INTRODUCTION

On June 10, 2024, the Canada Electricity Advisory Council issued its final report: Powering Canada: A blueprint for success (Advisory Council Report).^[1] The report stated:

For Canada to reach its net-zero goal, multiple studies have concluded that in addition to largely eliminating the remaining [greenhouse gas] emissions from current electricity production, the share of overall energy supplied by electricity will need to roughly triple, increasing from 17% to between 40 and 70%. In a single generation, then, clean electricity will need to become the dominant source of energy in Canada.^[2]

However, the report also stated that even this level of electrification will only contribute up to 38 per cent of required reductions.^[3]

The remaining 62 per cent of total greenhouse gas greenhouse gas emissions (GHGe) reductions needed consist of some combination of remaining fossil fuel supplied energy that cannot be electrified and from processes not used for energy production. While the report acknowledges the challenges of the “potential emissions reduction in 2050 from electrification and clean grids”^[4] it is silent on how the remaining GHGe can be abated.

How will Canada reduce the remaining 62 per cent of total emissions? Can these emissions be eliminated? If not, is there a strategy to mitigate these emissions through a net-zero strategy?

This gives rise to questions not addressed in the report, such as: What is net-zero and how does it relate to electrification? How will the remainder of the GHGe be eliminated? Who decides on net-zero policies?

This article reviews the international framework for reporting on and reducing GHGe and examines the role of offsets in that framework. Then it considers how offsets are managed in Canada and its provinces — the policy driving investments in offset projects and the role of offsets in meeting net-zero targets.

WHAT ARE GHGS?

The Paris Agreement^[5] sets emission limits for GHGe, which the International Panel on Climate Change (IPCC) defines as:

those gaseous constituents of the atmosphere, both natural and anthropogenic, that absorb and emit radiation at specific wavelengths within the spectrum of thermal infrared radiation emitted by the Earth’s surface, the atmosphere itself, and by clouds… Water vapour (H₂O), carbon dioxide (CO₂), nitrous oxide (N₂O), methane (CH₄) and ozone (O₃) are the primary greenhouse gases in the Earth’s atmosphere. Moreover, there are a number of entirely human-made greenhouse gases in the atmosphere, such as the halocarbons and other chlorine- and bromine-containing substances, dealt with under the Montreal Protocol. Beside CO₂, N₂O and CH₄, the Kyoto Protocol deals with the greenhouse gases sulphur hexafluoride (SF₆), hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs).^[6]

This article refers to these gasses collectively as GHGs, unless the context requires otherwise. Further, GHGs are often counted and reported in t CO₂e, metric tonnes of CO₂ equivalent.

The Paris Agreement was adopted by 196 Parties, including Canada, at the UN Climate Change Conference (COP21) in Paris, France, in 2015. It entered into force in 2016.^[7] Canada ratified the Paris Agreement in the same year.^[8]

GHG SOURCES AND SINKS

Article 13 of the Paris Agreement^[9] commits all signatories to develop, periodically update, publish and make available their national inventories of anthropogenic emissions by sources and removals by sinks of GHGs. As a signatory to the Paris Agreement, Canada has committed to reporting its GHGe, the most recent of which is the National Inventory Report 1990–2021: Greenhouse Gas Sources and Sinks in Canada on 2023.^[10]

Significant natural sinks are the ocean and vegetation. The Paris Agreement requires parties to take action to conserve and enhance, as appropriate, sinks and reservoirs of greenhouse gases including biomass, forests and oceans as well as other terrestrial, coastal and marine ecosystems.^[11]

However, GHGs, in particular CO₂ can also be removed from the atmosphere by deliberate human activities and durably stored in geological, terrestrial, or ocean reservoirs, or in products. The IPCC does not distinguish natural sinks from sinks created by human activities, defining a sink as “any process, activity or mechanism which removes a greenhouse gas, an aerosol or a precursor of a greenhouse gas from the atmosphere.”^[12]

WHAT IS NET-ZERO

Net-zero refers to a state where the amount of GHGs added to the atmosphere from sources equals the amounts removed by sinks, measured over some agreed upon time period, preferably as short as possible.^[13] Achieving net-zero doesn’t intrinsically require any emission reductions — theoretically net-zero could be achieved with no emission reductions if there were sufficient sinks to absorb all emitted GHGs, although there are significant practical impediments to that approach.

