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The system could be a financial boost to the agriculture and forestry sectors, both of which have opportunities to reduce greenhouse gas emissions and then sell the resulting credits to heavy emitters.David Ryder/Bloomberg

The federal government says it will launch its domestic carbon trading system by mid-2020, with the aim of creating a market that will allow major emitters who fall short of greenhouse gas reduction targets to buy credits from those who have reduced emissions outside of heavy industry.

But with just months to go, the rules for such a system have yet to be finalized, raising concerns about what kind of activities will generate credits and how the federal system will link up with its provincial counterparts.

Ottawa’s offset system has long been expected as part of the effort to reduce emissions among heavy emitters. But Ottawa is now providing more detail about the time frame for its introduction, with a rollout ahead of the third quarter. At that point, heavy emitters who don’t meet emission-reduction targets will have to pay a carbon levy to the federal government, or purchase a credit from another heavy emitter.

The targets apply to industrial operations that emit more than 50,000 tonnes of carbon dioxide equivalent annually, ranging from oil refineries to manufacturing plants to mining.

The offset system will offer another alternative: buying credits from emission-reduction projects in areas of the economy, such as most agricultural and forest activities, not subject to carbon pricing. The system could be a financial boost to the agriculture and forestry sectors, both of which have opportunities to reduce greenhouse gas emissions and then sell the resulting credits to heavy emitters.

Agriculture is largely exempt from carbon pricing; significant emissions from livestock and fertilizer use aren’t taxed. But farmers do pay carbon tax on some fuels, such as natural gas, and face indirect costs, which run into the thousands of dollars. Emissions credits from reducing untaxed emissions could help to lessen the financial burden that farmers face.

“This kind of system will enable them to see the other side of the equation, which is actually earning income from doing the right thing,” Environment and Climate Change Minister Jonathan Wilkinson said in a recent interview with The Globe and Mail.

The trading system will operate directly only in those provinces where the federal government has not given its approval for regulation of heavy emitters: Ontario, Manitoba, New Brunswick. In Saskatchewan, emissions from electricity generation and natural-gas transmission lines will be federally regulated.

But the rest of the country could also be incorporated into Ottawa’s system for trading carbon offsets, if provincial versions meet the federal government’s standards.

The plan is an extension of the government’s approach of tethering the power of markets to reducing emissions. The first step was to place a price on carbon, including the carbon tax on fossil fuels and the related measure of placing caps on the emissions of industrial heavy emitters.

Under what Ottawa calls output-based pricing, those heavy emitters have to reduce their emissions intensity – the amount of greenhouse gases generated by a unit of output – to a level set by Ottawa in 2018. Most must reduce their emissions intensity to 80 per cent of their industry’s average, although some sectors, such as cement production, that are deemed to face strong international competition, have less stringent benchmarks. Companies then pay the prevailing carbon price ($20 a tonne in 2019, rising to $50 a tonne by 2022) on any emissions that exceed their sector’s intensity target.

The new offset program would allow those companies to reduce their payments by buying credits from farmers, forest companies and others who have earned credits through reducing emissions in a relatively inexpensive way. Sellers would get cash, buyers would pay a bit less carbon tax. And, according to economists, emissions would be reduced for the least cost.

But there are significant questions that have yet to be resolved, including how the federal system will work with provincial counterparts, and how potential reductions will be assessed and measured. Longer term, there is a possibility that a Canadian system could be linked to a broader international market, but those rules have yet to be determined in global negotiations.

The agricultural industry is cautiously optimistic that a carbon-trading system could help farmers. “There’s a possibility, if it’s done right," said Keith Currie, first vice-president of the Canadian Federation of Agriculture.

The start date for projects has become a point of contention. The current federal plan limits credits to greenhouse gas reduction efforts that started after Jan. 1, 2017, a date when the broad thrust of Ottawa’s carbon-reduction strategy was known. But the CFA would like to see that cutoff point rolled back 10 or even 15 years, allowing farmers to claim credit for much earlier efforts.

Mr. Wilkinson said the government does not intend to change the cutoff date.

Tristan Skolrud, an assistant professor and agricultural economist at the University of Saskatchewan, said agriculture could be a significant source of reductions, particularly since the sector’s operations are a large emitter of two potent greenhouse gases, methane from livestock and nitrous oxide from the use of fertilizer. A single molecule of nitrous oxide is the equivalent of 300 molecules of carbon dioxide, for instance.

But unlike the emissions from the burning of fossil fuels, the greenhouse gases from livestock and fertilizer use are difficult to monitor. Emissions can spike dramatically simply because an ill-timed rainstorm washes through fields after fertilizer is applied. And monitoring the volume of emissions from herds of live animals is similarly problematic, Mr. Skolrud says. “There’s a lot of low-hanging fruit, but there’s not a good way to track it."

For forestry, the benefits are twofold. Large emitters in the sector that cannot meet emission-reduction goals will be able to purchase credits. Others will be able to generate revenue from selling credits. However, the industry is concerned about how the federal system will work with those of the provinces, and whether companies with credits in one jurisdiction will be able to use those to offset potential payments elsewhere, said Bob Larocque, senior vice-president at the Forest Products Association of Canada.

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