Canada's Domestic Carbon Emission and Trading Institution: Rules, Workability, and the Role of Offsets

When Canada ratified the Kyoto Protocol in December 2002, the country committed to decrease its Greenhouse Gas (GHG) emissions by 6% below its 1990 level. It is estimated that this commitment will require Canada to decrease emissions by 270 megatonnes (Mt) per year during the first commitment period 2008 to 2012. Carbon emission trading institutions have been identified, both internationally and domestically, as being a cost effective mechanism for supplying carbon emission reductions. The paper investigates two alternative mechanisms that can be used to allocate carbon and the potential development of the carbon offset credit market. The offset market could be important for the agriculture and forestry sectors, since these sectors have the potential to sequester carbon or reduce greenhouse gas emissions through various mitigation actions. Government is currently considering various types of offset credit vehicles in order to address the concern of permanence associated with carbon sequestration. These include temporary credits and "permanent offset credits." Temporary credits would provide a one year deferment for the purchaser. The "permanent offset credit" would give the buyer a permanent reduction but would require the producer of the credit to conduct the practice for a particular period plus some liability period during which the carbon would have to be stored. The choice of credit type, liability replacement rule, liability clock has an impact on the value of the "permanent offset credit." The paper estimates the economic incentives that can be expected from the alternative institutional arrangements.