The idea of net-zero came out of research in the late 2000s which concluded that global warming will only stop if net CO₂ emissions are reduced to zero.^[14] Net-zero was basic to the goals of the Paris Agreement as reflected in Section 4.1 of the agreement:

In order to achieve the long-term temperature goal set out in Article 2, Parties aim to reach global peaking of greenhouse gas emissions as soon as possible, recognizing that peaking will take longer for developing country Parties, and to undertake rapid reductions thereafter in accordance with best available science, so as to achieve a balance  between anthropogenic emissions  by sources and removals by sinks of  greenhouse gases in the second half of this century, on the basis of equity, and in the context of sustainable development and efforts to eradicate poverty. [emphasis added]^[15]

The term net-zero gained popularity after the IPCC published its Special Report on Global Warming of 1.5°C (SR15) in 2018.^[16]

GHG OFFSETS

A “carbon offset,” or “offset,” broadly refers to a reduction in GHGe or an increase in GHGs that are captured and stored in order to compensate for GHGe that occur elsewhere. An offset project, once completed, accomplishes these reductions.

Offset credits are generated by offset projects and can be purchased by GHG emitters, thereby helping them meet their statutory emission reduction requirements. They may also be purchased by organizations that have no statutory requirement to report or reduce emissions but do so voluntarily, or to meet Environmental Social and Governance (ESG) expectations of their shareholders or customers. Some of those organizations may also fund offset projects. In addition to providing a benefit to the purchaser, offset credits can provide offset project developers the ability to monetize the output of their project.

However, a market for associated offset credits is not necessary for an offset project to be viable. For example, it could be considered to be in the public interest to publicly fund an offset project in order to help abate emissions that are considered a societal responsibility. Funding of this nature could be provided by governments, Non-Government Organizations (NGOs) or private sector organizations.

OFFSETS IN CANADA

There are a number of offset projects generating offset credits in Canada. The Federal Government, British Columbia (BC), and Alberta all maintain registries of projects. Offset projects in the registries include instances of all the categories discussed above. Not surprisingly, BC has a significant number of forest-based sequestration projects and Alberta has a number of projects that utilize depleted oil and gas wells for the same purpose. Both provinces have a significant number of fuel-switching projects, some to biofuels and many to support electrification.

The Output Based Pricing System (OBPS), in place both federally and in most provinces, provides a market for offset credits generated by these projects described in the previous paragraph. While each province differs somewhat in implementation details, the description of BC’s program outlines the general approach.

The BC OBPS imposes a reporting requirement on companies that emit more than 10,000 tCO₂e per year. These “reporting companies” can claim an exemption from paying carbon tax on their facility-use fuel and combustibles but have a compliance obligation to emit less than their annual emissions limit. Operations that emit under their annual emissions limit earn credits. Operations that emit over their emissions limit have compliance obligations which can be met with earned credits, offset units, or direct penalty payments.

Sales of offset credits are managed by the BC Government according to a pricing schedule. The BC OBPS also imposes a limit on the amount of offsets that can be applied to a company’s compliance obligations.^[17] Offset credits are purchased by both reporting and non-reporting companies.

QUEBEC-CALIFORNIA CAP AND TRADE OFFSET SYSTEM

The province of Quebec participates in a Cap and Trade system, which includes an offset credit trading program, with the state of California.

