An Audit of Carbon Neutral Government

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Rprt 14: March 2013

www.bcatr.cm

AN AUDIT OFCARBON NEUTRAL GOVERNMENT


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The Honourable Bill Barisoff

Speaker of the Legislative Assembly

Province of British Columbia

Parliament Buildings

Victoria, British Columbia

V8V 1X4

Dear Sir:

I have the honour to transmit to the Legislative Assembly of British Columbia my 2012/2013

Report 1: An Audit of Carbon Neutral Government.

In its 2007 Speech from the Throne, the provincial government announced its goal of becomingcarbon neutral by 2010. In addition to making capital investments and reducing greenhousegases, a significant part of its plan was the purchase of carbon offsets.

This audit examined two projects which accounted for nearly 70 percent of the offsets purchasedby government to achieve their claim of carbon neutrality: the Darkwoods Forest Carbon projectin southeastern B.C. and the Encana Underbalanced Drilling project near Fort Nelson. However,

this claim of carbon neutrality is not accurate, as neither project provided credible offsets.

John Doyle, MAcc, FCA

Auditor General

Victoria, British Columbia

March 2013


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Auditor General of British Columbia| 2013 Report 14

An Audit of Carbon Neutral Government

C O N T E N T s

Audi tor General Comment

Eecutive summar

summar o Recommendation

Reone rom Minitr o Environment

Detailed Reort

Backgr

At Prps a Scp

At Ccs

K Fgs a Rcmmats

Looking Aead

Aendi 1: Deinition o Additional it

Aendi 2: Gloar

3

5

7

8

12

12

16

16

17

31

32

33


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Climate change is seen by many as he major environmenal issue acingus oday. Te evidence o is impacs (exreme sorms, increased droughs, warming andcooling shis) is a consan eaure in he daily news and he lives o many. Wih i comes

he increasing recogniion rom governmens around he world ha greenhouse gasemissions (GHGs) mus be reduced o miigae hese impacs.

In is 2007 Speech rom he Trone, he provincial governmen announced is goalo becoming carbon neural by 2010. In addiion o making capial invesmens andreducing GHGs, a signican par o is plan was he purchase o carbon oses.Tese oses represen a reducion or sequesraion o greenhouse gas emissions ha canbe used o compensae or emissions rom anoher organizaion, such as a public secorbody. Governmen esablished he Pacic Carbon rus (PC), a Crown corporaion,o purchase he carbon oses needed by governmen o mee is carbon neural goal.

Tis audi examined wo projecs which accouned or nearly 70 percen o he osespurchased by governmen o achieve heir claim o carbon neuraliy: he Darkwoods

Fores Carbon projec in souheasern B.C. and he Encana Underbalanced Drillingprojec near For Nelson. However, his claim o carbon neuraliy is no accurae,as neiher projec provided credible oses.

Te credibiliy o carbon oses is he crux o he enire concep. Wihin a complexsysem o dense erminology and calculaions is mired a common sense es:

Would he projec have happened in he absence o carbon nance? Regarding heprojecs examined, he answer is a sraighorward yes.

Te main reason or his is ha oses can only be credible in B.C. i, among oher hings,he revenue rom heir sale is he ipping poin in moving orward on a projec. I musbe an incenive, no a subsidy, or he reducion o GHGs. Ye neiher projec was able odemonsrae ha he poenial sales o oses were needed or he projec o be imple-

mened. Encanas projec was projeced o be more nancially benecial o he companyhan is previous pracices, regardless o ose revenue, while he Darkwoods properywas acquired wihou oses being a criical acor in he decision. In indusry erms, heywould be known as ree riders receiving revenue ($6 million beween he wo) orsomehing ha would have happened anyway.

Te challenge o proving he credibiliy o carbon oses is no limied o B.C. For example,he Unied Naions Clean Developmen Mechanism, he larges ose cericaion body inhe world, recenly acknowledged ha i needs o enhance is own processes and oucomes.I is, in par, recogniion o hese concerns ha led me o underake his audi.

Wih all my public repors, I aim or he resuls o be useul o individuals and groupsbeyond he specic organizaion audied, so ha Briish Columbians and heir elecedrepresenaives can ge ull value or he work o my Oce. Tis audi is no dieren no only would he Pacic Carbon rus and he Climae Acion Secrearia benerom i, bu so oo could he broader inernaional carbon ose communiy.However, I have reasons o be concerned wheher such benes will be realized.

AU D I T O R G E N E R A L s C O M M E N T s

John Doyle, MAcc, FCAAuditor General

Aud ea:

M S,

Assisan Audior General

Mk MSk,

Direcor

T W,

Senior PerormanceAudi Associae


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AU D I T O R G E N E R A L s C O M M E N T s

O all he repors I have issued, never has one been argeed in such an over manner byvesed ineress, nor has an audied organizaion ever broken my condence, as did hesenior managers a PC by disclosing condenial inormaion o carbon marke devel-

opers and brokers. Te orchesraed leter-wriing campaign rom domesic and oreigneniies which ollowed his disclosure demanded considerable sa ime, and resuled inhe delay o his repor. I canno sucienly express my surprise and disappoinmen haa public secor eniy, wih a duciary duy o he people o Briish Columbia, chose oexpend is ime and energy in his manner, raher han addressing he concerns raisedin he audi and ha hey did so wih he knowledge o heir governing board.

In ha conex, governmens response is small encouragemen, and my Oce willconinue o ollow-up on heir progress in implemening he recommendaionsin his repor.

John Doyle, MAcc, FCAAudior General o Briish ColumbiaMarch 2013


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Climate change, which is widely atribued o rising levels o greenhousegas (GHG) in he amosphere as a resul o ossil uel use and land-clearing, is considered

by many o be he larges hrea o he global environmen oday. In is 2007 Trone

Speech, he Province announced i would be aking an aggressive sand o reduce emis-sions o greenhouse gases. Bill 44, he Greenhouse Gas Reduction Targets Act(GGR),

called or a 33 percen reducion o GHG emissions by 2020 and 80 percen by 2050.

I also required each public secor organizaion o become carbon neural by 2010.

Te Province announced i had achieved his goal in July 2011.

While he Ac called on public secor organizaions which includes all core governmen

minisries, school disrics, pos-secondary insiuions, Crown corporaions and healh

auhoriies o pursue acions o minimize heir greenhouse gases, here are some

emissions ha canno be avoided. In order o achieve carbon neuraliy, public secor

organizaions are required o purchase eligible carbon oses.

Te Minisry o Environmens Climae Acion Secrearia (CAS) direcs governmenspolicy acions in he areas o climae change and aciliaes he legislaed mandae o

be carbon neural. Te Pacic Carbon rus (PC) is a Crown corporaion wih he

mandae o purchase qualiy B.C.-based oses o help he public secor mee heir

carbon reducion goals and o help grow B.C.s low-carbon economy.

We carried ou his audi o deermine wheher governmen achieved is objecive o

creaing a carbon neural public secor or 2010. We asked hree quesions:

1. Has governmen esablished reasonable procedures o allow public secor

organizaions o deermine heir greenhouse gas emissions and assessed wheher

hey have aken sucien acions o reduce hose emissions?

