Dear Ms. Shelley Hyatt,…

Dear Ms. Shelley Hyatt,

Re: EBR Registry Number 013-1460, Ontario Offset Credits regulation under the Climate Change Mitigation and Low-carbon Economy Act, 2016

We are pleased to submit comments to the Ontario Offset Credits regulation. Bluesource is one of the longest-standing GHG offset developers in North America and has have a strong track-record of successful offset project development in both the California and Alberta compliance markets. We take a long-term view on GHG mitigation and we depend on highly credible compliance offset markets that balance the integrity of the GHG reduction and the ability to incentivize project sponsors to undertake offset projects. We wish to provide our perspectives on what works and does not work for efficient and credible offset systems to the Ontario Government’s consideration of the Ontario Offset Credits regulation.

We have provided some generic comments related stated policy measures but organized our comments that are specific to the regulations according to the sections:

1.   Offset Protocol Approval Process – The offset program has the potential to enable innovation in GHG mitigation technology, but requires an open and dynamic process by which proponents can develop new protocols for approval. The Alberta offset system has such a process, and this has resulted in many innovative offset initiatives.

We recommend the inclusion of a clear and open framework for the introduction of new offset protocols, as well as the review and existing ones.

2.    Timelines for Approval Process – The mitigation potential of the offsets program, and its ability to incentivize projects in the agricultural and forestry sectors in particular, will depend heavily on the cost and length of registration and approvals process. Offset initiative sponsors need transparent and foreseeable costs and timelines for registration and issuance to commit to undertake initiatives. For this reason, California establishes maximum periods for offset issuance according to Section 95981.1 of the Regulation for the Cap on Greenhouse Gas Emissions and Market-based Compliance mechanisms.

Regulated maximum timelines are even more important if Ontario operates its own registry and does offer a competitive market for registries.

We recommend specifying maximum periods for approvals and cancelations of initiative registrations, approvals of applications for offset credits, the creation of the credits, and approvals of reversal reports.

3.  Offset registry - The Government has indicated in its response to comments on the regulatory proposal that it intends to develop an in-house offsets registry. The development of a new offset registry is a concern due to the potential for delays in registering offsets as the registry is put in place. Existing registries used in California and Alberta offer an alternative that does not require costly and timely development and ensures a competitive environment for reducing registry costs. The use of existing registries would allow offset projects to start using protocols as they come into effect and start providing low cost mitigation opportunities to capped entities without further delays.

We encourage the Ontario Government to use existing registries that meet the WCI standards and to put this infrastructure in place as soon as possible.

4.  Eligibility - Section 5 (1) 1. appears to render ineligible any offset project that has registered as a voluntary project. We recognize the need to protect against double-counting and it will be important to ensure that an emission reduction does not co-exist on voluntary and compliance registries. However, Ontario based organizations have been some of the most progressive early adopters of GHG reduction projects and a significant number are listed on current voluntary registries and have serialized volumes not by choice, but because there have been several false starts both with the Ontario government or federal government on a compliance offset program. As a result, they have resorted to voluntary offset markets to try to monetize whatever values are possible. As such, Section 5(1)1. overwhelmingly disadvantages Ontario-based projects and entrepreneurs and punishes early adopters.

We respectfully suggest that Ontario follow the precedent set by California and permit a pathway for existing listed projects and issued volumes on existing registries to be re-listed on a future compliance registry, subject to a rigorous re-verification process and appropriate accounting measures to ensure that no double-counting occurs.

5.  Application for Registration - Section 7(4)1. In reference to an offset initiative initial application to form a group, the provision requires a sponsor to provide estimates of total GHG reductions from all initiatives that are or will be part of the group. This may be very difficult to do for groups that start with one or more offset initiatives but that have significant potential to add initiatives in the future. It would either require very high-level estimates that make assumption about how many initiatives will join the group, or it would require forming groups with only those initiatives that have committed to the group at the outset. In our experience, offset groups often require one or few initiatives to demonstrate viability and the larger potential for emissions reductions is associated with new initiatives that could not be planned at the outset.

We recommend that the provision eliminate the need to provide estimates of GHG reductions from all initiatives within a Group and clarify that Groups can start with at least one initiative and add initiatives in the future that are not contemplated at the outset.

6.  Cancelation of Registration - Section 9(2) and 9(6) require the cancellation of all offset initiatives within a group if the sponsor or the Director respectively initiates cancellation related to any individual initiative. This restriction creates undue risk for all initiative sponsors and the group sponsor by making them jointly liable for any incident leading to cancellation. Offset groups represent significant mitigation potential for initiatives in agriculture and forestry in particular, but are likely to involve many landowners who are otherwise unrelated. Potential initiative sponsors such as these landowners who lack the scale to develop individual offset initiatives, will also be highly unlikely to undertake an initiative within a Group due to the joint liability of cancelation.