The shared emissions trading market between the American state of California and the Canadian province of Quebec is administered by the Western Climate Initiative Inc. (WCI). The WCI also administers the individual emissions trading systems in Nova Scotia and Washington state. It also provides administrative, technical and infrastructure services to support the implementation of cap-and-trade programs in other North American jurisdictions.^[18]

The WCI defines an offset certificate as:

a type of compliance instrument that is awarded by the program authority in a participating partner jurisdiction under the Partner jurisdiction’s cap-and-trade program to the sponsor of a GHGe offset project… An offset certificate represents a reduction or removal of one metric ton of carbon dioxide equivalent (tCO₂e). The reduction or removal must meet the recommended essential criteria for reductions and removals to be real, additional, permanent, and verifiable. Reductions and removals must also be clearly owned, adhere to recommended protocols, and result from a project located in a qualifying geographic area.^[19]

WCI offset protocols require that “the environmental, social, economic and health benefits that may arise from an offset project and the offset system will focus on those benefits directly related to mitigating climate change. A WCI offset project is required only to result in a greenhouse gas emission reduction or removal.”^[20]

At the outset of the program, offsets were governed as follows: ^[21]

Under the terms of the cap and trade agreement between Quebec and California, offset credits can be exchanged between participants in the two jurisdictions’ programs.

California’s offset use is currently limited to 4 per cent of an entity’s compliance obligation for the current period 2021–2025 (decreasing from 8 per cent during 2013–2020), but this usage limit will rise to 6 per cent for 2026–2030. As of mid-July 2022, nearly 240 million ARB offsets have been issued in California, with almost 50 million still in circulation.^[22]

OFFSET USE INTERNATIONALLY – THE INTERNATIONAL CARBON ACTION PARTNERSHIP

How does Canada — and its provinces — measure up internationally? In January 2023, the International Carbon Partnership published Offset Use Across Emissions Trading Systems. The 2023 report stated:

Many ETSs [Emission Trading Systems] worldwide…have at some point included offset provisions in their system design. Systems being developed, such as in Colombia and Vietnam, are considering how they could integrate offsets. Over time, systems have tended both towards an increased use of domestically- over internationally-sourced offsets and towards the development of self-established rather than independently administered crediting mechanisms. Approaches to offsets differ in other ways, including the geographical and sectoral scope, the level of reliance on offsets, and methodologies (or ‘protocols’) for offset generation. Several systems have chosen, either from the outset or subsequently, not to include offset provisions — these include Germany, Austria, the UK ETS, Switzerland, the EU ETS, Nova Scotia, and Massachusetts.^[23]

The figure below provides an overview of offset use in current ETSs.^[24]

The EU ETS experience is summarized in the report. During the first phase (2005–2007), regulated entities were allowed unlimited use of credits, except for those from large hydropower projects and land use, land-use change, and forestry projects.

However, in practice no offsets were used due to the allowance price crash at the end of phase one. “In phase two (2008–2012), after the EU ETS cap was tightened, offsets became an attractive option, but concerns circulated about the additionality and environmental integrity of some project types. The EU consequently restricted offsets of certain types by introducing qualitative criteria and banned credits from industrial gas projects.”^[25]

The EU experience illustrates the importance of a market with prices that support the development of offset projects and of a robust set of criteria for project development to ensure continued public support.

THE ROLE OF OFFSETS IN NET-ZERO – AND THE CONTROVERSIES SURROUNDING THEM

There is a growing consensus concerning the role of offsets in a net-zero world. For example, Bloomberg states:

“Few organizations can reach their net-zero goals solely via emission-reduction initiatives. Most are left with some residual emissions, which they can neutralize with carbon offsets.”^[26]

However, despite this growing consensus, the use of offsets continues to be criticized for a number of reasons, including:

• Offsets may delay active emissions reductions — they should only be considered after all means of GHGe reduction and elimination have been exhausted.
• Offsets may lead to inappropriate quantification of emission reductions of projects.
• Offsets may result in potential double-counting of emission reductions.
• Using offsets creates a disincentive to take mitigation action.

The criticism of offsets in part can sometimes result from the different role that offsets play in reporting GHG reductions and providing incentives and financing to GHGe entities to reduce their GHGe. The following example illustrates these different roles.