2. Has he Pacic Carbon rus purchased credible oses?

3. Is governmen evaluaing and reporing on he achievemen o is objecives?

AUDIT CONCLUsIONWe concluded ha he provincial governmen has no me is objecive o achieving

a carbon neural public secor:

Governmenthasestablishedreasonableprocedurestoallowpublicsector

organizaions o deermine heir greenhouse gas emissions. However, governmen

has no ye esablished crieria o evaluae wheher governmen as a whole is

aking sucien acions o reduce emissions.

PacicCarbonTrusthasnotpurchasedcredibleosets.

Governmentisreportingonitseortstoreduceemissionsanditsprogressin

achieving a carbon neural governmen. However, he PC has no providedsucien inormaion in is reporing abou he cos and qualiy o is purchases.

E x E C U T I V E s U M M A R y


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E x E C U T I V E s U M M A R y

sUMMARy OF KEy FINDINGsGvrmt s trmg grhs gas msss bt has tstabsh crtra t vaat whthr rct acts ar sfct

Te Greenhouse Gas Reduction Targets Actrequires all governmen organizaions

o pursue acions o minimize heir greenhouse gas emissions or each calendar year,

beginning in 2010. We ound ha while some organizaions had GHG reducion arges,

mos did no. We also ound he CAS has no esablished crieria o evaluae wheher

public secor organizaions acions o reduce emissions are sucien.

Th Pacfc Carb Trst has t prchas crb sts

We looked a wo ose projecs ha ogeher accouned or approximaely 70 percen

o he oal oses or 2010 he Darkwoods Fores Carbon Projec, comprising 450,000

oses and Encanas Underbalanced Drilling Projec, comprising nearly 85,000 oses.

We ound ha boh ose projecs sared wihou showing ha he value o oses wasconsidered o he exen ha i provided he incenive or going ahead an imporan

consideraion or demonsraing he eligibiliy o ose projecs.

We also ound ha neiher projec had a baseline ha could be suppored. Te Darkwoods

baseline was no conservaive and did no recognize he legal consrains on he projec

area. Te Encana baseline was no suppored by an appropriae es o show i was he

mos likely scenario.

Gvrmt a th Pacfc Carb Trst rprt thr achvmts,bt mprvmts c b ma

We ound ha governmen repored on acions aken o reduce emissions, on he

oal emissions generaed, he emissions required o be ose, and he oses purchased.

Alhough he repors highligh specic work aking place across he public service,

hey did no sucienly address he risks acing public secor organizaions in reducing

GHG emissions, nor did he repors discuss key barriers.

We also ound ha while he Pacic Carbon rus repors is ose purchases, heir

reporing lacked deails needed o demonsrae he cos-eeciveness o he oses

purchased. Te PC is resriced o purchasing oses generaed in B.C. and had

challenges demonsraing value-or-money in is purchases. For he projecs examined

in his audi, we ound ha he Pacic Carbon rus had o pay more han marke raes

or boh ose projecs.


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s U M M A R y O F R E C O M M E N D A T I O N s

WE RECOMMEND ThAT:

1 Te Climae Acion Secrearia work wih public secor organizaions o ensure eachis pursuing reasonable acions o reduce emissions. As par o his, governmen should

consider esablishing public secor emission reducion arges.

2 Te Climae Acion Secrearia ensure supplemenary guidance o he EmissionOses Regulaion be nalized and adhered o.

3 Te Pacic Carbon rus, o beter manage ose purchase risks, ensure ha he resulso is due di ligence eors are saisacorily analyzed, concluded and documened.

4 Te Climae Acion Secrearia provide sronger oversigh o ensure ha he osespurchased on behal o governmen are credible.

5 Te Pacic Carbon rus provide greaer ransparency abou he cos-eecivenesso is purchases.

6 Te Climae Acion Secrearia and he Pacic Carbon rus ensure ha reporingon carbon neuraliy assesses he rade-os beween reducing governmen emissions

and oseting hose emissions hrough he purchase o oses.


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REspONsE FROM ThE M IN IsTRy OF ENV IRONMENT

In 2010, bc became the first carbon neutral governmentin Norh America. We me his achievemen again in 2011 and are poised o do so or

2012 as well. Te Audior General o Briish Columbia has compleed a perormance

audi o our rs year as a Carbon Neural Governmen and in paricular wo o he rsoses purchased by he Pacic Carbon rus.

Te Governmen appreciaes he Audior Generals recommendaions on how we can

improve he program. We will move orward on hese recommendaions and have

already accomplished a lo in hese areas while he audi has been underway, including:

Developedadiversiedosetportfolioof32projectsinallsectorsofthe

economy and all regions o BC;

Completedextensiveengagementsacrossthepublicsector,withoset

proessionals, and wih academics and expers o improve our Carbon Neural

Governmen program;

Eliminatedreportingcoststotheentirepublicsector;

ImplementedanewCarbonNeutralCapitalprogramwhichhasalreadyprovided$10 million dollars over wo years in new capial unding o he educaion secor;

CreatedaCarbonOsetAdvisoryPaneltoadvisethePacicCarbonTrustonthe

developmen o is ose porolio;

Providedgreatertransparencybypubliclyreleasingthepurchasepriceofevery

ose in he Pacic Carbon russ porolio; and,

Iniiaed a review o deermine i he nancial surplus we currenly generae rom

ose purchases should be used o lower public secor coss or invesed o urher

reduce emissions.

BC is recognized inernaionally as a climae change leader, and our ose sysem is

based on inernaional sandards. BC is he chair o he Wesern Climae Iniiaives

oses commitee, and is reerred o by he Inernaional Emissions rading Associaion

as a bes pracice or oses inernaionally. A key eaure o BCs ose program is ha

hird pary accredied proessionals validae and veriy projecs o ensure hey mee he

requiremens o he Emission Oses Regulaion. Tis approach is consisen wih new

ose sysems now being implemened in Quebec, Caliornia, Ausralia, China, Souh

Korea, and elsewhere.

BC sands by he imporance o having qualied and independen expers make he

proessional judgemen calls necessary o deermine wheher a projec can be considered

an ose, bu noe ha he Audior General has a dierence o opinion on he judgemen

calls made on wo ose projecs. We will work wih he privae audi rms involved, as

well as he American Naional Sandards Insiue, o ensure ha BC oses are credible.

BC is he rs Carbon Neural Governmen in Norh America. Program improvemens

we have made since 2010 underscore our commimen o be he bes. Wihin ha conex,

we will incorporae he Audior Generals recommendaions ino our sraegic planning or

carbon neural governmen as noed below o urher srenghen our program.


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RECOMMENDATION #1:

Te Climae Acion Secrearia work wih public secor organizaions o ensure each

is pursuing reasonable acions o reduce emissions. As par o his, governmen should


Te audi examined BCs Carbon Neural Governmen achievemen in 2010, our rs

year o esablishing our carbon ooprin and he baseline o assess our uure acions

o reduce emissions.

