Written By Thomas McInerney, Sarah Gilbert, Sharon Singh, Serge Dupont, Dylan Gallant and Victoria Tulk

The federal Canadian Greenhouse Gas Offset Credit System Regulations (OCSR) and the Clean Fuel Regulations (CFR), under the Greenhouse Gas Pollution Pricing Act and Canadian Environmental Protection Act, 1999, respectively, have recently come into force.

Both the OCSR and the CFR represent important legislative components which underpin Canada's greenhouse gas (GHG) emission reduction aspirations, as set forth in Canada's 2030 Emissions Reduction Plan.

Canadian Greenhouse Gas Offset Credit System Regulations (OCSR)

The cornerstone of the federal government's climate change legislation is the Greenhouse Gas Pollution Pricing Act (the GGPPA or Federal Backstop). The Federal Backstop, in effect since January 1, 2019, is the key piece of legislation whereby a national price on carbon is established. Currently, that price is set at $50/tonne of CO₂e for 2022. The federal government has announced its intention to further increase this price past 2022 in $15 increments, until it reaches $170/tonne of CO₂e in 2030.

The Federal Backstop is aptly named, as it only applies in respect of provinces that fail to implement carbon pricing schemes at least as stringent as those prescribed federally. It is comprised of two main elements: (i) an output based pricing system (OBPS) applicable to facilities that emit 50,000 tonnes or more of CO₂e annually and those facilities that have opted in to the OBPS system (Covered Facilities); and (ii) a fuel charge (commonly referred to as a carbon tax) applicable to prescribed fuels that are created, imported into or otherwise consumed within the applicable province.

Covered Facilities can achieve their annual emission reduction requirements under the OBPS by physically reducing their emissions, paying an excess emissions charge, applying compliance units or a combination of the foregoing.

Compliance units under the OBPS can take three forms:

1. surplus credits: to the extent a Covered Facility reduces its emissions further than what is required by the OBPS, surplus credits are created in a quantity equal to such incremental reduction (similar to "emission performance credits" pursuant to Alberta's TIER regime);
2. recognized credits: a credit created by a provincial emission reduction regime that is recognized as complying with OBPS criteria (e.g., "emission offsets" created under Alberta's TIER regime pursuant to protocols recognized by the OBPS); and
3. federal offset credits: offset credits created by offset project proponents in compliance with the OCSR.

The OCSR are the mechanism by which federal offset credits can be created, tracked and used for OBPS compliance, and represent a crucial compliance mechanism for Covered Facility owners who are either unable to achieve their emission reduction requirements through physical means, or are looking for a cheaper alternative to the cost of physical emission abatement or the excess emissions charge.

The OCSR create an offset credit system which is very similar to the system that has been in place in Alberta for years. Like Alberta, the OCSR provide project proponents (Project Proponents) the opportunity to be issued offset credits for qualifying offset credit projects (Projects) that adhere to government approved protocols. Project Proponents will assert a quantity of offset credit creation, which must pass verification by an accredited third party before offset credits are issued.

The federal government has published its first protocol under the OCSR: Landfill Methane Recovery and Destruction, which applies to the reduction of methane emissions from landfill sites. Additional offset protocols have been prioritized for development, including those pertaining to Advanced Refrigeration Systems, Improved Forest Management, Enhanced Soil Organic Carbon, Livestock Feed Management, and Direct Air Carbon Capture and Sequestration. Environment and Climate Change Canada (ECCC) is considering the development of further protocols pertaining to Bioenergy Carbon Capture and Improved Forestry, Management on Public Lands, Livestock Manure Management and Anaerobic Digestion.

The OCSR follow closely to the draft regulation that was released on March 6, 2021, which was previously summarized here: Federal Government Releases Draft Greenhouse Gas Offset System Regulations. The OCSR depart from the draft regulation in several notable ways though, including:

• allowing for the development of offset protocols for non-biological sequestration Projects that remove and permanently store carbon dioxide, such as direct air capture with carbon capture and storage Projects, rather than just biological sequestration Projects;
• enabling Project Proponents to use a "tonne-year" and "hybrid tonne-year" quantification method in prescribed circumstances where the requirement to monitor Project GHG emissions for 100 years following the crediting period, as required by the "tonne-tonne" GHG quantification method, is difficult to achieve;
• reducing the frequency of monitoring report submissions to align with the submission of Project reports;
• reducing the frequency of monitoring reports after the crediting period ends, for sequestration Projects using the tonne-tonne quantification method, from annually to every six years;
• increasing the allowable time between the Project start date and the registration application date to a maximum of 10 years;
• extending the maximum duration of the crediting period for non-sequestration Projects to 10 years, rather than 8 years;
• requiring Project Proponents to include a statement in their Project report that environmental and social safeguards, as set out in the applicable protocol, have been implemented to minimize the potential negative outcomes of the Project and requiring Project Proponents to provide a description of the safeguards they have implemented; and
• clarifying that when a Project is registered, the most recent version of a protocol is the one that applies to the Project for the duration of the crediting period and that if a new version of a protocol is issued during the crediting period, a Project Proponent may choose to opt in to the new protocol.

Clean Fuel Regulations (CFR)

The CFR principally apply to producers or importers of gasoline or diesel (referred to as "primary suppliers"). Each such fuel type is assigned a lifecycle carbon intensity value, expressed in grams of carbon dioxide equivalent per megajoule of energy (gCO2e/MJ), which is meant to represent the emission intensity of such fuel throughout its entire lifecycle. Beginning July 1, 2023, each primary supplier must demonstrate that its company-wide inventory of gasoline and/or diesel does not exceed the prescribed carbon intensity for such fuel, for such year, as set forth below.

These carbon intensity requirements apply to each primary supplier on a company-wide basis, subject to certain exemptions. For example, such requirements will not apply to aviation fuel, fuels exported from Canada, fuels sold or delivered for a use other than combustion (i.e., solvents), fuels produced and used at the same facility, fuels sold or delivered for use in a marine vessel with an international destination, or fuels sold or delivered for non-industrial use in remote communities.

The CFR will also retain the volumetric requirements under the existing Renewable Fuels Regulations (RFR) (two percent low carbon fuel content in diesel/fuel oil, five percent low carbon fuel content in gasoline). Prior to the repeal of the RFR in 2024, companies will be entitled to rollover any existing compliance units under the RFR and convert those units into credits recognized under the CFR.

While primary suppliers are the only entities required to reduce the lifecycle emissions of their fuels, the CFR create three distinct categories of compliance actions which allow primary suppliers as well as "voluntary credit creators" to create credits to ultimately be sold to primary suppliers to meet their gasoline or diesel carbon intensity requirements:

1. Compliance Category 1: actions undertaken to reduce carbon emissions of a fuel throughout its lifecycle (e.g., carbon capture and storage);
2. Compliance Category 2: supplying low carbon intensity fuels (e.g., ethanol, biodiesel—including those fuels used to comply with existing federal and provincial renewable fuel requirements); and
3. Compliance Category 3: transportation fuel switching through end-users changing or retrofitting combustion devices to be powered by alternative energy sources such as electric vehicles, natural gas vehicles and hydrogen fuel cell vehicles.

The CFR follow closely to the draft regulation that was released December 19, 2020 which was previously summarized here: Canadian Government Releases Draft Clean Fuel Regulations. The CFR depart from the draft regulations in several notable ways though, including:

• the deletion of kerosene, light fuel oil and heavy fuel oil from those prescribed liquid fuels, applicable to a primary supplier, leaving only gasoline and diesel to be regulated under the CFR;
• the carbon intensity limits under the CFR are based an overall emission reduction of 14 gCO₂e/MJ by 2030, up from the 12 gCO₂e/MJ originally contemplated by the draft regulation;
• in respect of credits generated under Compliance Category 1, a reduction in the carbon intensity of gaseous or solid fuels is no longer eligible for credit creation, direct air capture for carbon capture storage or enhanced oil recovery projects is no longer eligible for credit creation and projects located outside of Canada may be eligible for credit creation; and
• the beginning of carbon intensity requirements placed on primary suppliers has been pushed back from December 1, 2022, to July 1, 2023.

Key Takeaways

The OCSR represent a necessary compliance mechanism for Covered Facilities while prescribing a mechanism for credit creation for Project Proponents. The CFR present compliance challenges for primary suppliers as well as credit generation opportunities for both primary suppliers and voluntary credit creators alike.

Bennett Jones has extensive experience providing advice on regulatory compliance strategies, as well as GHG credit project development and marketing of GHG credits both in the compliance and voluntary markets. If you have any questions regarding the OCSR or the CFR including in respect of compliance strategies or how to capitalize on the low-carbon economy, please contact a member of our Climate Change or Regulatory practice groups.

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