SCOPE OF PRESENTATION ________________________________________

1. IMPLEMENTATION ISSUES FOR THE CREATION OF OFFSETS IN THE AGRICULTURE AND FORESTRY SECTORS FOR USE IN A POTENTIAL CANADIAN DOMESTIC EMISSION TRADING SYSTEM Forestry & Agriculture Greenhouse Gas Modeling Forum Workshop #2: GHG Mitigation(October 8 - 11, 2002 Shepherdstowm WV) Judith Hull (Climate Change Secretariat)Tony Lempriere (Canadian Forest Service)

2. SCOPE OF PRESENTATION________________________________________ POTENTIAL DET SYSTEM OFFSET SYSTEM • rationale for including offsets • general description of potential offset system • key implementation issues • linking offset system, DET system & national GHG inventory

3. OVERVIEW OF POTENTIAL DET REGIME_________________________________________ • Federal Discussion Paper (Option 4 example) - government allocates 279 MT of emission permits each year to the covered sectors • equivalent to 85% of anticipated 2010 emissions from large emitting industrial sectors (42% coverage) • facilities within the covered sector required to have permits equivalent to its emissions • key issue – developing a mechanism to allocate permits to facilities • Industry has argued for an approach that takes into account growth and emission intensity prospects of individual sectors.

4. Possible allocation formula • output–based gratis allocation • emission intensity factor x scale-back factor x output(one coefficient per sector/sub-sector) (facility specific) • emission intensity factor – emissions intensity achievable at ‘reasonable cost’ • scale-back factor – ‘tightens’ requirements if projected emissions exceed the notional 279 MT cap

5. . Compliance – reconciliation and true-up • emissions > permit allocation - Kyoto units/offset credits are transferred from Canada’s account to entity account • emissions < permit allocation - Kyoto units/offset credits are transferred from entity account to Canada’s account • estimated 20 MT /year of offset credits during the First Commitment Period

6. Advantages of output-based system • lessens disincentive to expand output • maintains incentive to reduce emissions per unit of output • removes problems related to new entrants, shut down • deals fairly with firms that took early action to reduce intensities Concerns with output-based system • challenge to implement (industry classes, measure output, permits/unit of output factor (emissions intensity x scale-back) • opposition to scale-back factor • could lower incentive for structural adjustment to lower emissions economy • risk to government from over allocation

7. OFFSET SYSTEM – RATIONALE FOR INCLUSION__________________________________________ • promotes investment in emission saving activities (and structural change) from sources not covered by the DET system(Offset activities are often difficult to regulate or incent through other programmes due to lack of information, uniqueness, etc.) • allows DET entities to achieve compliance at lower cost • keeps investment dollars in Canada • could result in environmental co-benefits • key sources currently being considered for offsets - landfill gas capture and flaring, agriculture and forestry reductions & removals

8. DESCRIPTION OF POTENTIAL OFFSET SYSTEM_____________________________________________________ • baseline-and-credit system • voluntary system – cannot be regulated • regulation establishing the DET system sets out the criteria and assigns the body(ies) for creation of a commodity that is acceptable for DET system compliance (offset credit) • criteria – real (beyond business as usual (BAU), net of leakage), measurable, verifiable, surplus (beyond what is required), additional/incremental • body – possibly a federal / provincial government department / agency or in the private sector

9. process – register acceptable offset projects & certify emission reductions/removals achieved in 2008-12 from these projects • could ensure offsets contribute to improving GHG inventory- applying more stringent DET targets- setting more stringent baseline for creation of offset- requiring a contribution to the environment (discount)- government buying offsets and canceling (not using) them • offset credits could be traded domestically (fully fungible) • design work building on real project experience from Canadian pilots – Greenhouse Gas Emission Reduction Trading (GERT) pilot and Pilot Emission Reduction and Trading (PERT) project

10. KEY IMPLEMENTATION ISSUES__________________________________________ (1) activities to include • use inclusion list (e.g., only activities with accepted baseline methodologies) or leave open? • include emission reductions/removals from BAU activities? • include activities where baseline setting is very problematic (e.g., avoided emissions from deforestation and forest management)? • include activites covered by other incentive programmes? (2) approach for boundaries & baselines • system project-based? entity- based? management unit? • appropriate boundary for assessing leakage? • appropriate baseline - static / dynamic? samples / continuous monitoring / models? assumptions (company plans, government policy & economic factors relevant to baselines)?

11. (3)basic requirements for offset creation • core criteria - real, measurable, verifiable, surplus, additional(?) • other criteria - contribution to conservation and sustainable use of biodiversity? • criteria related to Protocol – minimum forest size affected? conform to international definitions? • consistent with existing land use regulations? (4) project design standards • assessment for leakage (boundary, method, rigour)? • identification and mitigation of risks (mitigation reports, solutions)?

12. (5) measurement, monitoring standards & enforcement • measurement, monitoring standards – who develops? • reduce uncertainty? • enforcement of standards – who develops? enforces? pays? • certification systems required? (6) accounting rules • implications of using a different approach to quantify offsets and prepare our national accounting (e.g., using approaches like long-term averaging though the Protocol allows only actual carbon stock changes)? • permanence – length of time carbon must remain sequestered? accounting for possibility of net carbon emissions during the project or after it ends?

13. (7) project reviews • expertise required? • institutional requirements – Offset Office? • review process – balances rigour with review costs?

14. LINKING OFFSET SYSTEM, DET SYSTEM & NATIONAL GHG INVENTORY____________________________________________ • offset credits would be defined in the DET regulation as an acceptable DET compliance commodity • bottom-up (project level) and top-down (national inventory) reconciliation of data is not required & will not be undertaken • linkages between a point source inventory used to build the national inventory and a DET system - revolves around technical data monitoring & reporting issues- avoid two reporting systems for point source emission data- ensure data is reported in a way that it can be incorporated in the national inventory