By law, all public secor organizaions are required o publicly repor on heir emissions

as well as he acions hey have aken o reduce hem. Te Climae Acion Secrearia

has worked across he public secor on hese plans and has highlighed key success sories

hrough our Carbon Neural Governmen repors in 2010, 2011, and soon or 2012.

o reduce emissions across he public secor, BC has aken eors such as :

commied$75millionfrom2007to2010toreduceemissionsacross

he public secor

reducedemissionsfromcoregovernmenttravelby60%;

requiredthatnewgovernmentbuildingsbebuilttoLEEDGoldor

equivalen sandards

requiredthatallnewvehiclepurchasesrstconsiderhybridorclean

energy vehicles;

establishedagreementswithBCHydroandFortisBCtoprovidenancial

incenives o energy projecs as well as energy managers o work wih public

secor organizaions across he province o develop plans o reduce emissions

and save energy coss;

Esablished a new Carbon Neural Capial Program ha has provided $10 million

owards energy eciency projecs in school disrics o help hem reduce GHGemissions;

Usedthexedpriceofosetsof$25/tonneasaconcretenancialincentiveto

change capial planning and infuence behaviour change across he public secor.

In suppor o his recommendaion, he Climae Acion Secrearia will ake greaer

eors o promoe emission reducions across he public secor. As we repor on BCs

Carbon Neural Governmen commimen over ime, we will assess wheher emission

reducions are broadly in line wih BCs provincial greenhouse gas reducion arges o

ensure governmens achieving appropriae resuls.

RECOMMENDATION #2:

Te Climae Acion Secrearia ensure supplemenary guidance o he Emission OsesRegulaion be fnalized and adhered o.

Te audi has assessed wo o he rs ose projecs purchased by he Pacic Carbon

rus. Since ha ime, he Climae Acion Secrearia has been working wih he Pacic

Carbon rus and he proessional communiy o ensure ha roles and responsibiliies

are clear and ha he requiremens o he Emission Ose Regulaion are undersood

by all paries.



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In suppor o his recommendaion, he Climae Acion Secrearia will review guidance

provided o dae wih he Pacic Carbon rus and he proessional communiy and

ormalize he guidance and procedures or oses.

RECOMMENDATION #3:Te Pacifc Carbon rus, o beter manage ose purchase risks, ensure ha he resuls

o is due diligence eors are saisacorily analyzed, concluded and documened.

Te Pacic Carbon rus is a relaively new Crown corporaion supporing he

developmen o a new marke in BC, and as such i recognizes he need o coninuously

improve, and implemen processes o manage risk. Wih his in mind, PC has been

working wih Deloite & ouche o improve is business processes, policies and risk

managemen. Since 2010, Pacic Carbon rus has:

Supportedthedevelopmentofprovincially-approvedprotocolssuchasthe

Proocol or he Creaion o Fores Carbon Oses in BC.

Implementedriskmanagementpoliciesandproceduresincludinganenterpriserisk managemen regisr y.

Implementedasecondriskassessmentforallosetprojects.

ClariedPacicCarbonTrustsroleinrelationtoprotocoldevelopment.

Initiatedmonthlydatareportingtobeermonitorsupplychainrisk.

In suppor o his recommendaion, Pacic Carbon rus wil l coninue o work wih

Deloite & ouche and oher indusry expers o implemen coninuous improvemen.

Deloite has provided a ollow-up perormance review o assess PCs implemenaion

o previous recommendaions and o sugges urher areas or improvemen.

RECOMMENDATION #4:Te Climae Acion Secrearia provide sronger oversigh o ensure ha he oses

purchased on behal o governmen are credible.

Te Emission Ose Regulaion denes BCs ose sysem and includes key elemens

o ensure oses are credible including:

Projectsmustbevalidatedandveriedbyindependent,accreditedthirdparties;

OsetsarepurchasedbyaCrownCorporationarms-lengthfromgovernment

and under he direcion o an independen Board o Direcors; and,

ADirectorattheClimateActionSecretariathasstatutoryauthoritiestoworkwith

he proessional communiy as well as se proocols o ensure he eeciveness

o BCs oses sysem.

Te Climae Acion Secrearia has been working wih he Pacic Carbon rus and

he proessional communiy o coninuously improve BCs ose sysem. Tis has

included increasing he number o CAS employees wih ISO raining in validaion

and vericaion o oses.

In suppor o his recommendaion, he Climae Acion Secrearia will consul wih

he proessional communiy and inernaional expers and release ormal procedures

on how he Direcors oversigh role will be delivered.



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RECOMMENDATION #5:Te Pacifc Carbon rus provide greaer ransparency abou he cos-eeciveness

o is purchases.

Wih he mauraion o he BC carbon marke and a porolio o more han 30 carbon

ose projecs, Pacic Carbon rus now has sucien daa o esablish he range o

prices i will negoiae wih suppliers. Te purchase price ranges correspond o he

hree projec ypes in he PC porolio: ores sequesraion, energy eciency and

uel swiching. Pacic Carbon rus is resriced o purchase oses wihin BC,

and each projec is evaluaed on is own coss, risks and value.

OnFebruary15,2013,thePacicCarbonTrustreleasedapricingframeworkfor

each o he hree projec ypes in is porolio. Tis will help guide poenial ose

projec developers as hey build nancing or heir projecs.

Inaddition,PCThasmadeallcarbonosetpaymentandpricinginformation

rom 2009 hrough 2011 available on is.

Goingforward,PCTwillreleasethisinformationonanannualbasiseveryJunein conjuncion wih he release o is annual carbon neural governmen porolio.

Te carbon marke has sucienly maured o allow or more ransparen nancial

reporing and a clear pricing srucure ensures ha releasing hese deails will no

creae any poenial nancial risk o B.C. axpayers.

RECOMMENDATION #6:Te Climae Acion Secrearia and he Pacifc Carbon rus ensure ha reporing

on carbon neuraliy assess he rade-os beween reducing governmen emissions and

oseting hose emissions hrough he purchase o oses.

Since he ime o he audi, BC has repored on is 2011 Carbon Neural Governmen

commimen and will soon repor on is 2012 commimen. Since beginning his

program, he Climae Acion Secrearia, he Pacic Carbon rus and he broader

public secor has been able o develop a series o public inormaion producs

communicaing he value o Carbon Neural Governmen, including boh he

benes o reducing emissions and energy coss in he public secor as well as he

value o he Pacic Carbon russ ose porolio across BC.

Te Climae Acion Secrearia and he Pacic Carbon rus have also inroduced since

2010 exper commitees o improve he measuremen and reporing o acions aken

by PSOs as well as he eeciveness o he Pacic Carbon russ ose porolio.

In suppor o his recommendaion, Governmen will ake urher acions o communicae

he value o reducing public secor emissions as well as invesing in emission reducions

across BC.

http://www.pacificcarbontrust.com/propose-a-project/carbon-offset-pricing-structure/http://www.pacificcarbontrust.com/propose-a-project/carbon-offset-pricing-structure/


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BACKGRoundClimae change is believed by many o be he bigges global environmenal hrea o his

cenury. Te provincial governmen has repored ha Briish Columbia is experiencinghe sympoms o climae change righ now rom he pine beele epidemic o increased

ores res and fooding which is cosing he province millions o dollars. Scieniss

atribue much o he climaes warming over he las hal-cenury o human infuences

in paricular he burning o ossil uels and land-clearing. Tese aciviies have been

linked o increased carbon dioxide and oher greenhouse gases (GHGs) in he amosphere.

