Generating (and selling) emission offsets from forest activities in Canada

Canada is now one of several countries aiming to achieve net-zero greenhouse gas (GHG) emissions within the next 30 years. To reach this objective, Canada can look to some of its natural strengths to help offset current GHG emissions from non-renewable sources. One such strength includes Canada’s expansive forest resources, which are in the process of being incorporated into Canada’s evolving federal and provincial carbon pricing and emission offset frameworks.

Canada’s forest resources

Canada’s forest area totaled 347-million hectares in 2020, accounting for nine percent of the world’s forest area and making Canada the third-most forested country in the world.^[1] This forest area represents a significant opportunity for carbon sequestration, notwithstanding that Canada’s managed forest area has in fact been a net source of GHG emissions over the last two decades (emitting more carbon dioxide than it absorbs) due to natural disturbances, mainly wildfires and insect outbreaks.

Forest management activities can increase the capacity of our forests to act as carbon sinks and thereby help offset GHG emissions from other industries. These activities include replanting and growing trees after harvesting mature forest; producing lumber products that effectively act as carbon storage mechanisms (because lumber products decompose and release carbon dioxide over long periods); planting strategies and genomics to adapt for climate change and insect or disease outbreaks; changing rotation lengths to optimize for carbon sequestration; and avoiding deforestation. Regulatory frameworks that allow companies to generate recognized emission offsets from these activities and sell them to facilities required to reduce or offset their emissions will incentivize these activities, and in turn benefit federal and provincial governments and the Canadian public.

Introduction to federal offset credits

At the federal level, Canada has taken several steps towards establishing a framework for emission offsets. The first step was the enactment of the federal output-based pricing system (OBPS), which requires certain industrial facilities to reduce their annual GHG emissions below applicable emission limits. The OBPS applies to facilities that emit 50 kilotonnes or more of GHG per year (or facilities with lower emissions that opt in), carry out activities covered by the federal Output-Based Pricing System Regulations (OBPSR)(adopted under the Greenhouse Gas Pollution Pricing Act [GGPPA]) and are located in provinces or territories that have not implemented their own carbon pricing systems for large emitters that meet the minimum federal standards.

An OBPSR-covered facility with GHG emissions below its emissions limit for a given year receives surplus credits, while a facility that exceeds its emissions limit must either pay an excess emissions surcharge or use compliance units to account for each tonne of excess emissions. Compliance units can take one of the following three forms:

• surplus credits a facility has earned in a previous year or purchased from another facility that is required to meet an emissions limit
• provincial or territorial offset credits formally recognized as compliance units under the OBPSR
• federal offset credits generated by voluntary activities (not required under the OBPSR or covered by other standards related to carbon pricing) that reduce emissions or remove GHG from the atmosphere

Currently, the third listed option — purchasing and using federal offset credits — is a purely theoretical one, as there is not yet a system in place to quantify, register and sell federal offset credits. However, the federal government is in the process of developing an offset credit system made up of the following three components:

• regulations under the GGPPA to establish the framework for offset credit generation, and to authorize the issuance of credits and the creation of offset protocols
• offset protocols to establish the methods for quantifying GHG reductions for different project types
• a credit and tracking system for offset projects and credits

With respect to the first component, the federal government published the draft Greenhouse Gas Offset Credit System Regulations (Canada) (Draft Offset Regulations) in March 2021, and these regulations are expected to be issued in final form by the end of 2021.

As we discussed in an earlier post on emission offsets in Alberta’s agricultural industry, the federal government has announced that its excess emissions surcharge will increase annually by $15 per tonne to reach $170 per tonne in 2030. Because the federal OBPS provides facilities subject to the regime with the option to pay the excess emissions surcharge as an alternative to using offset credits to comply with emission limits, the surcharge will act as an effective price ceiling for offsets generated in accordance with any finalized offset protocols. Increasing this price ceiling will therefore increase the potential value of federal emission offsets, including those generated from forest activities. Provincial carbon pricing on facility emissions must keep in step with the federal carbon pricing standard, so the value of emission offsets generated in accordance with any finalized provincial protocols is also expected to increase steadily over the next decade.

