Module 2: Carbon Markets & Carbon Offsets
2.1 Carbon offsets: Introduction
Background
The concept of carbon markets emerged from international climate change talks in the late 1990s. Carbon markets are trading systems in which carbon credits are sold and bought. The carbon market connects the supply and demand of emissions reductions and removals, resulting in the sale and purchase of carbon credits.
One carbon credit represents one metric tonne of CO₂ equivalent (tCO₂e) that was removed and reduced/avoided through the implementation of a carbon project.
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‘Carbon dioxide equivalent’ or CO₂e helps us measure emissions from various GHGs with one metric. It’s based on the different global warming potential (GWP) of each GHG and their ability to trap heat in the atmosphere compared to CO₂. For example, the global warming potential for methane (CH₄) over 100 years is 28, this means that emissions of one metric ton of methane emitted is equivalent to 28 tonnes of CO₂, making it a much higher heat-trapping greenhouse gas.
In other words, 1t CH₄ = 28t CO₂e
Watch our video explainer below - “Carbon Offsets”
An overview of carbon markets: Compliance vs. Voluntary
Carbon markets can be created and regulated through voluntary or compliance programs. Compliance carbon markets are created and regulated through mandatory national, regional, or international carbon reduction regimes.
In both types of markets, the “supply side”, or seller, is made up of project developers that establish carbon offset projects that actively reduce or remove emissions.
On the demand side, for example, an industrial emitter can offset 100 tonnes of emitted CO₂e through purchasing 100 carbon credits from a forest carbon project where logging was limited.
Compliance carbon markets
Compliance carbon markets are created and regulated through mandatory national, regional, or international carbon reduction regimes.
In compliance markets, the “demand side”, or buyer, is made up of large industrial emitters or companies that must offset their emissions for compliance obligations, such as pulp mills or cement companies.
Generating and offsetting carbon credits
Carbon projects can generate carbon credits once they are certified for their emission reduction or removal activities, in accordance with the corresponding carbon offset standard.
The type of land a project is on (private, reserve, treaty, or aboriginal title land vs ‘crown’ land), as well as the market (voluntary or compliance) helps determine the protocol a project must follow.
A carbon credit can be purchased, traded or sold but until it is retired, it does not offset any emissions.
Once a carbon credit is retired, it represents 1 tCO₂e offset by the (final) buyer, and cannot be claimed again. The sale of offsets can provide revenue for the communities developing and maintaining the carbon offset project.
2.2 Carbon Offsets: Protocols
Forest Carbon Offset Protocol (FCOP) Development in B.C.
The the second version of the B.C. Forest Carbon Offset Protocol (FCOP 2.0) has been released in April 2024 [2].
Currently, B.C. forest carbon projects on public land are required to use the BC FCOP 2.0. Eligible carbon project types include Afforestation/Reforestation, Conservation/Improved Forest management, and Avoided Conversion [3].
Prior to the publishing of the final FCOP 2.0, only projects that have been previously approved under FCOP 1.0 continue to generate offset credits under the grandparenting provision of the provincial government’s offset legislation [4].
With the release of FCOP 2.0, prospective carbon projects on ‘crown’ land are required to work under the protocol and register with the B.C. Offset Registry.
For further reading on carbon offset protocols and FCOP 2.0 and First Nations, see BCAFN’s submission to the provincial government on the draft Offset Protocol Policy and submission to the draft B.C. FCOP 2.0.
Forest carbon offset protocols in Canada
Canada’s GHG Offset Credit System
The Federal GHG Offset Credit System includes regulations, protocols for different project types, and a tracking system which includes a public registry of projects. Projects in the federal system must follow a federal protocol. As of August 2024, forest carbon projects can be developed on private land, reserves, modern treaty settlement lands, and aboriginal title land.
On May 6, 2024, Environment and Climate Change Canada released the Improved Forest Management on Private Land federal protocol. Two other protocols have been published and four additional protocols are currently in development. Development of a protocol for Improved Forest Management on Public Land, will begin in 2024 [5]. The Improved Forest Management on Private Land protocol is applicable anywhere in Canada except British Columbia, as BC has published its own forestry-related protocol.
Voluntary Offset Programs
Carbon projects can participate in voluntary offset programs. Carbon projects must use an applicable protocol approved for use in the offset program in which the project is participating.
For information on Carbon Rights, Ownership and Entitlement, see Module 3.
Applicability:
Carbon projects on private land, reserve land, treaty land, treaty settlement lands and aboriginal title land can use any available protocol.
2.3 Market Structures: Compliance and Voluntary Markets
Canada’s Federal Offset System
A compliance carbon market is created by governments to regulate large emitters (like pulp and paper producers, cement producers and mines) by putting a price on their GHG pollution.
In Canada, legislation that creates demand for carbon credits is the Greenhouse Gas Pollution Pricing Act (GGPPA), which came into force in 2018 [6]. This act includes a carbon pricing system for large industrial facilities (facilities with annual emissions above 50,000 tCO2e), known as the federal Output Based Pricing System (OBPS) [7].
Another category of carbon pricing system is “cap-and-trade”. Refer to the pop-out box of this section for more information.
In Canada’s Output Based Pricing System, the federal government sets an emission performance standard based on their output, for industrial emitters. Emitting above their performance standard results in a legal obligation to either:
Pay a fee per tonne of CO2e emitted in excess; or
Purchase and retire the equivalent amount of carbon credits; or
Retire the equivalent amount of carbon credits that were banked from previous years where they outperformed. Banked credits can be saved and used for up to 5 years.
Emitting below the performance standard results in surplus carbon credits that can be purchased by those emitting above the performance standard.
