By John McCloy for Canadian Clean Energy Conferences
In the run-up to the 2nd Annual Ontario Cap and Trade Forum on April 18-19 at the Beanfield Centre in Toronto, Canadian Clean Energy Conferences is producing a series of articles featuring the key topics concerning regulated entities under Ontario’s program.
Market experts agree that offsets have a potentially pivotal role to play in entities achieving their compliance obligation within the Ontario cap and trade system. However, with offset regulations still in the process of being finalised and the long-term effects of the Western Climate Initiative (WCI) linkage still being assessed, questions remain about how best to integrate these offsets into an effective compliance strategy.
“We are currently adapting 13 offset protocols for Ontario and Quebec,” notes Craig Ebert, President of Climate Action Reserve, which has been contracted by the Ontario Government to adapt existing offset protocols for use in Ontario and Quebec.
“We’ve already provided one protocol on landfill gas that’s gone through the entire process and has been publicly posted. The remaining work we expect to be moving forward expeditiously. We have been on hold for a short period while Ontario and Quebec discuss some key technical issues between the two provinces, but we are expecting resolution of those matters in the not too distant future.”
The Impact of Carbon Offsets
Under the current legislation, compliance entities in Ontario can use carbon offsets to meet up to 8% of their compliance obligation. As Ontario currently stands as one of the highest emitting provinces, this equates to a theoretical demand for offsets in the region of 42 million tons, making offsets a material part of the ecosystem of cap and trade.
The importance of offsets to achieving compliance is further highlighted by evidence from other cap and trade programs. “In other areas, for example Alberta, we had no limit for 10 years and saw as much as 50% of compliance, in certain years, coming from offsets and other kinds of credits,” points out Cooper Robinson, Managing Director of Cap-Op Energy.
The primary benefits of using carbon offsets as part of a compliance strategy is their ability to play a crucial cost reduction role. “There is a very well established precedence for what carbon offsets can bring to a cap and trade market,” notes Jamie McKinnon, Vice President of Environmental Solutions at Bluesource Canada. “They offer a lower cost of compliance and, for entities with a sizeable compliance obligation, there are significant cost savings to be had through the procurement of offsets relative to allowances.”
However, while it is clear that offsets represent a critical strategic option for compliance entities in Ontario, the lack of a solidified protocol framework continues to cause issues for developers attempting to incept offset creation projects.
“Practically, we do not yet have a workable offset system. The landfill gas protocol has been approved, so we have one offset protocol that can be used to create an offset projects, but we do not have an approvals process set up,” comments McKinnon. “We do not have a registry set up because the Ontario government has said that, instead of using the existing registries in the way that California does, they’re going to build their own. So in terms of infrastructure, we don’t have what it is needed to actually undertake offset initiatives yet.”
WCI Linkage and Questions Of Supply
Representing a potential solution to the evolving nature of the Ontario offset market, linkage with the WCI allows Ontario based companies access to carbon offsets generated in California and Quebec. “Certainly there will be far more supply for Ontario over the next few years, than otherwise would be as a result of the WCI linkage,” points out Arjun Patney, Policy Director at the American Carbon Registry. “It will take a few years to get protocols in Ontario adapted, to get the regulatory systems systems up and running, and for projects to be developed, verified, and their credits to be issued.”
“With the WCI linkage, Ontario companies have immediate access to tens of millions of available offsets and many more in the pipeline,” continues Patney. “It’s difficult to say in the long term whether it will be enough. There are some variables, for example, what additional protocols the California Air Resources Board (CARB) might adopt, which would significantly impact what types of volumes we might see in the future.”
Of significant importance to the questions of supply within the WCI, is CARB’s decision to potentially disallow millions of non-Californian offsets under Bill AB-398. The bill specifies that, of the offsets used to meet compliance by Californian entities, “no more than one-half may be sourced from projects that do not provide direct environmental benefits in state.”
“It remains to be seen how the California Air Resources Board interprets the specifications of the AB-398 bill,” notes Ebert. “The language does not specifically prohibit the use of offsets outside of the state of California. It simply says that up to half of the offsets used have to be to the direct benefit of the citizens of the state of California. There is a growing discussion as to what that means.”
“Some people would point out that the fact that an overall carbon emission reduction anywhere on the planet is of direct benefit to California,” he continues. “The opposing view would say that they want half the projects to happen in California and that should be their first priority. The California Air Resources Board needs to come to a decision on this issue and that hasn’t happened yet.”
Investing in Offset Creation
With offsets set to play a potentially vital role in entities achieving cap and trade compliance, direct investment in offset creation projects remains an attractive proposition. The potential benefits are clear; reduced offset cost and surety of supply. However, as with all investments there are attendant risks.
