On Wednesday, June 8, 2022 Canada launched its first federal carbon offset market, taking another step towards a nationalized carbon pricing strategy, similar to the existing Emission Trading Systems (ETS) such as in the EU, UK and other jurisdictions held by the Ninepoint Carbon Credit ETF (ticker CBON). The province of British Columbia, Quebec and Alberta already have their own compliance credit systems in place. However, there have been none at the federal level - until now.
The Greenhouse Gas Pollution Pricing Act, which came into effect in June 2018, provides the legal framework for the federal carbon pricing system in Canada. This system consists of two parts:
Similar to the emissions trading system in other countries, compliant companies covered under the OBPS are required to compensate for their GHG emissions that exceed an annual emissions limit. At the end of each compliance cycle, all companies under the federal OBPS that exceed their annual emissions limits have three options to comply:
The purpose of the federal carbon offset market is to help heavy emitters reduce compliance costs and maintain competitiveness.
As we discussed in our April commentary, we view the carbon offset market as the ‘wild west’ with many opportunities, and some risks, ahead. The creation of the Canadian federal carbon offset market is another step taken to enhance the transparency of the ‘wild west’ voluntary carbon market. The new program will provide a financial boost to the industries that the offset projects operate in and provide compliant companies another tool to decide when and how to manage their carbon emissions.
How to set up the rules under the new federal offset program is tricky though – the government needs to ensure enough flexibility is given to the compliant companies to ensure their competitiveness while maintaining the integrity of carbon pricing scheme. Right now, only landfill projects that recover landfill gas from their operations will be able to generate the new carbon offset credits, so we are unlikely to see material increase in carbon credits supply – at the moment. The government needs to make sure that, as the program evolves, the new program will not create a flood of compliance credits that allow major emitters to buy compliance credits at a price less than the current federal carbon price. They also need to ensure that the offset credits submitted under the new program will be audited to ensure that the cuts are additional and permanent.
Overall, in our view, a more regulated carbon offset market is needed, and the creation of the new program further signals the long-term growth potential of carbon market. As the rules become more established and mature, a more transparent carbon market will allow us to put the right price on carbon. Ultimately, a stronger carbon price will kick-start more growth in clean, renewable energy and will incentivize businesses to discover more sustainable business models.
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