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4 October 20235 minute read

How Canada's voluntary carbon credit market can help Japan to achieve carbon neutrality

In order for Japan to achieve its stated goal of achieving carbon neutrality by 2050, the trading of carbon credits will be an important element in its energy policies. In June 2021 the Japanese Cabinet specifically promoted the development of voluntary and market-based initiatives for carbon pricing and trading1 as a policy of the Government of Japan.

Consistent with its policy based approach, Japan has actively supported the development of carbon credit markets. The Japanese government ratified the Paris Agreement to support the establishment of bilateral and multilateral agreements between countries (Article 6.2) with respect to the trading of carbon credits to support national carbon reduction initiatives.

Canada is a voluntary carbon credit market, and while Japan has yet to enter into a formal arrangement regarding a joint carbon credit trading framework, given the robust trade between the two nations and their respective commitment to reduce carbon emissions, it is reasonable to anticipate such an arrangement is not far off.

As of the date of this publication,2 the Japanese government has signed agreements regarding the development of a carbon credit trading framework with 27 countries and it is expected that this number will continue to grow as the private sector adopts utilizing carbon credits as a tool to mitigate its carbon footprint.

Below is a brief summary of the Canadian voluntary carbon credit regime and expectations for its future growth.


What are carbon credits?

Carbon credit refers to a permit allowing the purchaser to offset their greenhouse gas (GHG) emissions. One carbon credit represents one metric tonne of carbon dioxide (CO2). Credits can be traded to account for the production of GHGs generated.

There are two types of carbon markets: compliance markets and voluntary markets. Compliance markets are mandatory carbon reduction regimes - entities must meet pre-determined emissions targets usually established in law. Voluntary markets allow emitters to meet their emissions targets by offsetting their emissions with the purchase of carbon credits.


Canada as a voluntary market

Canada has a voluntary carbon market whereby entities can purchase carbon credits in order to offset their emissions. Third-party verification services then assess and validate projects by entities to ensure that the credits are genuine and emissions are being reduced. Globally, carbon credit markets are growing rapidly.

“Data from the State of the Voluntary Carbon Markets shows that as of 31 August 2021, VCMs had already posted USD748.2 million in sales for 239.3 million credits, reflecting a 58 percent year-to-date jump in value (up from USD472.9 million), and growth in credit volume of 27 percent over 2020 performance (up from 188.2 million credits transacted).”3

Further, the Taskforce on Scaling Voluntary Carbon Markets recently projected that the voluntary carbon market needs to rise 15 fold by 2030 in order to deliver the 1.5 degree goal of cutting GHG emissions by 23 gigatonnes, the equivalent to 1.5 times total oil consumption in 2019.4


Carbon pricing

On 8 June 2022 the federal government launched Canada’s Greenhouse Gas Offset Credit System (Credit System). The purpose of this is to meet Canada’s emissions reduction goals.5  The Credit System introduces a market-based incentive program for entities to devise and implement solutions to reduce GHG emissions and mitigate the effect of climate change.

The Credit System operates under the Canadian Greenhouse Gas Offset Credit System Regulations, SOR/2022-111 (Regulations).6 The Regulations were put into place under the Greenhouse Gas Pollution Pricing Act, SC 2018, c 12 (GGPPA).7 The federal and provincial systems interact through several equivalency agreements. This ensures that the provincial credit systems can achieve the outcomes demanded by the GGPPA. Each province is permitted to design its own carbon pricing mechanisms. However, the federal government provides a ‘backstop’ (Federal Backstop) in provinces that do not meet the standards set out by the Regulations.

The Federal Backstop implemented by the GGPPA has two parts: the output-based pricing system (OBPS) and the federal fuel charge.8 The OBPS applies to industrial entities with high emission output. It sets facility-specific limits on emissions and requires the companies running those facilities to provide carbon credits to the government for the purpose of offsetting their emissions. The federal fuel charge applies at points of production, distribution, and importation. If a company reduces their emissions to below their limit, then their excess carbon credits can be traded.

Provinces and territories where the Act applies to in full are: Yukon, Nunavut, Manitoba and Prince Edward Island. The following provinces and territories are completely independent from the GGPPA: The Northwest Territories; British Columbia; and Quebec.

The Northwest Territories have a Territorial carbon tax, while British Columbia has its own Provincial carbon tax. These provinces and territories meet or exceed the minimum standards under the Regulations for both components of the Federal Backstop.

Quebec and Nova Scotia have both implemented a cap-and-trade regime. In a cap-and-trade system, the government sets the limit (cap) on emissions from specified industries. Entities operating in these industries receive an emissions allowance, which they can trade with one another as needed. The trade element encourages emission reductions so that there is more allowance to capitalize on.

1Action Plan of the Growth Strategy, June 2021
2Joint Crediting Mechanism (JCM)
3Canada develops GHG offset regulations referencing Ecosystem Marketplace press release
4TSVCM report
5Government of Canada news release
6Canadian Greenhouse Gas Offset Credit System Regulations, SOR/2022-111
7Greenhouse Gas Pollution Pricing Act, SC 2018, c 12, s 186
8Carbon pollution pricing systems across Canada