Environment and Climate Change Canada
(“ECCC“) has published a preliminary
draft of the new federal offset protocol (“Draft
Protocol“) for Direct Air Carbon Dioxide Capture and Geological
Storage (“DACCS“) projects.
The Draft Protocol is aimed at DACCS projects that capture
carbon dioxide (“CO2“)
directly from the atmosphere using chemical, mechanical and/or
electrochemical processes, and inject it underground for storage in
subsurface geological formations. These projects remove
CO2 from the atmosphere, thereby reducing greenhouse
gases (“GHG“). The Draft Protocol,
developed in accordance with the principles of GHG Standard ISO 14064-2:2019, aims to
ensure that GHG removals resulting from DACCS projects are real,
additional, quantified, verified, unique and permanent. Once
finalized, proponents who develop and operate DACCS projects will
be able to generate carbon offset credits under the federal Canadian Greenhouse Gas Offset Credit System
Regulations (the
“Regulations“).
Background
Project activities that are eligible to generate federal carbon
offset credits in Canada are those listed in a published federal
offset protocol. The federal government has currently published
three federal offset protocols: (i) the Landfill Methane Recovery
and Destruction Protocol, applicable everywhere in Canada except
British Columbia, Alberta and Quebec; (ii) the Reducing Greenhouse
Gas Emissions from Refrigeration Systems, applicable nationwide;
and (iii) the Improved Forest management on Private Land protocol,
applicable in all provinces and territories except British
Columbia.
These offset protocols incentivize emission reductions across
sectors and establish standardized methodologies for generating
federally recognized carbon offset credits, which entities can sell
or use to meet regulatory obligations under Canada’s federal
carbon pricing system, including in those provinces which operate
under the federal Output-Based Pricing System, and/or capitalize on
additional revenue streams.
The Draft Protocol is currently open for public comment until
March 28, 2025. Once finalized, it will become just the fourth
federal offset protocol in Canada.
Eligibility
To generate federal offset credits under the Draft Protocol, a
project proponent must follow the established methodology and meet
certain requirements, in addition to the requirements established
in the Regulations. Key requirements set out in the Draft Protocol
include:
- Baseline Conditions: The project site’s
capture facility must not have previously captured
CO2. - Start Date: The project’s capture facility
must have begun operating on or after January 1, 2022. - Eligible Jurisdiction: The project site must
be in a single province or territory of Canada and located in a
province or territory that has sufficient environmental laws and
enforcement governing the permanent storage of captured
CO2. At this time, only Alberta, British Columbia and
Saskatchewan have been designated as such provinces. - Aggregation: Aggregation of two or more DACCS
projects is not eligible under the Draft Protocol. The project site
must include only one capture facility (meaning the equipment and
supporting buildings for direct air CO2 capture), and
one injection infrastructure (meaning the injection well(s) and
supporting equipment and buildings) with an associated storage
reservoir. - Additionality: Any GHG removal resulting from
the Project must not occur because of other federal, provincial or
territorial law or regulations, or other legally-binding mandates.
If GHG removals become legally required after a project is
registered, the GHG removal of a registered project will no longer
be credited starting on the date on which the law or the legal
requirement comes into force. Further, GHG reductions will not be
eligible for federal offset credits under this program if they
result from reducing or displacing fuels subject to a regulatory
charge on fuel or another pricing mechanism for GHG emissions. - Project Conditions: CO2 captured
and stored must come directly from the atmosphere. CO2
captured at the capture facility within the project site must not
have been injected into any storage reservoir or used for purposes
other than CO2 geological storage prior to the project start date.
The injection of captured CO2 into the storage reservoir within the
project site cannot be for the purpose of enhanced oil
recovery. - Avoiding the displacement of renewable energy:
If renewable energy is used for a project, the renewable energy
must be generated specifically for the project and must not be
displaced or removed from the grid or pre-existing end users. If
renewable energy is procured for the project, it must be produced
in the project’s province or territory. If renewable energy is
supplied through the grid, the project and energy production
facility must be connected to the same grid within the
project’s province or territory. Any proponent who procures
renewable energy for a project must ensure it has exclusive claim
to its environmental attributes and that they are not being claimed
by another entity.
Risk Management
The goal of the Draft Protocol is to develop permanent solutions
for the capture and geological storage of CO2 where such
activities are further incentivised with the opportunity to
generate carbon offset credits. However, there is a risk of
CO2 releasing from the storage reservoir into the
atmosphere or subsurface migration outside of the storage
reservoir. Depending on the magnitude and timing of a release, it
can cause a voluntary (an activity or action under the control or
responsibility of the project proponent or a failure in the
implementation of a reversal risk management plan) or involuntary
(outside of the project proponent’s control or responsibility,
like seismic activity) reversal of an offset credit. In order to
prevent such releases, project proponents must both identify
reversal risks throughout the lifetime of the project as well as
monitor the permanence of GHG removals within the project site. As
projects are developed under this program, project proponents will
need to be vigilant in ensuring that the risk of reversal is
minimized.
Key Takeaways
The Draft Protocol, once finalized, will be just the fourth
federal offset protocol established by the federal government. For
proponents interested in or currently involved in DACCS projects,
the Draft Protocol will provide certainty in how these projects can
successfully create federal carbon offset credits and lend
increased legitimacy to this sector of carbon capture. Investors,
stakeholders, buyers and traders of federal offset credits
developed from DACCS projects under the Draft Protocol will have
assurance from Canada’s federal government as to the legitimacy
and quality of these projects and the related offset credits.
While certain aspects of the Draft Protocol may change following
the public comment period, what remains clear is Canada’s
belief in the ability of DACCS projects to serve as yet another
tool for Canada to meet its net-zero GHG target.
McMillan is committed to helping clients navigate advancements
in the carbon market landscape and has previously published a
series of articles on carbon capture, utilization and storage and carbon pricing markets globally. Project
proponents, investors and stakeholders are encouraged to contact
the authors of this bulletin to learn how we can better support
your understanding of carbon pricing, federal offset programs and
emerging carbon credit related opportunities.
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
© McMillan LLP 2025
