Domestic Emissions Trading for Greenhouse Gases

Domestic emissions trading will be an important component of the Government’s market-driven approach to reducing emissions of greenhouse gases, and air pollutants.  Well-designed emissions trading systems can reduce overall costs associated to complying with regulations by allowing firms with high costs of emission reductions to fund lower cost emission reduction projects at other firms.  

The emissions trading system for greenhouse gases that will be part of the Regulatory Framework will have a number of components:

• A domestic inter-firm trading system, through which regulated firms may buy and sell emission credits among themselves, will be the central component. 
• A domestic offset system will allow regulated firms to invest in verified emission reductions outside the regulated system. 
• In addition, Canadian firms will have access to certain qualifying credits from the Kyoto Protocol’s Clean Development Mechanism for compliance with the regulations. 

Inter-firm Trading

The central component of the emissions trading system for greenhouse gases would be a baseline-and-credit system.  For each firm, the baseline would be its emissions intensity target.  Firms whose actual emission intensity in a given year is below their target would receive tradable credits equal to the difference between their target emission intensity and their actual emission intensity, multiplied by their production in that year. These credits could be banked for use in future compliance years or sold to other parties through an emissions trading market established by the private sector. 

Domestic Offset System

The emissions trading system would also include domestic offset credits; these are emission reductions that take place outside the regulated activities.   Examples of possible offset project include the capture of methane from landfill gas that is then used to generate electricity, energy-efficiency projects, and projects that store carbon in agricultural land.  This system is intended to engage other sectors of the Canadian economy to make greenhouse gas reductions.

Credits would be issued for verified emission reductions.  These credits could be sold to regulated entities to use for compliance purposes or they could be purchased by individuals or organizations that wish to "offset" their own greenhouse gas emissions or to retire such emissions for the good of the environment.   Given projects would be granted one offset credit per tonne of greenhouse gas reduction or removal achieved, measured in carbon dioxide equivalent.

The framework for the offset system will be built on the experience gained in Canada and on similar systems in ot2007-09-05play a major role in the offset system including verifying emission reductions achieved from eligible offset projects and providing infrastructure and services required for the trading of the credits.

The offset system will start as soon as possible in order to provide adequate time for projects to generate emission reductions. 

The Clean Development Mechanism

Canadian firms will have access to certain credits from the Kyoto Protocol’s Clean Development Mechanism (CDM) for purposes of meeting their regulatory obligations.

 The eligibility criteria for projects under the CDM have been internationally agreed on. Reductions are approved by an Executive Board, of which Canada is a member, and then credits are issued.  The Government will determine which types of CDM credits should be eligible for regulatory compliance in Canada.  

Access to CDM credits for compliance purposes under the regulations for each firm would be limited to 10% of its total target. 

International Linkages

Canada will actively work with U.S. partners to explore opportunities for linking Canada's emissions trading system with regulatory-based emissions trading systems at the national, regional or state level.  Canada will also actively explore cooperation on emissions trading with Mexico.

The Government will also monitor the development of the international carbon market.  As this market becomes more mature and robust, and emissions monitoring, verification and reporting systems evolve further, the Government will consider further linkages that could allow a broader range of international credits to become eligible for compliance with Canada’s regulatory system.  An essential condition is that any international credits used towards compliance with Canadian regulations will have to represent real, verified emission reductions.