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Canada to expand carbon offset trading program as part of low-carbon push

12 March 2021 Kevin Adler

Canada's national government published draft regulations earlier this month for the generation of carbon credits that can be sold to energy producers and users — one of several recent developments representing an acceleration of carbon-reduction efforts in the country.

The federal programs -- carbon offsets, drafting of a Clean Fuels Strategy, billions in extra spending, and the naming of a new advisory commission -- are aimed at moving the country towards its interim 2030 climate target of cutting emissions to 30% below 2005 levels and reaching net zero in 2050.

Together, the programs are bringing Canada in line with the depth and breadth of the European Union's climate plan. "Canada seems to be moving into the pole position [among national governments] on saying this is our target for reducing carbon, and this how we are going do it," said Anna Mosby, principal research analyst, energy-wide perspectives, IHS Markit.

"It's putting a lot of money behind programs…. Also, it's trying to strengthen its carbon price, which is always a good way to reduce carbon. And it's looking economy-wide, not just in power and not just in transport," she added.

The firm, legally accountable targets will be set under the Canadian Net-Zero Emissions Accountability Act, which was introduced in the House of Commons in November 2020. The targets for emissions reductions would begin in 2030.

On 25 February, the inaugural 14 members of the Net-Zero Advisory Body were named, with a task of advising the government on what those five-year targets should be. "The net-zero advisory body will help ensure we can continue to meet the environmental goals and economic ambitions of Canadians at the same time," said Minister of Environment and Climate Change Jonathan Wilkinson in a statement.

Carbon tax, greenhouse gas offsets

Canada has set a price for carbon under its Greenhouse Gas Pollution Pricing Act, which predates its net-zero pledge. The 2021 carbon tax rate is C$40/metric ton (mt), slightly less than US$32/mt.

Individual Canadian provinces can opt out of the national program if they receive federal approval for their own version that would provide equal carbon reduction. Three provinces have sued the national government over the carbon tax, saying that only provinces have the authority to impose it. That case was heard by the Supreme Court of Canada in September.

The carbon tax itself is imposed in various ways, such as directly on some fossil fuels, but also on emissions from regulated facilities, Mosby said. For those facilities, a carbon trading program enables them to purchase offsets if they exceed their emission limits.

The Federal Greenhouse Gas Offset program, proposed 5 March, complements the carbon market by enabling generation of new offsets. The program defines how farmers, foresters, municipalities, and others could generate and sell carbon credits. For example, a farmer could generate credits through practices that sequester carbon in the soil, or a municipality could generate credits by creating renewable natural gas from landfill waste.

"The potential to generate federal offset credits could incentivize activities leading to reductions in [greenhouse gas (GHG)] emissions or increases in GHG removal from the atmosphere by carbon sinks ... that are not required under existing regulations or covered by other measures related to carbon pollution pricing," Wilkinson said.

The planned offset program includes third-party verification and an "insurance" bank in which some credits are not available for purchase, but are held by the government as insurance in case credits are later voided.

The proposed offset regulations are subject to a 60-day comment period and further review, and Environment and Climate Change Canada said the final rules are expected to be completed before the end of 2021.

Carbon offsets could become more valuable as the nation's carbon fee is raised. The government is finalizing regulations that would raise the rate annually to reach eventually reach C$170/mt in 2030, said Mosby. At that point, it would add an estimated C$0.38/liter (US$1.13/gallon) to the cost of gasoline and diesel fuel (see prior IHS Markit coverage here).

Project grants announced

To achieve its 2030 and later targets, the national government already has started to fund projects in transportation, power generation, and energy efficiency. It announced the C$15 billion (US$12 billion) "Healthy Environment and Health Economy" plan in December 2020.

Among the recent bigger-ticket items:

  • C$2.75 billion (US$2.18 billion) over five years to electrify public transit systems across the country. In all, 5,000 zero-emission buses will be purchased with the help of the funding. Canada is home to electric vehicle manufacturers Nova Bus, Lion Electric Co., GreenPower, and New Flyer — each of which potentially will benefit from purchases.
  • Natural Resources Canada announced the first grant from its C$200 million (US$158 million) Emerging Renewables Power Program, which will drill two geothermal wells in the Yukon Territory in northwest Canada.
  • Natural Resources Canada also provided C$7.1 million (US$5.6 million) for Tugliq Energie Co. to help fund the third phase of its wind energy project at the Raglan Mine in northern Quebec. "These additions could bring the mine's renewable energy capacity up to 12 MW and its energy storage up to 6 MW, totaling 6.6-million liters per year of reduced diesel," the agency said on 10 March.
  • Infrastructure Canada will provide C$3.89 million (US$3.1 million) to replace turbines at the Klemtu hydropower plant in British Columbia.

