enough LFEs choose not to reduce their own emissions, there will be a high demand for and low supply of emission-reduction credits, Gorecki says. "Offsets can help bridge that period of volatile prices."

Examples of potential offset projects include forestry companies investing in reforestation, municipalities capturing and destroying methane gas from landfills, companies generating renewable electricity and transportation firms converting fleets to hybrid vehicles.

Agriculture has a potentially large role to play here. For example, livestock operators can reduce emissions through better nutrient management and the use of biodigestors, which capture and flare or use methane from livestock waste. Farmers can also sequester more carbon in the soil by reducing their cropland tillage or adopting crop rotation and grazing management practices.

In one recently-announced offset project, Edmonton-based electrical generator EPCOR has committed to buy up to two million tonnes of emissions credits from Alberta farmers who adopt reduced tillage practices. The project - operating under Alberta's new emission reductions regulations - currently has more than 500,000 acres under contract, with more than 60,000 tonnes of emission reductions verified thus far by an independent third-party assurance provider, the equivalent of taking more than 15,000 cars off the road for one year. Participating farmers are so far receiving an average $6,000 for reduced tillage practices, going back to 2002.

The scope and purpose of Canada's offset system has evolved over time. The federal government first proposed a domestic offset system in 2002 as a complement to the regulatory system, but it would only have covered emission reductions and removals in forestry, agriculture and possibly landfill gas.

In 2003, a federal-provincial-territorial Working Group on Offsets consulted with provinces and other stakeholders in the design of an offset system that, by 2005, was considerably expanded from the original proposal. The design also built on the experience of existing international offset systems and of three Canadian emission-reduction pilot programs - Pilot Emission Reductions Trading (PERT), Greenhouse Gas Emission Reductions Trading (GERT) and Pilot Emission Removals, Reductions and Learnings (PERRL).

"Offsets have been on and off the political radar for several years, going back to the Chrétien government," says Irwin, who co-founded and continues to co-chair the Industry-Provincial Offsets Working Group.

At the same time, Alberta was developing its own provincial offset system, which began operating in July, 2007, the first to do so in Canada. The Alberta system has created, to date, some 16 protocols, which are well-defined methods of quantifying emission reductions for specific project types. At least another 15 are under review in the Alberta Offset System  - a process Climate Change Central provides for the Alberta government.  And C3 gets calls from potential protocol developers every week with a new project idea - this clearly shows the offsets market is innovating in Alberta.

"Alberta has been an international leader in developing protocols, particularly in diverse areas like bioenergy, hog production methods and beef feeding and life cycle changes," says Gorecki. "In a lot of cases, Alberta has come up with a better way of quantifying projects, based on an international protocol framework (ISO 14064 Part 2), with more certainty that emission reductions are actually occurring."

In March 2008, the federal government announced the broad outlines of an offset system that differs somewhat from that proposed by the previous Liberal administration but still covers a wide spectrum of the unregulated economy. Details of eligibility requirements and the application process are to be announced later this year, with the system scheduled to be in operation by 2010.

"I'm delighted they've made this announcement and look forward to working with them cooperatively," says Irwin. "A number of technical details need to be dealt with for projects to have enough certainty to go forward. A big concern for industry groups facing a large compliance obligation is the issue of a liquid market - having a stream of projects large enough to meet market demand. Harmonization (of federal and provincial offset systems) across the country is also a priority."