In he 2007 Speech rom he Trone, he provincial governmen announced i would ake

an aggressive sand o reduce GHG emissions. I passed he Greenhouse Gas Reduction

Targets Actha pu ino law B.C.s arges or carbon reducion: 33 percen by 2020 and

80 percen by 2050. Te Ac also includes an annual requiremen or he public secor

o achieve carbon neuraliy beginning in 2010. Governmen sees is carbon neural

commimen as being an imporan way o demonsrae leadership in climae acion.

Tis commimen covers he enire public secor, including all core governmen minisries,

school disrics, pos-secondary insiuions, Crown corporaions and healh auhoriies.

Te Ac requires each public secor organizaion o become cao eua beginning

in 2010. o be carbon neural, a public secor organizaion mus:

pursueactionstominimizeitsGHGemissionsforeachcalendaryear;

determineitsGHGemissionsforeachcalendaryear;

purchasecao oe by he end o June in he ollowing calendar year; and

issueaCarbonNeutralActionReporteachyeartodescribetheactionstaken

o reduce emissions and plans o coninue minimizing hose emissions.

In July 2011, Briish Columbia announced i was he rs jurisdicion in Norh America

o achieve carbon neuraliy.

D E T A I L E D R E p O R T

CARBON NEUTRALTh ccpt achvg

carb trat vvs

prchasg carb

sts r a msss

grat t achv

t-zr GHG msss.

CARBON OFFsETA carbon oet

rprsts a rct

r sqstrat GHGsgrat b actvts

sch as mprv rg

fcc that ca

b s t cmpsat

r, r st, th msss

rm athr src,

sch as a pa trp.

o carb st

rprsts th rct

t carb

x (r ts qvat thr GHGs).


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Carbon Neutralit: Role and Reonibilitie

Te Climae Acion Secrearia (CAS) was esablished in 2007 o direc he Provinces

policy acions relaed o climae change and oversee he legislaed mandae o be carbon

neural. In 2008, governmen hen esablished he Pacic Carbon rus (PC), a Crown

corporaion wih he mandae o purchase B.C.-based oses o help he public secor mee

is carbon reducion goals and help Briish Columbia develop a low-carbon economy.

Achieving carbon neuraliy hrough his iniiaive is a our-sep process (Exhibi 1).

ExhIBIT 1: Th r stps t achvg carb trat Brtsh Cmba

MEAsURE

REDUCE

OFFsET

REpORT

Public secor organizaions (PSOs) measure he energy consumed rom heirbuildings, ransporaion ees, equipmen and paper use. Core governmen

(minisries and agencies) also measure emissions rom ravel.

Puting a price on GHG emissions is inended o creae an incenive or public secor

organizaions o ake reducion acion. Such acions may include reducing sa ravel,

promoing behavioural changes such as urning o compuers and lighs when no in

use, and reroting buildings o make hem more energy efcien. Even wih bes

eors o reduce, PSOs wil l sill generae greenhouse gas (GHG) emissions.

Public secor organizaions pay he Pacic Carbon rus $25 per onne o carbon

dioxide equivalens (CO2e)* hey generae. In urn, he Pacic Carbon rus uses

hese unds o purchase oses.

Governmen repors annually on he resuls. In his way, legislaors and he publiclearn abou he oucomes achieved (boh posiive and negaive) rom reducing andofseting GHG emissions, and governmen can deermine wha changes mighbe needed o improve he oucomes.

* CO2e is a common uni o measuremen used o compare he relaive climae impac, or global warming poenial, o he dieren greenhouse gases.

Global warming poenial is a relaive scale ha compares he gas in quesion o ha o he same mass o carbon dioxide.

Adapted romCarbon Neutral B.C. Transforming B.C.s Public Sector Report


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Enuring te integrit and credibilit o carbon oet

Under he Greenhouse Gas Reduction Targets Act, carbon ose projecs mus mee he

crieria laid ou in he Emission Oses Regulaion. Te regulaion, based on inernaional

sandards, is inended o ensure ha oses purchased by he PC are, among oher

hings, measureable, permanen and addiional o business-as-usual.

One o he mos challenging aspecs o ensuring he inegriy and credibiliy o oses

is demonsraing ha he projec in quesion is addiional o business-as-usual

also reerred o as demonsraing addiionaliy. (See Appendix 1.)

Te Emission Oses Regulaion includes several requiremens designed o ensure projecs

demonsrae ha hey are addiional o business-as-usual. Tese requiremens include:

TeprojecthastostartaerNovember29,2007,thedateofthepassageoftheAct.

Teprojectcannotberequiredbylaworregulation.

Itmustbedemonstratedthattheprojectfacesnancial,technologicalorotherobsacles which are overcome, or parially overcome, by he incenive o being

recognized as an emission ose.

Tenancialimplicationsofthebaselinescenarioneedtobeconsidered.

Beyond hese requiremens, he PC has also indicaed ha proponens mus have

considered and included he value o developing oses as par o he jusicaion or going

ahead wih he projec. When projecs have already sared (or have been compleed) i can

be dicul o demonsrae ha oses were par o he decision o implemen he projec.

Supporing evidence in hese circumsances may include he original business case, legal

documens or board minues showing how he value o oses was acored ino he decision

o implemen he projec. I his evidence does no exis, he ose purchaser may be invesing

in projecs ha would have happened anyway. A projec ha would have happened anywayis no addiional.

Anoher imporan characerisic o credible oses is a conservaive esimae o he quaniy

o greenhouse gas reducions. o do his, projec developers esablish an emissions baseline,

which is an esimae o he scenario ha would reasonably have occurred i he ose projec

was no underaken. Te baseline is wha he projec is compared agains o deermine

he quaniy o emission reducions. A baseline is always a hypoheical scenario, hereore

esablishing a credible baseline is criical. I he emissions baseline is overesimaed,

he projec would claim an aricially high number o oses, a porion o which are no

real greenhouse gas reducions.

B.C. project development and approval processesWhen a projec is ready o be underaken, he developer creaes a projec plan. Tis plan

conains a deailed descripion o he proposed GHG reducion projec and several

baseline scenarios. Te plan mus also ideniy he seleced baseline scenario, describe

why i was seleced and explain how he projec is addiional o he baseline. Te plan

ollows a proocol a deailed se o requiremens, similar o a recipe, prescribing how

emission reducions will be quanied and moniored.

Tey must see evidence,

such as meeting minutes

that show companies were

factoring in the ability to

earn money for emission

reductions in determining

the projects viability.

~ Pacifc Carbon rust CEO

Te Vancouver Sun, April 21, 2012.


16/36



Under he Emission Oses Regulaion, ose projecs mus be validaed and veried by

independen, accredied hird paries. Te job o a validaor is o ensure ha he projec plan

ollows he proocol and subsaniae wheher he planned GHG reducions are valid, reasonable

and in compliance wih B.C.s Emission Oses Regulaion. Te work o a verier is o reviewhe emission reducions ha have aken place compared o he heoreical baseline developed

in he projec plan o deermine he amoun o oses ha have been generaed. PC relies

on he work o validaors and veriers o ensure oses are credible, only purchasing oses

rom projecs ha have saemens o assurance provided by appropriaely accredied bodies.

