Opinion: Can Alberta earn carbon credits for exporting its LNG?

One of the more obscure parts of the Paris Agreement, Article 6 establishes the rules for two kinds of “trading” in carbon credits: between countries and between companies.

Geoff Stiles writes "International trading of carbon credits in exchange for LNG is at best a lengthy and problematic option, and at worst simply a white elephant." STR/AFP/Getty Images photo.

By Geoff Stiles

Now that Alberta’s provincial election has been called, it’s time to have a critical look at how the United Conservative Party plans to reduce the province’s massive carbon emissions. Will they finally put a hard cap on oil sands emissions, growing at a rate of 21 per cent over the past 10 years despite industry claims to the contrary? Or will they find new ways to tackle the emissions problem, while keeping the oil industry competitive?

Recent pronouncements suggest the latter. Only a month or so ago Danielle Smith told the federal government that, rather than reduce emissions, they’d like to sell their Liquified Natural Gas (LNG) to international customers in exchange for carbon credits. Now, in their just released Emissions Reduction and Energy Development Plan (EREDP), they’ve elaborated on this idea, promising to “enable emissions reduction strategies that encourage the replacement of higher-emitting fuels in Asia with environmentally responsible Alberta energy” and to use the “international transfer of carbon credits between countries under Article 6 of the Paris Agreement” to achieve Alberta’s carbon emission goals.

Quite a mouthful. But in the end, it means just more energy sector growth for Alberta and a bounty of carbon credits to compensate for the increased emissions. What could be wrong with that?

First, we need to state the obvious: natural gas is a fossil fuel and therefore responsible for some of the very same carbon pollution the Paris Agreement is intended to prevent. And while it is indeed legitimate to claim reduced emissions from switching to natural gas from higher emitting sources such as coal or oil, there are a lot of barriers to doing this, particularly under Article 6.

So why Article 6? One of the more obscure parts of the Paris Agreement, Article 6 establishes the rules for two kinds of “trading” in carbon credits: between countries (Subsection 6.2) and between companies (Subsection 6.4). Different in detail and intent, both sub-sections require a common ground for implementing such trades: the so-called Nationally Determined Contribution (NDC), which specifies how a country intends to meet its Paris targets.

Critically, for countries or companies wanting to trade carbon credits under Article 6, the activity generating the credits must be reflected in each country’s NDC. NDCs are updated every 5 years at a minimum, though countries can update them more frequently if circumstances require. Canada’s NDC was last updated in 2021 and contains no reference to the sale of LNG (or any fossil fuel) and only mentions Article 6 by stating that  it intends to “…use voluntary cooperation under Article 6 of the Paris Agreement, if applicable.”

Surprisingly, there is no specific limitation in Article 6 itself on what kind of activities can be used as a basis for trading. Under 6.2, countries are free to decide what kinds of emissions reductions they will trade, provided that they can prove the reductions help both countries achieve “higher ambition in their mitigation…actions and…promote sustainable development and environmental integrity.”

So, if Canada were to allow Alberta to sell its LNG to other countries in exchange for carbon credits, Canada would have to include this activity (type of project) in a revision of its NDC while proving that it meets the criteria of sustainability and environmental integrity in the long term; and the host country (the one receiving the LNG and issuing the credits in payment) would have to do likewise.

Surely, Alberta must recognize that there is zero probability that the Canadian government—already struggling to meet its 2030 Paris commitments–would accept an agreement to receive carbon credits in return for increased emissions, effectively a zero-sum game from Canada’s perspective? But hope dies slowly in Alberta, and the UCP never misses an opportunity to show they can keep pumping oil and gas without affecting Canada’s emissions reduction plans.

If trade between countries under 6.2 is not an option, why not use 6.4 instead? Say, allowing a Canadian company (or provincial government) to fund the development of a coal-to-LNG conversion project in an industry or power utility in, say, India or China or Malaysia, using Alberta LNG as the new fuel source? As it turns out, the same general rules apply for projects as for countries: both governments must approve the projects, and both must include projects of this kind in their NDCs. More importantly, because the activity is defined as a “project,” the baseline emissions and emissions reductions must be calculated using an approved methodology.

The latter is an even greater obstacle to Alberta’s plan because the availability of acceptable methodologies for Article 6.4 projects is still subject to much debate and controversy, including whether to use the old Clean Development Mechanism (CDM) methodologies for this purpose or to invent new ones more consistent with the goals of 6.4.

Discussion in the periodic meetings of the key Article 6 advisory bodies makes it increasingly clear that whatever the final decision on methodologies, Article 6.4 projects will need to have much higher social and environmental value than projects approved under the CDM. So substituting gas for oil or coal, which might have worked in the past as a mitigation strategy, may be simply unworkable under Article 6.

NDCs and methodologies aside, a further constraint is that the buyer of LNG, whether it’s a country or a company, must have a surplus of carbon credits that can be traded in exchange for the LNG. This is perhaps the least understood aspect of Article 6: countries engaging in a trade (either directly or via private entities) must have established a regulatory system by which carbon credits are registered and valued at both the domestic and international levels. In doing so, they will also have established emissions reduction targets both for the entities that emit greenhouse gases, as well as for the country.

So how would this work for Alberta and Canada?  Even if Alberta could prove that substituting LNG for coal or oil meets the criteria of “sustainable development and environmental integrity,” and that both Canada and the host country made provision for this in their NDCs, the user of the LNG would have to demonstrate that it had a legitimate surplus of credits from its carbon regulatory system which it could use for payment. In short, they would have to demonstrate that they had either reduced their emissions by more than the legally required amount (their “cap”) or had been able to purchase surplus credits legally from another regulated entity which could then be used to “pay” Canada for the LNG.

How likely is this? Well, to start with, carbon credits are viewed by many developing countries as a national asset and not something which can be readily privatized. The government of Tanzania, for example, has published new carbon regulations which stipulate that the managing authority is entitled to 61 per cent of the gross carbon revenues from a land-based project, to be distributed to local and regional partners and authorities. Aggressive regulations like this are likely to become more and more common as trading under Article 6 begins in earnest and countries realize the value of carbon credits in a market-based system. Unlike the CDM, payment in carbon credits under Article 6 is a fully negotiable process, with host country governments seeking to maximize their gains and minimize their costs.

So: Alberta, whether governed by the UCP or the NDP after the May election, will need to go back to the drawing board and find more reliable and effective ways to meet their emissions reduction goals. International trading of carbon credits in exchange for LNG is at best a lengthy and problematic option, and at worst simply a white elephant.

Facebook Comments

Be the first to comment

Leave a Reply

Your email address will not be published.