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A typical compliance carbon market is a cap-and-trade system, where a government sets an emissions cap for the overall market (made up of large emitters), which is split into allowances for each emitter. Each allowance permits the release of one tonne of carbon emissions and can be traded in the market.
If an emitter pollutes above the regulated allowance, there might be a demand to buy carbon credits to “offset” their excess emissions.
In June 2022, a new Federal Greenhouse Gas Offset Credit System (Federal Offset System) was introduced. Under this new system, industrial emitters performing over the benchmark can purchase carbon credits under this system to meet their compliance obligations, for example, buying credits from a First Nations’ forest carbon project. This is positive news for those wishing to develop carbon projects, as it means a likely increase in demand.
The federal OBPS is a backstop. Each province and territory may develop their own system, as long as it meets the minimum national stringency standards (the federal ‘benchmark’). If a province or territory decides not to price pollution, or proposes a system that does not meet these standards, the federal system is put in place [8].
B.C. is one of the provinces that has developed its own system.
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European Union’s (EU) Emissions Trading System regulates EU’s industrial sectors under a cap-and-trade market since 2005; each year, the market sets overall allowable GHG emissions (also known as ‘the cap’), which a portion is allotted, and the other portion auctioned to regulated emitters as “allowances” in the units of tCO2e. The cap decreases annually to meet the EU’s climate commitments.
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California began using a cap-and-trade system in 2014, jointly operating with Quebec. The joint program regulates over 600 heavy industries in California and 130 in Quebec. This program also allows individual participants to buy and trade credits, including investors, brokers, and consultants. In Quebec, emitters can meet 8% of their compliance obligation by buying accepted offsets from a list of compliance offset protocols.
Compliance Carbon Markets
B.C.’s Carbon Pricing System
British Columbia has established a carbon tax since 2008 on consumer and industrial emitters [9]. Starting in 2024, B.C.’s industrial emitters will transition to a provincial Output-based Pricing System (BC OPBS) in replacement of carbon tax.
Similar to the federal OBPS, under the BC OBPS, emitters will have the option to buy carbon credits to fulfil their compliance obligations. The new BC OBPS will connect with B.C.’s Offset System, and create new demand for these B.C.-made carbon credits.
In July 2023, B.C. published proposed program design details for BC OBPS. Notably, it is proposed that as much as 30% of carbon credits can be sourced from the B.C. Offset System (called ‘Offset Units’) for compliance. Only offset units that are issued within the three years of the compliance year are eligible. If this limit on credit usage is implemented, credits that are from before 2021 would be excluded, as the first compliance year is 2024.
Up until 2023, B.C. remains the biggest buyer of these B.C.-made credits to fulfil its Carbon Neutral Government commitments and that all provincial public sector organizations must reduce, report and offset their annual carbon footprint [10]. In a technical briefing by the Ministry of Environment and Climate Change to BCAFN and Ecotrust Canada, the Ministry shared that about 650,000 units were retired for B.C.’s annual carbon-neutral government commitment, sold at about $8-15 dollars per credit/unit; Reporting of the credit issuance and purchase shows that over 4.5 million forest carbon credits were issued as of March 2023.
Voluntary Carbon Markets
While compliance carbon markets are strict about eligibility and limited by regional boundaries (such as provincial, territorial, national or political unions), voluntary carbon markets generally allow for individuals participants globally to buy and sell credits.
In voluntary markets, participants purchase carbon credits not because of a legal obligation to reduce emissions, but for other purposes such as corporate social responsibility. Carbon credits can be purchased and retired by governments, companies, and individuals to offset their emissions. Third-party, non-governmental bodies create marketplaces by establishing carbon offset standards and protocols.
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The value of a carbon credit is fundamentally driven by supply and demand. In a compliance carbon market, the purchase of carbon credits is primarily driven by the demand to meet regulated emissions reductions. Demand can vary greatly depending on the cost to emitters in the system (the cost to pollute) and the availability of opportunities to reduce emissions (the cost to reduce).
In voluntary carbon markets, credit prices can vary greatly. The main driver in these markets is corporations and organizations who want to reduce their carbon footprint to fulfil their own environmental responsibility targets or to achieve “net zero”. Because demand for compliance carbon credits is driven by regulatory obligations, their prices tend to be higher than offset credits issued solely for the voluntary market. See live price comparisons at carboncredits.com.
The supply of carbon credits in the market will fluctuate with the availability of offset protocols, financing available to the offset project developers, and project developers’ assessment of future demand.
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By design, compliance carbon markets restrict the use of carbon credits to offset only a portion of emissions that may not be technologically feasible to reduce at this time, but emitters must focus on directly reducing their emissions on their production.
Each year, emitters that continue to operate business-as-usual would see increasingly higher costs on their emissions. In 2019, the federal government established a mandatory $20 price per tonne of greenhouse gas emissions (CAD/tCO₂e) with an increase of $10 per tonne annually. This price increased to $65 per tCO₂e in 2023, and will increase by $15 each year.
In addition, Canadian industry faces pressure to align with the tightening international carbon policies and standards, as many of their trading partners prefer lower emissions and cleaner products.
Continue reading
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About the Forest Carbon Community Toolkit
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Module 3: Implementing and Upholding Indigenous Carbon Rights, Ownership & Entitlement
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Module 4: Opportunities, Barriers & Case Studies
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![Two person in forest]()
Module 5: Planning Your Carbon Project
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Glossary
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![A winter forest]()
Module 2: Carbon Markets and Carbon Offsets
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Module 1: Climate Change & Natural Climate Solutions
