The Carbon Offset Question: Will Canada Buy its Way to the Climate Finish Line?

On Dec. 9, after much deliberation and political theatre, the federal government, eight provinces and three territories signed the Pan-Canadian Framework on Clean Growth and Climate Change.

Saskatchewan and Manitoba were notably absent from the list of signatories.

But also absent was an explanation of just how and how much Canada will rely on emissions trading  — technically known as internationally transferred mitigation outcomes — to meet its 2030 target of cutting greenhouse gas emissions down to 524 megatonnes of carbon dioxide equivalent per year, a reduction of 30 per cent compared to 2005 emission levels.

In its framework Canada vaguely pledged to “continue to explore which types of tools related to the acquisition of internationally transferred mitigation outcomes may be beneficial to Canada.”

Yet Canada may be eyeing the offset tool as a fundamental part of achieving emissions reductions, especially if global resource prices rebound and the oilsands expand to production levels allowable under newly approved pipelines.

Simon Donner, climate scientist and assistant professor of geography at the University of British Columbia, says Canada was “definitely a leading part of the push to have a carbon trading market” included in the UN Paris Agreement, which aims to limit temperature increases to as close to 1.5 degrees Celsius as possible.

Dale Marshall, national program manager with Environmental Defence says emissions trading is “clearly something that’s being held up as not only an option but as a priority” for the Canadian government.

The new federal climate framework contains a gap, Marshall says, between expected emissions and climate targets.

“That gap can be filled by being more ambitious with regulations, it can be filled by ensuring the carbon price continues to rise…or it can be filled with the purchase of international credits.”

“The last option is certainly in the framework.”

However, emissions trading has developed a shoddy reputation over the years — which may account for the government’s decision to downplay the possibility of deploying it.

So, what exactly are emissions offsets or emissions trading schemes? How do they help reduce emissions? And what are the potential downsides?

How Does Emissions Trading Work?

If you’ve travelled on an airplane in recent years, you may have been invited to pay for offsets to mitigate the emissions associated with your flight. The money can be used to protect trees from deforestation, fund renewable power projects or cogeneration technology, or eliminate pollutants such as nitrous oxide and hydrofluorocarbon.

Governments have also participated in voluntary, one-time offsets, such as when the federal Conservatives spent $226,450 to make the 2010 Winter Olympics “carbon neutral.”

The purchase of offsets, whether personal, corporate or by government, basically amounts to a voluntary accountability mechanism.

An emissions trading scheme (ETS) is a different kind of beast, and one that arguably makes a bit more sense given there are now national climate commitments under the Paris Agreement that countries are expected to meet (as opposed to individuals who could ostensibly choose not to travel, for example).

Under a trading scheme, a jurisdiction can have an abatement opportunity “certified” by a governing body.

Investments in a wind farm or preservation of a peat forest designated for burning would be deemed equivalent to a certain number of tonnes of carbon dioxide equivalent. These tonnes are then represented in the form of certificates.

Other jurisdictions can buy those certificates and the seller can use the profits to fund further emissions abatements.

The seller can’t count the sold emissions reduction towards its national commitments — but the buyer can.

So How Does this Help Climate Change Again?

Ultimately, it’s about rooting out the cheapest ways to prevent a tonne greenhouse gas destined for the atmosphere from getting there.

If a country or a province can purchase cheaper offsets elsewhere, an international emissions trading scheme opens up the market to those purchases.

For instance, Ontario and Quebec are in the process of establishing cap-and-trade schemes that will link their emissions reduction efforts to inexpensive carbon offsets in California via the Western Climate Initiative.

Blake Shaffer, doctoral student at the University of Calgary with an expertise in energy economics, says it makes sense for provinces to seek out the least expensive carbon abatement opportunities.

He points to a recent study that found Ontario would require a $157/tonne carbon tax if it tried to achieve its emissions reduction target domestically, yet could achieve those same reductions by purchasing much cheaper offsets in California.

Shaffer says that means Ontario will get an equal amount of emissions reductions for a cheaper price. That same principle applies internationally.

“International offsets are an intriguing solution because in the end, a tonne is a tonne is a tonne,” he says.

“If a country like Indonesia has reduction opportunities for less than a dollar per tonne, it’s a fair question as to why we’re paying $50/tonne in Canada.”

The cost savings are potentially very large, he says, noting that if Canada is short 100 Mt in 2030, the difference between abating between $50/tonne or $10/tonne on international markets is $4 billion a year in savings (and there’s a likelihood Canada’s carbon price could be higher by then).

Shaffer also notes there are more emissions coming from Indonesia’s peat fires in one year than all of Canada so “there’s really big-sized potential” for reductions.

Have Emissions Offsets Been Used Before?

Emission offsets have been used before — with seriously mixed results.

Donner says that although emissions offsets had been discussed since the early 1990s, it was under the Kyoto Protocol — with its binding emissions limits that entered into force in 2005 — that the idea really gained steam.

“It’s not a new idea, “ Donner says. “And there are mechanisms in place, like Kyoto. Under previous governments, under the Chretien government and then the Harper government, when we were part of the Kyoto Protocol it was assumed for a long time that the only way we could meet our targets was to purchase offsets on a trading market.”

It’s those binding limits that really give rise to market approaches. If a nation or province isn’t close to meeting its own targets, the option exists to buy your way to the finish line.

The Kyoto Protocol spawned the European Union Emissions Trading System, the largest of its kind in the world. The system had certain “flexibility mechanisms” built into it to help countries purchase different kinds of offsets to meet their targets.

