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The federal government is set to add a new layer to its industrial carbon-pricing system, stepping into one of the most contentious debates in the climate-policy world.

Very soon, Ottawa will begin rolling out long-promised rules for a domestic carbon offsets market. Once that’s done, large polluters that exceed the industrial pricing system’s emissions caps will be able to purchase emissions-reductions credits from businesses in certain other sectors that are investing in new climate-friendly practices.

Offsets are an increasingly popular mechanism, billed by proponents as a relatively inexpensive way of achieving measurable emissions reductions. Justin Trudeau’s Liberals have been drawn to them because they could incentivize sectors mostly exempt from carbon pricing and other climate-related regulation, such as agriculture, to invest in emissions reduction as a way to generate revenue from offset sales.

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But to many environmental groups, it looks more like a form of greenwashing – a way for heavy emitters to cheaply claim environmental virtue while passing the buck – unless there are tight controls.

That leaves the Liberals facing a tricky balancing act in setting the rules. If too loose, the pricing system could be flooded with cheap offsets that don’t reduce emissions at their promised rate, blowing reduction targets. If too tight, with narrow requirements and heavy administrative burdens, they could so dissuade intended participants that the market never takes shape.

The government will imminently publish regulations setting a broad framework. Then, likely later this year, it will start releasing more specific protocols for how offsets can be generated by certain emissions-reduction activities. The initial protocols will cover soil management on farms, forest management, landfill practices to reduce methane emissions, and refrigeration systems. Another tranche, largely involving other activities in sectors such as agriculture, forestry and waste management, is to follow.

Industrial polluters will effectively be able to buy emissions reductions from other businesses for less than the cost (soon to be $50 a tonne, and rising) of excess emissions penalties. The system is to be directly applied in provinces, such as Manitoba, where the federal government administers industrial carbon pricing itself. In provinces that have their own pricing systems, subject to Ottawa’s approval that they meet national standards, the federal protocols could serve as a template or baseline.

So when it comes to the integrity of Canada’s climate plans, there is a lot riding on Mr. Trudeau’s government getting the federal model right.

One of the simpler decisions it faces is how much of an industrial emitter’s carbon-pricing compliance can consist of offset purchases, before their relative cheapness proves too much disincentive for the polluter to work on reducing its own emissions. There is some expectation that Ottawa will set the threshold around 8 per cent (which is what’s used in Quebec under its cap-and-trade system for carbon pricing). But it could be a little higher or lower depending how the government responds to competing pressures.

A much more fraught undertaking is to sort through “additionality”: the determination of whether emissions-reductions would have happened regardless of the offset market existing, in which case they shouldn’t qualify.

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That means tackling questions such as how common a practice can be within its sector for new adopters to be rewarded for it, and whether it’s already required or subsidized by other government policies.

It’s a particularly daunting task in an area such as soil management. Climate-friendly methods such as cover-cropping (planting unharvested crops to help the soil) are good for farmers’ yields, so it’s difficult for government to know if they would be undertaken anyway. There are not definitive data on exactly how much carbon that sort of practice sequesters, either. Plus the government will need to sort through whether such activities receive funding through other federal or provincial agricultural programs.

There is some domestic experience that could help. Alberta, a province that already has offsets systems under its own industrial carbon pricing regime, is one of the few jurisdictions in the world to have included agriculture in it. But that head start might also mean extra complications around additionality, because it’s contributed to some practices – such as no-till farming, which minimizes soil erosion – being more common there than elsewhere in Canada. Ottawa has to figure out whether to allow some efforts to qualify for offsets in only some provinces.

In addition to additionality, there is the matter of “permanence”: how to ensure offsets aren’t rewarding emissions reductions that prove temporary. That applies to agricultural offsets, too, but the most frequent example of where it’s challenging is forest management – avoiding, for instance, credits for preservation of woodlands that are later razed.

Ottawa may set a standard, as in some other offset systems, that qualifying projects keep carbon from being emitted for at least 100 years. But making that requirement meaningful, likely through a manner of insurance program, is another aspect where there will be concern about avoiding the whole thing being more trouble than it’s worth.

Not being so prescriptive as to make costs and risks too high is a common message from those who have worked in existing offset systems. “Conceptually speaking, protocols need to be designed so that they’re economically viable,” says Chelsea Bryant, the managing director for global markets and strategy at Calgary-based Radicle Group Inc., which specializes in GHG credit trading.

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That factors into what worries climate activists more wary of offsets’ role. “Everyone has an incentive to make the rules as lax as possible,” says Dale Marshall, the national program manager for Environmental Defence. That includes not just polluting companies wanting easy access to credits and would-be sellers wanting to make money, he suggests, but also a government wanting to quickly point to emissions-reduction wins.

That may be a particular concern given that, by nature, offsets are to be generated in areas of the economy where governments have found it too difficult to apply carbon pricing or other mechanisms.

“The problem with offsets is they’re from these really hard-to-regulate sectors,” says Seton Stiebert, an environmental consultant who has researched and advised governments on the subject. So if policy makers aren’t careful, they could push promised emissions reductions from where they know how to monitor action to where they don’t.

Canada is hardly developing its policies in a vacuum: Offset markets have grown globally in recent years, especially voluntary ones in which emitters purchase credits to demonstrate their commitment to sustainability, as opposed to using them as a compliance mechanism within a carbon-pricing system.

But with all the variables, it’s unknown what results a country-specific set of rules will produce until it’s put into action. So one premise on which advocates and (some) skeptics agree is that if Ottawa is going down this path, it should get the regulations and protocols out the door reasonably swiftly – with a willingness to quickly adjust them as needed.

“I’m in favour of going, and having a process that allows for mid-course correction in an effective way, without going back to square one,” is how Cedric MacLeod, a New Brunswick rancher and agro-economist who has long done work on agricultural offsets, puts it.

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That means yet another balancing act for Ottawa: setting up a system reliable enough for businesses to feel comfortable trading within it, but flexible enough to tweak along the way.

Mr. MacLeod and others make a strong case for not letting the perfect be the enemy of the good. But Mr. Trudeau’s Liberals will still need to be careful not to inadvertently affect their climate commitments in outright negative ways, instead.

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