Consider the following categories of offset projects:

1. Projects that conserve and enhance natural sinks and reservoirs of greenhouse gases. Examples include reforestation and restoration of wetlands.
2. Human constructed processes to remove GHGs that are in the atmosphere and transport them to a storage facility where they can be sequestered and stored them there for an indefinite time. This is commonly known as Direct Carbon Capture (DCC).
3. Capturing GHGe directly from an emitting source and transporting them to a storage facility where they can be sequestered and stored for an indefinite time. This is commonly known as Carbon Capture and Storage (CCS).
4. Replacing a GHG emitting process with a different process that generates less or zero GHGs — for example, replacing a compressor fuelled by natural gas with an electrically driven This is commonly known as “fuel switching.”

Offset Projects in the third and fourth categories remove emissions that are being simultaneously emitted from an identified process or remove emissions that would occur were it not for the offset project. While that in itself results in “net-zero,” selling the resulting offset credit enables an equivalent amount of GHG to continue to be emitted by the purchaser.

Further, a “fuel switching” offset project fully or partially eliminates the GHGe associated with an emitting process. As a result, with respect to those eliminated GHGe, there is no real “offset”.

However, many jurisdictions allow trading in offset credits generated from fuel switching and from CCS, with sound policy reasons for doing so. In essence, all offsets provide a financial incentive for the offset project developer to reduce or eliminate GHGe and provides a pathway for subsidization from an owner of a GHGe process. Overall, emissions are reduced.

That said, there can still exist the potential for double counting if both the seller and the purchaser of an offset credit claim the same GHGe reduction.

With the exception of offsets in category 4 above, which incent permanent GHGe elimination, all categories of offsets are considered by many critics to enable continued GHG emissions.

A 2021 Nature article summarized the criticisms:

Net-zero commitments are not an alternative to urgent and comprehensive emissions cuts. Indeed, net zero demands greater focus on eliminating difficult emissions sources than has so far been the case. The ‘net’ in net zero is essential, but the need for social and environmental integrity imposes firm constraints on the scope, timing and governance of both carbon dioxide removal and carbon offsets.^[27]

Are these criticisms valid? Notwithstanding these criticisms, achieving net-zero has become the main framework for GHG reduction strategies, with many countries and organizations setting net-zero targets and venturing into the realm of offsets as a pathway to meeting those targets.^[28]

OFFSET PROGRAM DESIGN

Given the criticism of offsets, how can they form part of an accepted and successful net-zero strategy? The International Carbon Action Partnership (ICAP) is an international forum for governments and public authorities that have implemented or are planning to implement emissions trading systems (ETS). In its work with cap and trade ETS, ICAP has considered the role of offsets in those systems and manages offset credit trading markets. According to the ICAP, offsets should:

• be additional, meaning that the reduction would not have occurred without the incentive created by offset revenues;
• be appropriately quantified, such that emission reductions are not overestimated;
• be permanent or come accompanied with a way to mitigate the environmental damage of reversals;
• be appropriately accounted for (such that emission reductions have an exclusive claimant and are not double-claimed); and
• not create disincentives for mitigation action by the jurisdiction hosting the offset project^[29]

Perhaps in response to the criticism of offsets, many jurisdictions have imposed limits on the amount and nature of offsets that can be used. While this may be a reasonable approach to mitigate the risk of an offset program that is unpopular, can the limit itself pose a risk to a net-zero strategy? Achieving net-zero is viewed by many as challenging and expensive, therefore limiting the use of offsets could potentially compromise efforts to reach it.

CONCLUSION

Offsets put the “zero” in “net-zero.” Without them, all human-made GHG emitting processes must be eliminated or replaced with non-emitting processes. Without offsets, we will have to learn to live without those GHG emitting processes that cannot be replaced with a non-emitting process.

Given this stark choice, clearly there is a role for offsets. However, the viability of offsets depends on many things, including their integrity, their economics, their public and political acceptance and the ingenuity of developers. How can Public Policy support?