Rik o te carbon oet market

Te carbon ose marke as an indusry is relaively young and he conceps associaed

wih oses are quie complex. I involves a signican amoun o scienic undersanding

and echnical experise. o build he inegriy o his sysem, several inernaional sandards,

such as he Veried Carbon Sandard and he Clean Developmen Mechanism (CDM),

have been developed wih varying degrees o regulaion and oversigh. Te InernaionalOrganizaion or Sandardizaion (ISO) has also developed ose deniions and

procedures o accoun or GHG ose reducions. Many ose sandards, including B.C.s

program, require adherence o he ISO sandards. Te role o he Pacic Carbon rus

is o ensure he oses hey purchase are credible.

Recen sudies and audis have idenied a number o risks o he assessmen and qualiy

o oses. Te CDM, esablished by he Unied Naions under he Kyoo Proocol,

has developed one o he mos infuenial carbon ose sandards in he world. A 2007

repor1 looking a 93 projecs regisered by he CDM ound ha addiionaliy was unlikely

or quesionable or roughly 40 percen o he projecs. Furhermore, 64 percen o he

projecs ha sared beore seeking oses did no show ha he incenive rom CDM was

seriously considered in he decision o proceed wih he projec aciviy even hough hisis a CDM requiremen. Subsequenly, he CDM examined a number o projecs isel and

emporarily suspended several organizaions rom validaion and vericaion work. In 2012,

he agency acknowledged ha i needed o improve is sandards and oucomes.

Tese issues are no isolaed o projecs approved under he CDM sandards. Oher ose

programs have experienced similar challenges. Emission reducions ha would have

happened anyway are somehing he indusry calls ree-riders.

Te Pacic Carbon rus is mandaed o purchase oses rom projecs in Briish Columbia

ha reduce greenhouse gas emissions. Tis can creae risks around availabiliy and qualiy

and makes he PC dependen on a resriced pool o projecs. Given hese acors, our

audi included examining wheher he oses purchased me he key requiremens o heEmission Oses Regulaion and he PCs expecaions. Te audi also assessed wheher

he PC used appropriae due diligence in heir acquisiions o ensure ha hey only

purchased credible oses.


1 Is he CDM ullling is environmenal and susainable developmen objecives? An evaluaion o he CDMand opions or improvemen. Repor prepared or World Wildlie Fund, 2007.


17/36



AudiT PuRPoSe And SCoPeWe carried ou his audi o deermine wheher governmen achieved is objecive

o creaing a carbon neural public secor or 2010. We asked hree quesions:

1. Has governmen esablished reasonable procedures o allow public secor

organizaions o deermine heir greenhouse gas emissions and

assessed wheher hey have aken sucien acions o reduce hose emissions?

2. Has he Pacic Carbon rus purchased credible oses?

3. Is governmen evaluaing and reporing on he achievemen o is objecives?

We developed he audi objecives using he Greenhouse Gas Reduction Targets Act,

he Emission Oses Regulaion, Pacic Carbon rus guidance and an undersanding

o he risks associaed wih carbon ose projecs. For purposes o his audi, credible

oses are dened as oses ha are addiional, conservaive and real.

Te audi ocused on he acions o he Climae Acion Secrearia and he Pacic

Carbon rus. In conrming he credibil iy o oses purchased by he Pacic Carbon

rus, we also exended our work, as necessary, o obain evidence rom agencies ouside

o governmen involved wih he ose projecs developmen and approval.

We carried ou our work beween January and Augus 2012. Subsequenly, we wen

hrough an exensive clearance process wih a number o organizaions involved in hese

projecs. We conduced he audi in accordance wih secion 11(8) o he Auditor General

Actand he sandards or assurance engagemens esablished by he Canadian Insiue

o Charered Accounans.

AudiT ConCluSionWe concluded ha he provincial governmen has no me is objecive o achieving

a carbon neural public secor:

Governmenthasestablishedreasonableprocedurestoallowpublicsector

organizaions o deermine heir greenhouse gas emissions. However, governmen

has no ye esablished crieria o evaluae wheher governmen as a whole is aking

sucien acions o reduce emissions.

PacicCarbonTrusthasnotpurchasedcredibleosets.

Governmentisreportingonitseortstoreduceemissionsanditsprogress

in achieving a carbon neural governmen. However, he PC has no providedsucien inormaion in is reporing abou he cos and qualiy o is purchases.



18/36




Key FindinGS AndReCoMMendATionS

Government i determining greenoue ga emiionbut a not etablied criteria to evaluate weterreduction action are ufcient

Determining emissionsIn order o calculae a carbon ooprin, each public secor organizaion needs o deermine

heir greenhouse gas (GHG) emissions. Te provinces Carbon Neural Governmen

Regulaion requires hese organizaions o measure specic GHG emissions relaed o

heir energy, uel and paper consumpion. Emissions are caegorized ino hree groupings:

1. Direc emissions (reerred o as scope 1) are rom sources owned or conrolled by

he organizaion, such as emissions rom urnaces, boilers and company vehicles.

2. Indirec emissions (scope 2), such as hose arising rom elecriciy consumpion.3. Oher indirec emissions (scope 3) ha are a consequence o he aciviies

o he organizaion, bu occur rom sources no owned or conrolled by i such

as employee commuing, business ravel, paper consumpion, wase disposal

and ousourced aciviies.

Te organizaions are required o deermine heir scope 1 and 2 emissions. Te only scope

3 emissions included are hose rom business ravel (core governmen only) and paper

consumpion.

Calculaing he emissions was a signican underaking or he organizaions because hey

had no previously been racking hem. Each organizaion had o esablish procedures or

ideniying is sources o emissions a all aci liies and recording emissions daa.

Our audi did no direcly assess he procedures used or es emissions daa, bu ocused

on wheher he Climae Acion Secrearia (CAS) has provided reasonable ools and

procedures or PSOs o use in calculaing heir emissions. We ound ha he CAS provides

raining and oversigh o help ensure he daa recorded is complee and accurae and here

are processes in place o ideniy errors and omissions.

In addiion o calculaing emissions, public secor organizaions (PSOs) mus veri y he

accuracy o hose calculaions. For he 2010 reporing period, organizaions ceried ha

he emission inormaion hey submited was correc. During his ime, he Climae Acion

Secrearia piloed a more deailed sel-cericaion process ha included an independen

vericaion o a sample o PSOs. Te independen assessors concluded ha he sample had

implemened saisacory procedures o aciliae reasonable carbon emissions reporing.

Tis sel-vericaion process was expeced o be rolled ou o all PSOs aer he conduc o

our audi and should urher suppor he reliabiliy o he emissions daa.


19/36



ExhIBIT 2: nrthr lghts Cg

Actions to reduce emissionsTe Greenhouse Gas Reduction Targets Actrequires all governmen organizaions o

pursue acions o minimize heir greenhouse gas emissions or each calendar year,

beginning in 2010. I also requires hese organizaions o describe he acions akenby hem during he year o reduce heir emissions and heir plans o coninue doing so.