But the system was plagued with problems, like the so-called Clean Development Mechanism which has been accused of inefficiency, the undermining of Indigenous rights and fraud.

Donner says a major controversy under the mechanism involved companies purposely creating hydrofluorocarbon and other human-made gases only to destroy them for money.

In a similar vein, the whole trading system was marred by major issues such as a massive oversupply of allowances on the market and huge price spikes.

In 2015, it was found that the Joint Implementation scheme created in Russia and Ukraine following Kyoto led to “significant criminal activity” and the release of 600 million tonnes of emissions that should have been abated.

Many smaller offset initiatives have hit similar pitfalls.

In February 2013, it was found that many public institutions in B.C. had been paying $25/tonne for certificates only worth between $9/tonne to $19/tonne; later that same month, conflict flared up “over the appropriateness of counting credits in [Great Bear Rainforest] where it was understood that large swaths of land would be protected anyway.”

Indigenous groups have also voiced opposition to emissions offsets, due to the historic displacement of communities for privatization and commodification of nature into property.

So Why Are We Still Considering Emission Offsets?

The UN Paris climate conference changed everything.

Specifically, Article 6 of the Paris Agreement changed everything, allowing for the use of emission offsets to achieve national targets.

Former CEO of the International Emissions Trading Association, Andrei Marcu, called its unlikely inclusion a “major success and minor miracle.”

The recent UN climate summit in Marrakech expanded on that opportunity, effectively making decisions about the process for making the decisions about implementing it (that’s international geopolitical bureaucracy for you).

Marshall, who attended the climate talks in Marrakech as part of the Canadian delegation said the emissions trading scheme under Article 6 is undetermined as of yet.

“What we don’t have all the information on is how Article 6 will be articulated [in the Paris Agreement]. We still have two more years of negotiations to determine what the market mechanisms are and what the non-market mechanisms are as part of Article 6,” he says.

“Those will also determine to what extent Canada can rely on [emissions trading] as an option.”

Despite uncertainties, Canada was eager to have the option included in the agreement. Canada’s climate and environment minister Catherine McKenna chaired the negotiations on Article 6 in Paris and Canada’s senior negotiators described the element as “very dear” to them, Marshall says.

Emissions trading is expected to play an important and positive role in the way the Paris Agreement influences international climate policy.

So why such optimism?

For one, unlike with Kyoto, China is a full participant in the Paris Agreement. Shaffer suggests the momentum from its inclusion is resulting in an acknowledgment that global integrated action is cheaper than individual unilateral action.

Having China on board increases the potential of eventually equalizing abatement opportunities across the globe.

Amin Asadollahi, lead on climate change mitigation for North America at the International Institute for Sustainable Development, says the Paris Agreement specifically called for a detailed measurement, reporting and verification process.

While such a process has yet to be developed at the international level, some more localized systems, like the one serving the Western Climate Initiative, could serve as models.

Donner is also confident that we won’t see a repeat of previous problems with emission offsets.

Canada, he adds, pushed for guaranteed accounting to ensure incremental reductions that wouldn’t otherwise be performed and avoids double counting (in which both parties, buyers and sellers, take credit for emissions reductions).

“The good news is that by making mistakes in the past, the world can maybe figure out a better system this time,” he says.

Downsides of Emissions Trading

Of course, there are potential downsides associated with an international emissions trading scheme.

George Hoberg, environmental policy professor at the University of British Columbia, worries an over-reliance on offset measures could draw down ambitious climate leadership.

“Sharing technology and climate financing are also important indications of leadership, but only if they are a supplement to, not a substitute for, meeting domestic emission reduction obligations internally,” Hoberg says.

Asadollahi agrees: “Longer term, if you just rely on that and your emissions continue to go up, you’re not preparing your economy for this changing world.”

Marshall adds it is still important to focus on the hardline domestic policies and sectors that influence Canada’s emissions.

“I think the priority for those who want to see as much domestic action as possible is to continue to push for more ambitious emission reductions at home and for Article 6 to be relied on only to get Canada beyond its 2030 target, which we know is a weak target,” he says.

Critics also worry emissions trading could potentially be used to cover poor policymaking at the expense of public coffers.

Shaffer notes that offsets result in capital outflow — money leaving jurisdictions for specific reduction targets — unlike a carbon tax which results in a higher per-tonne price retained in the jurisdiction for possible investments in renewables, energy efficiency measures, rebates or tax cuts (that very debate surfaced at the Pan-Canadian Framework negotiations).

He says that requires governments to compare the trade-offs between a lower price per tonne and keeping all the money in the province.

Possibly the greatest danger of all — and this is something near impossible to assess as the federal government still hasn’t released the specific math of its 2030 plan — is the chance of overbetting on the availability of cheap offsets.

If many other countries manage to greatly reduce their emissions in the next decade-and-a-half due to strong climate policies and the falling price of renewables, the number of offsets on the global market may be fewer than expected.

That low supply of sellable certificates could drive up the price, the inverse of what happened under the European Union Emissions Trading System.

None of this takes into account the fact that the world’s combined national climate commitments don’t result in enough emissions reductions to stay within 1.5 degrees Celsius of warming.

“There are real accounting challenges in doing this,” Donner acknowledges.

With files from Carol Linnitt.

Image: Emissions rise from a processing plant in the Alberta oilsands. Photo: Kris Krug/DeSmog

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