Federal offset credits for forest activities

The federal government announced in March 2021 that its first phase of offset protocols will include an offset protocol for improved forest management (IFM Protocol). The IFM Protocol, like other planned offset protocols, will provide methods for determining baseline (or business-as-usual) GHG emissions and for quantifying GHG reductions from that baseline to generate offset credits. The IFM Protocol will also set out detailed requirements for forest project monitoring, reporting and risk assessment and management.

The Draft Offset Regulations establish the information that a proponent will have to provide when registering an offset project, set out eligibility criteria for new projects and identify the time periods over which a project will be eligible to generate credits. For forest projects, the proposed crediting period is 30 years, with the opportunity to extend that period to a maximum of 100 years. Another important detail is that, as proposed, the Draft Offset Regulations would require that a certain percentage of all offset credits that a project generates be held back from the proponent and deposited into an “environmental integrity account” to act as insurance in the case of an involuntary reversal of GHG reductions, such as forest fires or insect outbreaks. For all biological sequestration projects, including forest projects, this percentage is to be three percent, plus an amount corresponding to the risk of disturbances that would result in GHG emissions.

Activities expected to qualify for offset credits under the IFM Protocol include such things as increasing rotation ages (i.e., the age of harvest for forest stands), thinning diseased trees, managing competing vegetation, and stocking trees to maintain or enhance carbon storage. The federal government has also indicated in a 2020 discussion paper that it contemplates developing a future offset protocol that covers afforestation and reforestation activities (i.e., creating new forest on non-forested land and planting trees on degraded forested land affected by natural and human disturbances).

The federal government has said it will release a timeline for the completion of the IFM Protocol soon.

Other Canadian jurisdictions

There are currently no provinces or territories with a system in place to recognize emission offsets from forest activities, but that is quickly changing, with British Columbia and Québec leading the way.

B.C. has a provincial framework in place for the recognition of emission offsets under its Greenhouse Gas Industrial Reporting and Control Act and Greenhouse Gas Emission Control Regulation (B.C. Regulation). The province is also developing a Forest Carbon Offset Protocol (FCOP) to allow offsets to be generated from forest activities on public and private lands, including afforestation and reforestation, improved forest management (e.g., improved stocking, fertilization, reducing burning and increasing long-term carbon storage) and avoided conversion of forest to non-forest land. B.C. published its draft FCOP in March 2021 and the window for feedback closed on May 31, 2021. The finalized FCOP is expected by the end of 2021.

Under the B.C. Regulation and the draft FCOP, the proposed crediting period for forest projects is 25 years, with the opportunity to extend that period to a maximum of 100 years. As in the case with the federal offset credit system, B.C. will require a percentage of credits generated by a forest project to be held in a contingency account to act as insurance in the case of an involuntary reversal of GHG reductions. In this regard, the “insurance” credit provisions in B.C.’s FCOP and the federal IFM Protocol may be impacted by increasing wildfire activity, which was on full display in 2021.

Meanwhile, Québec is in the process of developing an offset protocol for afforestation and reforestation projects on privately owned lands within the province. It published a draft regulation setting out project eligibility and quantification criteria for comment on August 4, 2021, and the public consultation period closed on September 18, 2021. A final version of the regulation is expected by the end of the year.

Conclusions

Notably, once the federal Draft Offset Regulations and offset protocols are finalized, the federal protocols will be applicable in all provinces and territories in Canada, except where the same project activity is covered by a provincial or territorial offset protocol. This means it will likely soon be possible for forest projects across Canada to generate and sell either provincial or federal emission offset credits.

As the value of emission offsets increases and regulations and protocols are finalized to recognize offsets from forest activities, we anticipate Canadian companies (and some private landowners) will be well positioned to take advantage of the opportunity.