See Exhibi 2 or an example o a greenhouse gas reducion iniiaive in he public secor.

We expeced governmen o se clear crieria o be able o evaluae wheher public secor

organizaions acions o reduce emissions are sucien. We also expeced governmen o have

clear reducion arges in place agains which o evaluae reducion eors across governmen.

Te CAS ses ou he conen requiremens or he Carbon Neural Acion Repors

and ensures ha each organizaion submis he repor o hem, which hey hen make

available on he CAS websie. Tere is no requiremen or public secor organizaions

o have GHG emissions reducion arges. We reviewed a sample o repors or 2010

and ound ha while some organizaions had GHG reducion arges, mos did no.

For 2011, governmen repored a 6 percen increase in emissions over he previous year.

Tis increase is conrary o governmens expecaion o reduce GHG emissions. However,

he oal increase was repored as a relaive reducion o approximaely 3 percen when

normalized or climae variabiliy (i.e. a colder average emperaure in 2011).

Tese acors sugges ha wihou clear emission reducion objecives in place or public

secor organizaions, eors o reduce emissions may be l imied. Reducion arges can

ac as an incenive, encouraging organizaions o subsanially reduce heir own GHG

emissions. Oherwise, organizaions may choose o purchase oses o reduce heir

carbon ooprin raher han inves in reducion aciviies.

WE RECOMMEND ThAT:Te Climae Acion Secrearia work wih public secor organizaions o ensure each

is pursuing reasonable acions o reduce emissions. As par o his, governmen should



Source: Northern Lights College

In2011,NorthernLightsCollege

compleed he Cenre or Clean

Energy and echnology. Tis

LEEDPlatinumbuildingwill

showcase waer conservaion and

he laes o he grid echnology

or elecriciy producion including

solar and geohermal heaing.


20/36



ExhIBIT 3: Tw st prjcts prchas b th Pacfc Carb Trst

Te pacifc Carbon Trut a not urcaed credible oetTe provincial public secors GHG emissions or 2010 were calculaed a 814,149 onnes2.

In all, 128 public secor organizaions provided $18.2 million o he Pacic Carbon

rus o purchase oses on heir behal. We expeced he Pacic Carbon rus o havepurchased high-qualiy oses consisen wih he Emission Oses Regulaion, and heir

own expecaions.

In assessing he credibiliy o he oses purchased by he PC, we looked a wo

projecs ha ogeher accouned or approximaely 70 percen o he oal oses or 2010.

One, he Darkwoods Fores Carbon Projec, involved he purchase o 450,000 oses.

Te oher, Encanas Underbalanced Drilling Projec, involved he purchase o 84,671

oses. A descripion o hese projecs is presened in Exhibi 3.


Source: Canadian Geographic

2 O his oal, 84, 367 onnes do no require oseting under he Carbon Neural Governmen Regulaion. As per heregulaion, some o he emissions repored in he oal do no require he purchase o oses in order o reach carbonneuraliy. Tis includes emissions rom mobile or saionary combusion o biomass as well as emissions rom schoolbuses and BC ransi buses.

Dakwood Foe Cao ojec

In April 2008, he Naure Conservancy o Canada

(NCC) bough a 54,792-hecare propery in

souheasern B.C. known as Darkwoods, wih

he objecive o managing he land or ecological

conservaion. Darkwoods is an area o signican

habia or a leas 19 species a risk, including

grizzly bear and endangered mounain caribou.

Te projec plan saes ha he propery was

under immediae hrea o liquidaion logging

by a marke-driven acquirer. Tis became hehypoheical baseline scenario or he projec.

Under his scenario, he projec expeced o

achieve GHG emission reducions by avoiding

he release o carbon associaedwih aggressive

logging pracices. Te NCC claimed ha carbon

nance would help i overcome nancial obsacles,

allowing hem o implemen he projec. Te

Darkwoods projec was developed, validaed and

veried under he Veried Carbon Sandard.


21/36



ExhIBIT 3 (CONTINUED): Tw st prjcts prchas b th Pacfc Carb Trst

Ecaa Udeaaced D ojecTis carbon projec, locaed near For Nelson,

B.C., was developed by Encana Corporaion and

resuled in emission reducions rom reducedgas

faring. Te projec used an exising echnique

known as underbalanced drilling, bu wih

naural gas used as he drilling lubrican insead

o nirogen. Tis naural gas was conserved

hrough on-sie recovery and capure, and hen

sreamed direcly ino a pipeline, eliminaing

he need or faring. Encana claimed ha carbon

nance would help overcome echnological

obsacles, allowing hem o implemen he projec.

Te Encana projec was developed under hePacic Carbon rus Sandard, meaning i was

validaed and veried agains he requiremens

o he Emission Oses Regulaion.

Project eligibility concernsWe expeced he Pacic Carbon rus o ensure i only purchased oses ha me

he addiionaliy crieria o he Emission Oses Regulaion (EOR) and he PCs

expecaions. Tis includes ensuring ha he proponens considered and included he

value o developing oses as par o he jusicaion or going ahead wih he projec.

Tis is a saed expecaion o he PC and is consisen wih EOR and good pracice.Carbon expers also conrmed his o be an imporan expecaion.

We ound ha boh projecs sared wihou showing ha he value o oses was

considered o he exen ha i provided he incenive or going ahead. Oses are

supposed o be he ipping poin o make a projec happen.

eNatureConservancyofCanada(NCC)decidedtopurchasetheDarkwoods

propery in 2006, bu he ransacion did no close unil April 1, 2008 (Exhibi 4).

For he NCC, oses were no a criical acor in he decision o acquire he Darkwoods

propery. A carbon oses easibiliy sudy was no compleed unil January 2009.

Te NCC did no approach he Pacic Carbon rus abou oses unil lae 2009.

InthecaseofEncanasunderbalanceddrillingproject,thecompanystartedtheprojec in 2008 and had already successully compleed many wells by he ime

hey me wih he Pacic Carbon rus in Augus 2009 (Exhibi 4). We ound

ha carbon credis were no par o he decision o proceed wih he projec.


Source: Encana Corporation


22/36



ExhIBIT 4: darkws a ecaa tm actvts

Te Darkwoods and Encana projecs were underway beore seeking ose credis.

Source: Ofce o the Auditor Gen

The project baselines werenot properly determinedEven i he projecs had considered

he value o oses, hey would sillbe problemaic because o heir fawed

baselines. Te baseline scenario is a

hypoheical represenaion o wha

would reasonably be expeced o have

occurred in he projecs absence.

Secion 3(2)(j) o he Emission

Oses Regulaion requires baselines

o resul in a conservaive esimae

o he GHG reducion by considering

legal requiremens and any oher

acors needed o suppor he seleced

baseline. We expeced projecspurchased by he Pacic Carbon rus

o demonsrae ha he baseline me

hese requiremens. We ound ha boh

projecs had problems saisying hese

baseline requiremens.

Neiher projec had a baseline

scenario ha could be suppored.

Te Darkwoods baseline was no

conservaive and did no recognize

he legal consrains on he projec area.

