Canadian Regulatory Framework for Industrial GHG Emissions and Domestic Trading System

The system proposed by the Canadian government is described as a “baseline and credit system”. This system is based on the allocation of units to a company for exceeding its intensity-based greenhouse gas (GHG) emissions reduction targets [1 credit = right to emit one metric ton of carbon dioxide equivalent (CO₂e)¹].

The baseline and credit system works like this: at the end of each compliance year, the emissions of the large regulated industrial emitters will be verified. Each emitter must then offset its GHG emissions against its intensity-based GHG emissions reduction target established by the government. The discrepancy between the imposed target and the actual emissions may be offset by, among other things, the purchase of units on the domestic market. The initial compliance year is 2010.

As part of the federal plan published in March 2008, in addition to internal reductions, large regulated industrial emitters will be able to choose from the following three compliance measures in order to ensure compliance with their GHG emissions reductions obligations in Canada:

1. Buying units on the domestic carbon market:
   1. Regulated emitters’ credits will be issued by government authorities at the end of a compliance year to regulated emitters that reduce the intensity of their GHG emissions below the target established by the federal government. These emitters will be able to sell their credits on the market or keep them for subsequent compliance years.
   
   
   2. Offset credits will be attributed to companies that will not be subject to intensity-based emissions reduction targets but will be involved in voluntary projects to reduce their eligible GHG emissions.
   
   Futures contracts proposed by the MCeX will be based on these Canadian units.
2. Contributing to a technology fund:
   The contribution to this fund will be limited to 70% of emitters’ compliance needs in 2010. However, this contribution rate will gradually be reduced between 2011 and 2017, and the contribution limit will disappear in 2018. The fund’s contribution rate has been fixed at $15/metric ton of CO₂e between 2010 and 2012, and $20/metric ton of CO₂e in 2013. The contribution rate would then be indexed to the nominal GDP.
3. Buying international units (CERs or Certified Emission Reductions) under the Kyoto Protocol’s Clean Development Mechanism (CDM). Access to CER credits for compliance purposes would be limited to 10% of each regulated emitters’ target.

¹ GHG emissions are calculated based on the equivalent quantity of carbon dioxide required to produce a similar warming effect. The six GHGs are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, sulphur hexafluoride and perfluorocarbons.