Carbon Trading

Carbon emissions’ trading is a trading system that applies to greenhouse gas emissions. It is calculated in tonnes of carbon dioxide equivalent (tCO₂e). Carbon trading currently makes up the majority of emissions trading. It is one of the ways countries can meet their targets under the Kyoto Protocol to reduce carbon emissions and thereby mitigate global warming. European countries have been the most active in the trading of carbon dioxide emissions and the London, England financial market has established itself as the centre of international carbon trading.

In order to establish a carbon trading market, governments must set a cap on the amount of the pollutant that can be emitted. Industrial emitters have limits set on the amount of emissions that are permitted by the industry or facility. The total amount of allowances and credits cannot exceed the cap, limiting emissions to the regulated level. Industrial emitters that exceed their cap must buy credits or offsets from those who pollute less. The transfer of allowances is referred to as a trade.

Carbon trading is seen as a better approach than direct carbon tax or regulations since in theory it achieves pollution reductions at the lowest possible cost to society, although detractors cite complexity, monitoring and enforcement problems. The overall goal of an emissions trading plan is to reduce emissions. The cap is usually lowered over time reducing emissions gradually. In many cap and trade systems organizations that do not pollute may also participate and earn credits for emissions reductions. The value of emissions credits will vary in accordance with demand and the cost of compliance.

Emissions or carbon taxes are different from carbon credits as the taxes are a price instrument applying to all carbon fuel users and not just to specific industries or industrial emitters. A tax fixes the price while the emission level will vary according to economic activity, however the amount of emissions reductions is not guaranteed unlike a cap and trade system.

The government of Canada is in the process of implementing a cap and trade system as part of its recently introduced Regulatory Framework for Industrial Gas Emissions. Quebec and British Columbia have recently implemented carbon taxes and more recently British Columbia became the first province to introduce cap and trade legislation.

Canada’s Offset System for Greenhouse Gases is currently under development, and the framework for the Offset System has been developed and published. Because of its lower carbon footprint, propane is ideally positioned to reduce GHG emissions and collect offset credits when used to replace conventional fuels such as gasoline, diesel and fuel oil. It is anticipated that propane industry participants will develop programs achieving offset credits meeting the government’s criteria.

The key elements of Canada’s Offset System include:

The Offset System is designed to encourage cost-effective domestic greenhouse gas reductions or removals in activities that are not expected to be covered by proposed industrial air emissions regulations.
Opportunities for Offset Projects exist across the economy and must be in Canada.
The Government will administer the Offset System under the Canadian Environmental Protection Act, 1999.
To be eligible to generate offset credits, projects must be within the scope of the Offset System, and must achieve real, incremental, quantified, verified and unique reductions of greenhouse gases.
The credit creation process is as follows:
- A Protocol Developer creates a quantification protocol for the project type and Environment Canada approves the protocol
- A Project Proponent applies to have their project registered
- Environment Canada registers the project
- A Project Proponent reports the greenhouse gas reductions achieved from a registered project and ensures that a verifier has provided a reasonable level of assurance on the reductions claim
- Environment Canada certifies the reductions and issues offset credits.
Each offset credit will represent one tonne of carbon dioxide equivalent(tCO2e). Offset credits will be tradable and bankable within the unit tracking system. The proposed industrial air emissions regulations will set out the conditions under which regulated entities will be able to use offset credits for compliance.

Guidance documents will be published during the spring and summer of 2008 and Environment Canada will begin reviewing quantification protocols over the summer and project applications in the fall. Emitters will also be able to make contributions to a technology fund as a means of complying with the regulations, however the contribution rate will increase over time from $15.00 per tonne. The percentage of regulatory obligation will decline over time eventually becoming zero in 2018.

The value of the offset credits will depend upon market conditions. As the government has set $15.00 per tonne as its initial contribution rate to the technology fund it is likely that this will be the minimum value. Over the longer term it is anticipated that offset credits will be in the $30 to $40 range as this is the approximate cost for utilities to reduce GHG emissions from thermal plants. The government has indicated that consideration will be given to recognizing reductions in the United States, once the United States has a regulatory system in place and cross-border emissions trading is feasible. A cross-border system will add significantly to the trading market and improve the liquidity of offset credits.