Te Encana baseline was no suppored

by an appropriae es o show i was

he mos likely scenario.

darkws basltrmat

We ound he baseline assumpions

in his projec were no conservaive

and resuled in a baseline ar above

wha would likely have occurred had

common pracice been reasonably

esablished. We also ound ha heNCCs poenial harvesing aciviies

are signicanly consrained by

a legal obligaion o conserve he land,

hereby limiing he baseline opions

available o he NCC.


NCC = NATURE CONsERVANCy OF CANADA; pCT = pACIFIC CARBON TRUsT

2005

2006

2007

2008

2011

2009

2010

JUnE 2005

Darkwoods propery pu up or sale.

EArly 2006Te Naure Conservancy o Canada(NCC) makes an oer o purchaseDarkwoods

AUgUst 2007

Iniial propery appraisal orEcological Gis Program

April 2008NCC acquires Darkwoods propery(projec sar dae)

JAnUAry 2009Carbon ose projeceasibiliy sudy

OCtObEr 2009PC has rs discussions wihNCC abou he projec

OCtObEr 2010

Ose purchase agreemen signed

April 2011Projec proocol approved, projecvalidaed, projec veried

AUgUst 2009

PC has rs discussions wih Encaabou he projec

nOvEmbEr 2010

Projec proocol approved by PC,projec validaed

DECEmbEr 2010Ose purchase agreemen signed

JAnUAry 2011Projec veried

April 2008Encana projec sar dae

nOvEmbEr 29, 2007Ose projecs mus sar aer his dae

mArCH 2008

PC is incorporaed


23/36




baee auo o coeae

Te Darkwoods projec was designed under

he assumpion ha i he Naure Conservancy

o Canada had no purchased he propery,he mos likely owner would have been a

liquidaion harveser, who would purchase

he propery o generae he maximum

nancial reurn wih litle regard or

environmenal proecions. Following his

scenario, he projec expeced o achieve

GHG emission reducions by avoiding he

release o carbon associaed wih aggressive

logging pracices. Oher alernaive baselines

presened in he projec plan included a

susained yield harvesing scenario, and he

previous owners hisorical pracice whichinvolved limied annual harvesing.

Te seleced baseline (liquidaion logging),

as well as he oher opions available o he

projec developer, is shown in Exhibi 5.

ExhIBIT 5: Cmpars harvstg vms ptta bas scars vp r th darkws prjct

Source: Ofce o the Auditor General

Prjct scar11,000 m3/ar

Hstrca practc scar57,000 m3/ar

Ssta scar150,000 m3/ar

Projectstartdate:April1,

2008

lqat ggg scar (bas)300,000 m3/ar

Darkwoods Photo: Bruce Kirby


24/36



However, we ound limied suppor or a liquidaion logger scenario: no such

companies bid on he propery, and i was widely repored a he ime o sale ha

he owners preerence was o sell o a buyer who would appreciae or mainain he

areas ores and wildlie values. Our assessmen is ha a logging company, ceriedo one o hree inernaionally recognized ores cericaions, would be he mos

likely alernaive purchaser o he Darkwoods propery. Mos logging companies in

he province are ceried and sawmills in his region are also ceried. Such cericaion

requires oresry pracices o refec key values (see sidebar). Fores companies ha do

no preserve environmenally sensiive areas can ace public pressure o do so. As such,

an alernaive owner would likely have ollowed susainable oresry pracices as opposed

o he unsusainable pracices assumed in he seleced baseline.

Te projec assumed a liquidaion logger would no ollow he requiremens o he

Private Managed Forest Land Act(PMFLA),eventhoughtheprojectplanidentiedthat

mos privae ores land owners in he area ollowed hese requiremens. Tis is common

pracice in he area, as signican ax benes are gained by regisering a ores under heAc. Te projec documenaion provided no explanaion or omiting such regisraion

fromthebaselinecalculation.BynotregisteringunderthePMFLA,aliquidationowner

would no ollow he minimum ores managemen objecives or privae land (e.g. or

soil conservaion, proecion o waer qualiy, sh habia and criical wildlie habia,

and reoresaion). Te baseline assumed ha areas classied as environmenally proeced

by he previous owner such as sensiive habia or mounain caribou and oher a-risk

species, would be logged, and no replaned by a liquidaion owner.

We ound ha aggressive assumpions around he harvesing pracices under he baseline

scenario resuled in 30 percen more harvesable wood han was projeced in he imber

appraisal used or esablishing he propery purchase price. Tis resuled in overesimaing

he emission reducions and in oversaing he carbon oses generaed by he projec.

FOREsTRy pRACTICEs

IN ThE KOOTENAy

REGION

Th Sustaabl Frstry

itatv (SFi) s a glbally

rcgz staar that

cvrs ky valus such as

prtct bvrsty,

spcs-at-rsk, wll

habtat a watr qualty,

as wll as sustaabl

harvst lvls a prmpt

rgrat. Fr xampl,

cmpay lcat Crst, B.C., ssu a

gu r tmbr prucrs

curagg ahrct

th SFi prgram a

clug th statmt that

ts mll wll t purchas

tmbr rm ukw

surcs r prucrs whs

practcs ar llgal r

t mt rgulats r

prvat la maagmt.


Darkwoods Photo: Bruce Kirby


25/36



Te susained yield scenario considered by he projec was he closes o ollowing he

requirementsofthePMFLAbutwasnotselectedasthemostlikelyoption.Whilethis

scenario would have resuled in signicanly lower harves levels and ewer oses

(see Exhibi 5), even his scenario is no he mos likely baseline. Baselines are requiredo mee any legal obligaions on he projec area. For he Darkwoods projec, signican

legal consrains on harvesing were no accouned or in he projec plan.

Te naue Coeac o Caada had a ea oao o coee he oe

Te Naure Conservancy o Canada acquired he Darkwoods propery using a Naural

Areas Conservaion Program gran o $25 million and a donaion o a major porion o

he propery hrough he ederal Ecooca gf poa (see sidebar). Tese wo

sources accouned or he majoriy o he properys purchase price o approximaely

$100 million. Under he Ecological Gis Program, he Naure Conservancy o Canada

becomes legally obligaed a he ime o purchase o manage hese lands or conservaion.

o say wihin heir legal obligaions, he NCC is resriced o a minimal harves requiredo mainain ecological values and he healh o he ores. Wih such a minimal amoun

o harvesing available o he NCC, he projec baseline should have been no greaer han

he hisorical pracice.

ecaa bas trmatEncana developed is own proocol or he proposed underbalanced drilling projec.

Tis proocol was approved by he Pacic Carbon rus, alhough he EOR does no give

such approval auhoriy o he PC. We ound ha he proocol included an inappropriae

process o deermine he baseline. In he proocol, he baseline is dened as hisorical

pracice gas faring. Tis approach is inconsisen wih EOR and ISO expecaions or

esablishing a baseline, which require a es o selec he baseline rom several poenial

scenarios. Tis limiaion allowed Encana o avoid conducing a nancial es o deerminewheher he projec was more nancially atracive han he baseline scenario.