Clean Fuel Standard

Yet another leg of Canada's climate plan is the Clean Fuel Standard, proposed in December 2020.

"The Clean Fuel Standard will require liquid fuel (gasoline, diesel, home heating oil) suppliers to gradually reduce the carbon intensity of the fuels they produce and sell for use in Canada over time, leading to a decrease of approximately 13% (below 2016 levels) in the carbon intensity of … liquid fuels used in Canada by 2030," the government said.

Stakeholder input on the rule has been received, and the government plans to have the rule finalized by the end of this year.

Alberta's investments

On the provincial level, Alberta, which is the largest producer of oil and natural gas in the country, provided updates in March on its Natural Gas Vision and Strategy. The province is aiming to become a global supplier of "responsibly sourced" natural gas, hydrogen, and petrochemicals. Alberta's strategy includes large-scale "blue" hydrogen production, generated from gas and paired with carbon capture, utilization and storage (CCUS) by 2030.

Alberta and the federal government announced a collaboration on 8 March to develop CCUS projects, and in a news conference to discuss the economic recovery, Alberta Premier Jason Kenney said the province and the nation "have been world leaders in the technology … and we're at risk of falling behind if we don't up our game."

Two CCUS projects are operational in Alberta. One of those, the Alberta Carbon Trunk Line (ACTL) developed by Enhance Energy, said on 10 March it has exceeded 1 million metric tons (mt) of carbon dioxide (CO2) sequestration. The 150-mile ACTL is the world's largest carbon capture and transportation project. Built at a cost of C$1.2 billion (US$950 million), ACTL can transport up to 14.6 million mt of CO2 per year, or about 20% of all oilsands emissions in Alberta, according to Environment and Climate Change Canada.

Separately, Canadian media outlets reported that Kenney has asked the national government to invest up to C$30 billion (US$23.7 billion) in CCUS over the next decade.

Supporting the province's energy transition, the Alberta Electric System Operator (AESO) has committed to retiring all coal-fired generation by 2030 and generating 30% of the province's power from renewable energy by 2030, up from 10% in 2019. AESO envisions 5 gigawatts of additional renewable power by the end of this decade, and a recent update showed that more than 180 connections of renewable power from existing generation to the grid are in progress (see Connection Project List).

Private sector's plans

The private sector is getting involved in the low-carbon transition as well. In addition to investments by oil and gas companies to reduce methane emissions and advance CCUS and hydrogen power, the Royal Bank of Canada (RBC) said in early March that it will expand its investments in sustainability projects to C$500 billion (US$400 billion) by 2025. It already has invested more than C$100 billion.

The bank will join the Partnership for Carbon Accounting Financials and the Center for Climate-Aligned Finance, said RBC President and CEO Dave McKay in a 25 February statement at the first RBC Capital Markets Environmental, Social and Governance Conference, which the bank said attracted more than 2,500 online participants.

The Pembina Institute, an Ottawa-based energy think tank, said the government should leverage its investments for post-COVID economic recovery to reduce carbon emissions. "Aid should not be given to traditional polluting sectors unless it comes with green conditions for sustainability improvements," Pembina Institute said.

In a report published on 11 March, "How to get net-zero right," Pembina said that financial incentives and regulations should prioritize emissions reductions. "There is nothing safer than a tonne of carbon pollution directly reduced," it said.

In a report published on 4 March, "Sustainable finance for a safe climate," Pembina said that government investment in energy and infrastructure projects should be judged by the standards of the Task Force on Climate-related Financial Disclosures.

Framework

The considerable funding intentions, the carbon tax, and new regulations to control emissions make Canada's climate action plan among the most robust in the world, said Mosby.

"From what I've seen, this is being talked about as one of the best frameworks out there for a country to move towards its net-zero emission goals. A lot of countries have goals, but few have released a specific plan about how they intend to get there," she said.

The five-year targets under the Canadian Net-Zero Emissions Accountability Act will be especially important, she said. "The UK has a similar plan with five-year targets, and it's been pretty successful at reducing targets," Mosby said. "The idea is, if you set five-year targets, you're more likely to see if you are on track, [especially if it's] legally binding, which this would be."

Includes original reporting by Abdul Latheef, OPIS.

Posted 12 March 2021 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

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