The Advisory Council Report states that to achieve the country’s goals in the most cost-efficient way, electricity’s market share will need to grow roughly threefold within a single generation, to become the country’s primary form of energy supply. Further, current forecasts show that more than 10 gigawatts (GW) of new, emissions-free electricity will need to be added to Canadian power systems every single year from now until 2050. This means that electricity generation capacity must grow at least 3 times as fast as it has in recent decades.^[30]

Tripling, in 25 years, the amount of electricity generated and delivered is an ambitious goal that will, as the report points out, require considerable regulatory reform and an estimated investment of between $1.1 and $2 trillion. To put 10 GW into perspective, it is roughly equivalent to 9 new Site C dams each year from now to 2050!

In addition, while some modelling shows an overall reduction in total energy costs for 70 per cent of people, 30 per cent of people — the most economically vulnerable among us — will face higher energy bills.^[31]

Even if this electrification goal is achievable, this only accounts for less than half of Canada’s 2050 emissions. Offset projects bridge the gap — in addition to backstopping the electrification effort, should that be needed.

It is essential to maintain public confidence in any offset policy. Is current public offset policy transparent and understandable? To be successful, it must be. Policy considerations include:

• Should there be a limit on the use of offsets to balance the need for mitigation action with the cost efficiencies that offsets offer?
• Should there be restrictions placed on the nature of offset projects?
• How should an offset credit market be managed?
• What, if any, public subsidies should be available for offset project development?
• Are verification and audit standards and practices sufficient to ensure: there is an exclusive claimant; emission reductions are not over-reported; the reductions are permanent and not double claimed?

The Advisory Council Report’s blue-ribbon panel recommended that government “[c]learly articulate a 2050 net-zero or carbon-neutral objective in the energy roadmap.”^[32] Section 4.1 of the Paris Agreement^[33] provides guidance here: we need an equitable, economically sustainable pathway to meet our net-zero One that doesn’t disadvantage our citizens that are least able to afford it.

Open discussion and a thoughtful approach to offsets are needed. Let’s keep an open mind to how offsets can help Canada reach its net-zero targets and meet its international obligations.

* David Morton is a professional engineer with over 45 years of experience, specializing in utility regulation and energy policy. He led the British Columbia Utilities Commission (BCUC) and conducted several significant inquiries for the British Columbia government. Currently, he is involved in international energy regulatory associations and frequently participates in global conferences and training sessions.

