I had a feature this weekend in the Toronto Star about the cap-and-trade system coming to Ontario and the likelihood an offsets market will be created a year or more before the 2012 launch of the program. The government here is working hard to align our own provincial system with the Western Climate Initiative, in which it is a member, as well as the Waxman-Markey bill under consideration in the United States (which will likely set the North American standard). The idea of allowing a carbon offsets market to emerge in advance of the cap-and-trade launch is a smart one, as it gives industry a way to prepare and it stimulates offset project development before the final cap-and-trade rules go into effect.

But here’s the problem: A good portion of offset projects are also electricity generation projects, such as wind, solar, biogas and hydroelectric. But in Ontario, if you want to sell your electricity to the power authority you sign a 20-year deal under a new feed-in tariff program. The tariffs are generous, but most developers are also hoping to keep the carbon credits they would qualify for so they can be sold as offsets.

Unfortunately for them, the Ontario Power Authority’s contract for power purchases stipulates that it — and by “it” I mean the Ontario government, which is ultimately the Ontario ratepayer — gets to keep all environmental attributes. This raises a number of issues:

First, by keeping the credits will this discourage green-energy development, which would be ironic given that the government’s new Green Energy and Economy Act was created — and highly touted, I should add — for the sole purpose of stimulating such development and the jobs that come with? It’s certainly possible, since it’s tough these days for developers — particularly smaller local developers — to raise capital for projects.

Second, what does the government plan to do with these credits? Will it sell them on carbon markets and throw the cash in the general treasury? Will it sell them and dedicate the revenues to a special clean energy fund aimed at stimulating further green power development? Or, will it simply retired the credits?

Personally, I think it has no choice but to retire the credits. The whole justification for having Ontario electricity consumers pay a premium for their power over the coming years is based on the idea that we must do our part to tackle climate change, and we must set an example for other jurisdictions to follow. But if the government, say, sells the credits to Ohio or Michigan so those states can go on burning coal, how is that fair to Ontario ratepayers — i.e. How can you explain to Ontario ratepayers that they’re paying a green premium so that other jurisdictions can go on polluting? Sure, the money from the sold credits would come back to ratepayers (maybe), but then what would be the sense in the end of pursuing green energy in the first place?

Finally, what carbon credits are the Ontario Power Authority justified in keeping? I can understand — and generally support — the reasoning behind keeping carbon credits related to indirect electricity displacement. That is, the amount of carbon that’s avoided when solar or wind power or any other renewable displaces fossil-fuel-based power generation. It’s here where Ontario ratepayers have the right to keep those credits and see them properly retired. But some renewable power developers, such as those collecting biogas from anaerobic digesters and landfills, have a strong argument for keeping at least a portion of the credits.

Here’s why: Biogas-based power generation both displaces fossil-fuel-based electricity and it destroys methane, a greenhouse gas that’s 21 times more potent than carbon dioxide. You can earn carbon credits from methane destruction, even if you just flare the biogas instead of burn it to produce electricity. Given this, why should the power authority have the right to those credits? The agency’s reach, one could argue, should be limited to the portion of a project that deals directly with electricity generation.

Biogas projects are important to Ontario. They can supply dispatchable renewable power that displaces fossil fuels. Anaerobic digesters can kill bad microbes from livestock manure that can contaminate water systems (remember Walkerton?). And they keep methane from slowly creeping into the atmosphere.

They should be encouraged, not discouraged. This means flexibility of policy, and a recognition that not all projects and technologies are created equal.

NOTE: If you want to keep up to date as the Ontario government develops its cap-and-trade program, visit www.carbonomics.ca (the URL is mine, which I forwarded to the government site because it had an insanely long URL. I’ll likely keep the link in tact for at least a few months)

NOTE II: I’m not a fan of cap-and-trade, because it’s complex to set up and it adds another thick layer of bureacracy to government. It also creates a new class of lawyers, accountants, etc… who take their cut of the action, and it’s so complex that there’s room for abuse — not unlike the abuses that set off the derivatives crisis that helped plunge the global economy into recession and almost led to a collapse of Wall Street. I’d much prefer to see a carbon tax, which is more efficient and transparent and less open to abuse. But cap-and-trade seems to be the way the world is going, so who am I to question it?