COMMENT: What role will carbon offsets play for Ontario industries?

Published 17:18 on January 27, 2017  /  Last updated at 17:18 on January 27, 2017  /  Americas, Canada, Conversations, US, Views, Voluntary Market  /  No Comments

What role will Carbon Offsets play for Ontario Industries? This is one of the key questions for those heading cap and trade compliance for Ontario companies.

In the run-up to the Ontario Cap and Trade Forum on April 26-27 at the Allstream Centre in Toronto, Canadian Clean Energy Conferences is producing a series of article and interviews featuring the key topics concerning regulated entities under Ontario’s program. Visit the news section of the Forum’s website to read other stories and sign-up to receive news.

By Adrienne Baker, Director, Canadian Clean Energy Conferences

What role will Carbon Offsets play for Ontario Industries? This is one of the key questions for those heading cap and trade compliance for Ontario companies. Last week, 100 of the around 120 mandatory and voluntary participants in this new market took part in a practice auction designed to familiarize organizations with the process before the first auction in March. While offset protocols are still under development, market experts say they will play a significant role for Ontario participants by offering an economic solution to assist with compliance.

Craig Ebert

Craig Ebert

“Carbon offsets are designed as a cost containment mechanism for cap and trade participants,” comments Craig Ebert, President of Los Angeles-based Climate Action Reserve, which has been contracted by the Ontario Government to adapt 13 existing offset protocols for use in Ontario and Quebec, and possibly other jurisdictions across Canada. Offset protocols are a set of rules that must be followed to be eligible to apply for credit creation. “Offsets can play a critical cost reduction role which can be particularly helpful for large emitters,” agrees David Moffat, Fund Manager for Quebec-based COOP Carbone.

“From a climate perspective, offsets are a way to target emissions from sectors outside the regulated community,” adds Ebert. “They allow for a cap and trade program to seek innovative, cost-effective ways to reduce emissions elsewhere.” Offsets allow participants to both meet compliance obligations and support environmental entrepreneurs who are creating new green projects, adds Moffat.

Are offsets relevant now?

So when should market participants be looking to get serious about offset credits? “If companies are new to cap and trade, they have to get started right away in thinking about their compliance strategy and knowing what role offsets can play,” advises Ebert. “One consideration, for instance, is whether or not to develop their own portfolio of offset projects for compliance.”

As Ebert notes, offsets are but one component of a broader compliance strategy for organizations. “Companies need to look at their marginal costs for abatement to know whether they can reduce emissions onsite and weigh that against the cost of buying carbon allowances,” he says “Another component is to understand offsets. These are the fundamental questions that can not be answered in isolation.”

Offsets can be used as a cost containment safety valve for regulated entities if the costs of reducing emissions get too high. In California and Quebec, offsets are limited to up to 8% of a company’s total compliance obligation. This limit is designed to ensure that most emissions reductions happen within a jurisdiction. Ontario has yet to establish a limit but it’s likely to be in line with the established limitation.

Quebec and California regulated entities are investing in carbon offsets as part of their compliance strategies. For instance, in September, Gaz Metro signed a five-year agreement to purchase offset credits from activities generated from the Régie intermunicipale des déchets de la Rouge (RIDR). These offset credits result from the elimination of biogas from landfill and will help cover part of the utility’s GHG emissions.

In a September 22 press release about the deal, Vincent Pouliot, Carbon Market and Energy Efficiency Manager at Gaz Métro, says: “As part of the fight to reduce GHG emissions, Gaz Métro is first trying to reduce its own environmental footprint and encouraging its customers to reduce their consumption through energy efficiency programs. Beyond that, GHG residual emissions must be offset in a variety of ways, including offset credits. We’re proud of the agreement signed with the RIDR, which supports a community’s commitment to finding concrete ways to cut its GHG emissions.”

Some Ontario companies and offset project developers are already looking into offset projects in the

David Moffat

David Moffat

province. “Whether it is reaching out to asset owners like forest landowners or sources of ozone depleting gases, some companies are already exploring offset projects in Ontario which is very exciting,” observes Moffat.

Getting it right

Offset protocols outline the processes that project developers must follow to create offsets for particular project types. Climate Action Reserve is adapting three priority protocols including landfill gas, mine methane, and ozone depleting substances which it is aiming to complete by the end of March. Working with Canadian partners Brightspot Climate, Cap-Op Energy, EcoRessources, Green Analytics and Viresco Solutions, the protocol adaptation process aims to ensure all key stakeholders across Canada have the opportunity to engage. After finalizing the first three, the next ten are expected to be in place by 2017/2018.

Having those protocols in place is one of the first steps to launching offset credits in Ontario. The Ministry of Environment and Climate Change is also currently conducting an offset credits consultation and seeking input into a draft regulatory proposal on offset credits.

This consultative approach, combined with the link to the broader WCI market, is excellent, notes Moffat. “You fundamentally want the regulator to establish a long-term regulatory platform with clear boundaries and a range of protocols that allows for innovation in a number of sectors across Ontario’s economy,” he says. “This creates a bigger pool of projects with different risk profiles.”

Financing Carbon Offsets

Financing carbon offset projects is not yet attractive to traditional sources of capital because they don’t usually fit the risk profile of these investors. Quebec-based COOP Carbone is addressing this finance challenge by launching a North American fund to invest in these projects. Partnering with Fondaction CSN, they have created a C$20 million fund dedicated  to financing projects to reduce greenhouse gas emissions in exchange for generated offset credits.

“We will be financing offset projects within the regulated carbon markets in North America,” says David Moffat, Fund Manager, COOP Carbone. “This capital is challenging to find in carbon markets. We can invest up to 2 million per project which, from a traditional capital point of view isn’t a lot, but from a carbon markets standpoint is significant.”

The fund’s product is a financing offer for GHG reduction projects through a carbon contract. When a project is at the financing phase, the fund will offer capital by which terms it will take the offset credits generated by the project as collateral for a fixed period. The capital will first be repaid using the offset credits generated by the project, and once it has been repaid, the fund may commit to purchasing the credits for the remainder of the project duration at a price previously set in the carbon contract and below market rates. The fund is set up to provide funding for 15 to 25 projects.

The Ontario Cap and Trade Forum takes place at Toronto’s Allstream Centre on April 26-27.

Take advantage of this high-caliber networking opportunity with mandatory participants in Ontario’s cap and trade and key government decision-makers, and gain useful updates on compliance and trading strategies from international carbon market experts.

Visit the event website for more details on the Ontario Cap and Trade Forum, which will bring together regulated entities from Ontario, Quebec and California with key government decision-makers and carbon market experts.

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