1. Canada Electricity Advisory Council, Powering Canada: A blueprint for success, Final report (2024), online: <natural-resources.canada.ca/our-natural-resources/energy-sources-distribution/electricity-infrastructure/the-canada-electricity-advisory-council/powering-canada-blueprint-for-success/25863#a11> [CEAC].
2. Ibid at 37.
3. Potential reductions from electrification of 268 MT / Total annual emissions of 708 Mt = 28% (ibid at 10).
4. CEAC, supra note 1 at 10, 49.
5. Paris Agreement, being an Annex to the Report of the Conference of the parties on its twenty-first session, held in parties from 30 November to 13 December 2015—Addendum Part two: Action taken by the Conference of the parties at its twenty-first session, 12 December 2015, UN Doc FCCC/CP/2015/10/Add.1, 55 ILM 740 (entered into force 5 October 2016, accession by Canada 4 November 2016) [Paris Agreement].
6. Intergovernmental Panel on Climate Change: Data Distribution Centre, “Definition of Terms Used Within the DCC Pages: Greenhouse Gas (GHG)” (last visited 1 August 2024), online: <ipcc-data.org/guidelines/pages/glossary/glossary_fg.html>.
7. See United Nations Climate Change, “Process and meetings: The Paris Agreement” (last visited 1 August 2024), online: <unfccc.int/process-and-meetings/the-paris-agreement>.
8. See Government of Canada: Environment and Natural Resources “UN climate change conference: The Paris Agreement” (last visited 1 August 2024), online: <www.canada.ca/en/environment-climate-change/services/climate-change/paris-agreement.html>.
9. Paris Agreement, supra note 5 art 13.
10. Environment and Climate Change Canada, National Inventory Report 1990–2021: Greenhouse Gas Sources and Sinks in Canada, Canada’s submission to the United Nations Framework Convention on Climate Change (2023 edition, part 3), online (pdf): <publications.gc.ca/collections/collection_2023/eccc/En81-4-2021-3-eng.pdf>.
11. See Paris Agreement, supra note 5 art 5.1; See also United Nations Framework Convention on Climate Change, 9 May 1992, 1771 UNTS 107, art 4.1(d).
12. Intergovernmental Panel on climate change, Climate Change 2021: The Physical Science Basis: Annex VII: Glossary, Working Group 1, J.B. Robin Matthews et al, Cambridge University Press, 2022 at 2249.
13. Having half of the desired concentration of CO2 for 50 years followed by twice as much for the next 50 years would result in net-zero over the 100 year time span, but that is not the intent of the Paris Agreement.
14. Myles R. Allen et al, “Net Zero: Science, Origins, and Implications” (2022) 47, Annual Rev of Envt and Resources 849, online: <annualreviews.org/docserver/fulltext/energy/47/1/annurev-environ-112320-105050.pdf?expires=1723048008&id=id&accname=guest&checksum=FD05D4E10A6512A68A1E9E1EF6B93E72>.
15. Paris Agreement, supra note 5 art 4.1.
16. Hans-Otto Pörtner et al, Global Warming of 1.5°C (Intergovernmental Panel on climate change: 2019), online (pdf): <www.ipcc.ch/site/assets/uploads/sites/2/2022/06/SR15_Full_Report_HR.pdf>.
17. Government of British Columbia, “Getting started with the B.C. output-based pricing system” (February 2024),  online  (pdf ):  <www2.gov.bc.ca/assets/gov/environment/climate-change/action/carbon-tax/obps-technical-backgrounder.pdf> [Government of British Columbia].
18. Western Climate Initiative, Inc., “Greenhouse gas emissions trading: a cost-effective solution to climate change”, online: <wci-inc.org>.
19. Western Climate Initiative, “Offset System Essential Elements Final Recommendations Paper” (July 2010), online (pdf ): <www.environnement.gouv.qc.ca/changements/carbone/documents-WCI/recommandations-finales-elements-essentiels-WCI-en.pdf>.
20. Ibid at 7.
21. See Jonathan Drance, “Examining California and Quebec’s cap-and-trade systems” (28 May 2015), online: <www.stikeman.com/en-ca/kh/canadian-energy-law/examining-california-and-quebec-cap-and-trade-systems>.
22. Legislative Analyst’s Office, “California’s Cap-and-Trade Program: Frequently Asked Questions: How Do Offsets Work?” (24 October 2023), online: <lao.ca.gov/Publications/Report/4811>.
23. Stephanie La Hoz Theuer et al, Offset Use Across Emissions Trading Systems, , (Berlin: Secretariat of the International Carbon Action Partnership, 2023) at 11, online (pdf): <icapcarbonaction.com/system/files/document/ICAP%20offsets%20paper_vfin.pdf>.
24. Ibid.
25. Ibid at 13.
26. Bloomberg Professional Services, “Why net-zero targets require carbon offsets to succeed” (25 April 2022), online: <www.bloomberg.com/professional/insights/commodities/why-net-zero-targets-require-carbon-offsets-to-succeed>.
27. Sam Fankhauser et al, “The meaning of net zero and how to get it right” (2022) 12 Nature Climate Change 15 at 19, online (pdf) : <www.nature.com/articles/s41558-021-01245-w.pdf>.
28. John Lang, “Energy & Climate Intelligence Unit: Net Zero: A short history” (8 January 2021), online: <eciu.net/ analysis/infographics/net-zero-history>. See also Jorei Rogelj et al, “Net-zero emissions targets are vague: three ways to fix” (16 March 2021), online: <www.nature.com/articles/d41586-021-00662-3>.
29. Supra note 23 at 10.
30. This presents a dual challenge.
31. CEAC, supra note 1 at 34.
32. Ibid at 158.
33. Government of British Columbia, supra note 17.