“One advantage of investing directly in a project is the lower cost for the offsets ultimately generated, but that comes with inherent risk that the project may have problems, delays or that it may generate fewer offsets than anticipated,” comments Patney. “It’s important to have a full understanding of an investment and its inherent risks.”
One method of mitigating the risks of direct investment, while increasing the potential return, is by synergistically investing in offset creation projects that feature additional commercial interests that can leveraged to generate other business opportunities.
“If you are simply investing in offset projects that are not related to your business and do not offer synergies, there are very limited benefits,” points out Mackinnon. “Most companies would much be in a much better position as off-takers, looking at an innovative structures on how to procure offsets, which may or may not include some investment upfront. Certainly, in my experience, direct investment on behalf of a compliance entity is best done when they can leverage other commercial or business opportunities related to that investment.”
Ensuring an Efficient Compliance Strategy
With Ontario’s offset protocol framework in its nascent stages, and regulatory issues concerning the WCI still to be resolved, the questions remains; how do companies efficiently integrate offsets into their compliance strategies?
Diversification can help to mitigate the risks associated with the procurement of offsets, both through non-delivery of offsets or potential invalidation through the WCI. “An important step is to diversify the offset supply in terms of project type, comments Patney. “Doing so should help to mitigate the invalidation risk. Another advantage of diversification is limiting non-delivery risk. Instead of just relying on one project developer or one project, the buyer has a range of supply sources and non-delivery becomes less of a concern.”
In addition to diversification, gaining a detailed understanding of the offset market is fundamental to efficiently integrating offsets into a compliance strategy. By generating a clear understanding of the costs and potential risks of offset procurement, and integrating that information with their own risk profile and internal compliance costs, companies can create a combined strategy to minimize their ultimate compliance costs.
“The first thing any company should do is to invest the time to really examine the offsets market and generate an understanding of how it works and the dynamics of it, because the offset market is very different from the allowances market.” notes Mackinnon.
“You can procure offsets in the primary market or in the secondary market and the real opportunity for securing offsets a lower cost is in that primary market and that’s where you’re trading off opportunity for a given level of risk,” he continues. “Trading effectively requires a clear understanding of the nature of these projects, the protocols and the delivery risk associated with offsets.”
Forest Carbon Sequestration
As a leader in the field of offset generation, Bluesource have partnered with Haliburton Forest to create a sustainable forest carbon sequestration project capable of generating 75,000 tonnes per year of additional Greenhouse Gas (GHG) reductions over the long-term. This groundbreaking agreement is the first it kind in Ontario.
“The project is an improved forest management project as defined by the current California compliance protocol for forest carbon,” notes Jamie McKinnon, VP of Environmental Solutions at Bluesource Canada. “It’s really about incentivising a landowner, in this case Halliburton Forest, to make a very long term and robust commitment to preserving a much more rigorous practice of low-carbon sequestration in their forests and to grow that over time.”
Haliburton Forest continues to be leader in sustainable forest management in Canada, and their innovative forestry techniques have resulted in their 100,000 acre holdings in Haliburton County being the first forest in Canada to earn Forest Stewardship Council (FSC) certification.
“As a company we have a longstanding and demonstrable history of sustainable forest management, which means that it’s part of our culture,” points out Malcolm Cockwell, Managing Director of Haliburton Forest. “We have the science to back it up and we know how to execute forestry projects on a large scale, which meaningfully reduces the risk associated with any project on our property.”
Currently the project is still in the policy stage as Ontario lacks the policy framework for forest carbon sequestration projects on private land.
“We do have a solid agreement with Bluesource and a mutual desire to see a great project come out of our efforts to create sustainable forestry and sequester carbon in the hardwoods of Ontario,” notes Cockwell. “What we don’t have is a government program or policy framework that would actually allow us to do that.”
Both Cockwell and Mackinnon agree that forest carbon sequestration projects represents a unique opportunity for Ontario to leverage its natural resources to low-cost carbon offsets with a range of significant co-benefits.
“The Ontario government has the opportunity to really unlock the best option for low-cost mitigation in the province, with very significant co-benefits,” comments Mackinnon. “They can do that by putting in place a protocol that works for private landowners and provides the right integrity on emissions reduction.”
We believe this project has a number of co-benefits,” agrees Cockwell. “From broader environmental benefits that are going to occur well beyond climate change mitigation to social benefits for local communities who are, in many senses, the foundation of the provincial economy.”
The Ontario Cap and Trade Forum takes place at Toronto’s Beanfield Centre on April 18-19.
Take advantage of this high-calibre 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.