We recommend eliminating subsections 2 and 6 and allowing either the Group Sponsor or the Director to request cancellation or cancel individual initiatives without canceling the Group. Any reversals related to a cancelled initiative within a Group that exceed the materiality threshold could be recovered from the Group or the buffer pool, as dictated by the cause of the reversal. This would allow Groups to contractually bind individual initiatives to live-up to their commitments without unduly burdening each one with joint risk of cancelation.

7.  Crediting Periods - Section 15(8) limits a sequestration offset initiative to 3 subsequent crediting periods. This limitation appears to be arbitrary and inconsistent with the objective of the offset program to generate an incentive for project sponsors to go beyond common practice. At the end of a 3rd crediting period, a project sponsor wishing to continue investing in emissions reductions that go beyond the baseline determined at that time should be provided the incentive to do so.

We suggest removing the limitation of 3 crediting periods.

8.  Reporting Periods - Section 12(1)(a) and (b) establish a 12-month reporting period which dictates the minimum and maximum period for which issuance of offset credits can be requested. In the case of large projects or initiatives that reduce emissions in one particular instance (ODS destruction), a shorter reporting period may be desirable to improve project economics by generating revenues earlier on. Allowing for shorter reporting periods would not lead to excessive burden on the registry and approvals process as the shorter-interval verifications would only be viable for initiatives that involve a single verification or that are large enough to justify the added cost. We request that this provision define the 12-month terms as a maximum but have no minimum limitation within the period.

9.  Creation and Transfer of Credits - Section 16(3)(a) specifies that 3% of non-sequestration credits be retained to manage potential emissions reduction reversals. We believe this to be an important component of the offset system to ensure its integrity and manage risks in an efficient and effective manner. However, there should be a mechanism by which retained offsets are returned to project owners after a certain period of time without suffering a reversal. Such a mechanism would also need to account for overall availability of retained offsets to cover reversal risk. This is particularly important for sequestration offsets for which retained volumes can represent a material portion of the overall offset value.

We request that offsets retained under this provision be returned to initiative sponsors once criteria are met with respect to the overall quantity of retained offsets and periods without any reversals for individual initiatives.

10. Reversals – Sections 18(1) and (2) establish a 1-tonne threshold for reversals and create a very inconsistent approach to treating error, misstatement, and omissions that leads to potentially significant transaction costs for very little additional assurance. The verification process uses the 5% materiality threshold to assess whether the initiative report represents a material misstatement. This is good practice in GHG quantification and recognizes that a limited degree of error must be accommodated to be practical. However, if an error, misstatement or omission is discovered after the fact and needs to be disclosed as a potential reversal, the criteria changes to identifying whether this has led to over-crediting of 1 tonne or more.

A 1 tonne over-crediting threshold could be equivalent in many projects to a materiality threshold that is far below 5% (potentially a small fraction of 1%) and would represent an unreasonable standard for managing uncertainty. The result of applying this standard will be extremely onerous and costly 3rd party verifications, potential under-reporting of ex-post errors and omissions, and a lengthier bureaucratic process. The materiality threshold protects against any material reversals. As a result, the added protection of the 1 tonne reversal threshold is for immaterial reversals at the expense of much higher costs and administrative burden. There are sufficient provisions within the protocols and the buffer pool to ensure that emissions reductions are credited on a very conservative basis.

We recommend a more balanced and consistent approach to managing reversals by using the 5% materiality threshold as the single standard for determining whether a reversal has occurred.

11. Verification – Section 22(1)2 specifies that an on-site verification is needed for each initiative report within a group, unless otherwise specified within a protocol. One of the principle purposes of a project grouping is to reduce the costs of verification for each initiative sponsor by pooling the risk of error and misstatement, thereby allowing for verification on a sub-set of the group to achieve the same overall assurance of integrity. Without such a provision, offset groups lose their purpose. For this reason, we believe that a mechanism for on-site verifications on a statistically representative sample of initiatives within a group should be the default established in the regulation. Individual protocols could then address discrete circumstances where this may not be appropriate. This approach would provide the needed certainty to offset group sponsors.

We respectfully suggest adapting this provision for initiatives within a Group to allow for verification of a statistically representative sample of initiatives for each reporting period. The viability of small scale initiatives would also be enhanced by a provision similar to 14(4)(b) allowing for greater flexibility in reporting periods.

Should you need any clarifications on any of the points raised herein, please do not hesitated to contact us.

[Original Comment ID: 211352]