ThE ECOLOGICALGIFTs pROGRAM

Ths ral gvrmtprgram allws Caaas

wh w clgcally

sstv la t sur

ts prtct thrugh tax

bts t la wrs wh

at la t a qual

rcpt. Fr a cgt

t mt th rqurmts

th prgram, th ral

evrmt Mstr must

crty that th la sclgcally sstv,

apprv th rcpt t

rcv th gt, a crty

th ar markt valu th

at. Th r rcvs

a tax rcpt r th ull valu

th cgt. Th la

rcpt must th sur

that th las bvrsty

a vrmtal hrtag

ar csrv prptuty.

UNDERBALANCED DRILLINGs a prcur us t rll gas wlls whr

th prssur th wllbr s kpt lwr tha th prssur th rmat

bg rll. As th wll s bg rll, rmat gas fws t th wllbr

a up t th surac. Hstrcally, ths gas has b far, as vtg has

mr srus atmsphrc mpacts. Cmmrcally avalabl tchlgy allws

ths gas t b captur a sl t th ppl.


26/36



When a carbon ose projec involves revenue, good pracice ypically requires a nancial

analysis es o show ha he proposed projec is no he mos atracive course o acion.

We expeced Encana o have considered he nancial benes o his projec, o ensurehis projec could no be considered business-as-usual.

Insead, we ound ha Encana did no assess he nancial implicaions o he projec.

Based on he preliminary inormaion provided o he PC on he projec coss and

gas recovery levels, he projec was projeced o be more economical han he hisorical

pracice o faring he gas. Te projec had he poenial o provide a signican nancial

reurn on he incremenal projec coss. Acual resuls conrm he projecions: he

company providing he echnology repored ha he gas conserved over he course

o he projec had a marke value o more han $7 million. Tis is subsanially greaerhan he projeced incremenal cos o he echnology. Gas valued a more han $3

million was si ll fared because he compressors employed had insucien capaciy

or he sronger gas fows.

Despie he lack o nancial inormaion, he Pacic Carbon rus purchased oses

rom he Encana projec. As he only ose purchaser o his projec, he PC could

have direced Encana o use specic ess. Te PC is able o selec projecs based

on heir own requiremens (as long as hese do no conradic he requiremens o he

B.C. Emission Oses Regulaion). Knowing ha revenues were a highly relevan acor

in his proposal, he PC should have pursued a nancial analysis by Encana.

Te Climae Acion Secrearia suppors he PC in creaing heir own purchaserequiremens, and he CAS has indicaed ha oses should no pay companies o do

wha hey had a solid business case o do already. Encanas projec does no pass his es.

Why this happenedTh tts th emss osts Rgulat hav t b clarly

Te Emission Oses Regulaion (EOR) provides he regulaory ramework or ose

projecs bu is designed o no be overly prescripive. Governmen has inenionally placed

reliance on he experise o hird paries o inerpre he regulaion during heir validaion

and vericaion work.


Encana Photo: Encana Corporation


27/36




Tese hird paries are required o assess he projecs agains he regulaion and

applicable ISO sandardsboh include language ha allows or considerable

fexibiliy and judgmen.

While proessional judgmen is necessary o evaluae hese projecs, governmens inenion

was ha guidance would be creaed o supplemen he regulaion and provide clariy

where appropriae. For example, he EOR does no provide any requiremens regarding

quanicaion proocols ha are developed by proponens. As here were no governmen

approved proocols when he regulaion was creaed, proponens creaed heir own

proocol or adaped a proocol developed under a dieren sandard.

We expeced o nd clear guidance or proponens in key risk areas such as addiionaliy

and proocol developmen. Insead, we ound ha while he PC had developed dra

guidance documens, proponens are no required o adhere o his guidance, and i does

no sucienly address key risk areas such as hose idenied in his audi. We also ound

ha here is currenly limied guidance or proocol developmen and approval. Over hecourse o he audi, he PC acknowledged ha gaps exis beween EOR and a ully unc-

ioning greenhouse gas program regarding proocol developmen and approval.

Te PC has acknowledged ha dening hese proocol requiremens will increase

he credibiliy o he program, sreamline he process o approving projecs, expand he

scope o he GHG program, provide greaer cerainy or projec developers, and ouline

crieria or validaion bodies o validae agains.

WE RECOMMEND ThAT:Te Climae Acion Secrearia ensure supplemenary guidance o he Emission

Oses Regulaion be fnalized and adhered o.

du lgc ccrs wr t satsactrly arss

Te carbon ose marke has been reerred o in lieraure as lacking he criical compeiive

check ound in well-uncioning markes, in which he ineress o buyer and seller are

naurally balanced agains each oher. In ose markes, boh he buyer and seller bene

rom maximizing he number o oses a projec generaes:

Sellershaveanancialincentivetooverestimatethebaselinescenario

aricially infaing emission credis o increase proabiliy.

Buyersseekingosetsaspartofacarbonreductionrequirementareinclinedto

ocus more on he volume o available oses raher han heir qualiy.

Tis was paricularly relevan or he Darkwoods projec as one o he projec developers

had a conrac wih he NCC o purchase oses rom he projec i was helping o develop.Te projec developer also helped develop he proocol or he Darkwoods projec.

Similarly, he validaor was involved in he iniial easibiliy sudy, proocol approval

and projec validaion. In such circumsances, poenial purchasers should exercise

enhanced due diligence and risk managemen.

Bcaus cmmrcal

xpltat was th

cutractual us

t justy th natur

Csrvacy Caaa

(nCC) carb sts,

sts wr subsqutly

sl t -arms-lgth

buyrs, a umbrs

carb sts ar hghly

sstv t assumpts,

ca ly cclu

that th carb sts

grat by ths (a

prbably may thr)

rst csrvat prjcts

ar smply spurus.

Source: G. Cornelis van Kooten, Tim Bogle, Frans P. de Vries,Rent Seeking and the Smoke and Mirrors Game in theCreation o Forest Sector Carbon Credits: An example romBritish Colu mbia, 2012, p 1.


28/36




Te wo projecs, Darkwoods and Encana, were among he rs wih which he Pacic

Carbon rus was involved. For assisance wih hese projecs, he rus hired consulans

o review cerain key aspecs o he projecs and ideniy issues relaed o heir credibiliy.

Tis due diligence appeared o be a valuable componen o he review, bringing severalsignican issues o he russ atenion.

We ound he concerns raised by hese consulans o be valid, bu noed ha many were no

saisacorily addressed by he PC beore purchasing he oses. Te PCs due diligence

lacked he necessary rigour. Overall, he Pacic Carbon rus was no a pruden purchaser.

For example, due diligence commens on he Darkwoods projec included an assessmen

ha he baseline represened rape and pillage o he ores, raing a 3 ou o 10 or

conservaiveness. I also saed ha even he mos aggressive ores pracices would

no be able o log every hecare idenied as operable on he landbase ye no changes

were made o address hese concerns. As described in an earlier secion, we had similar

concerns wih he realism o he baseline.

Te Pacic Carbon russ guidance maerial recognizes ha skepicism and common

sense should be used when evaluaing a baseline. Te guidance also acknowledges

ha rules-based approaches can encourage gamesmanship wih he inerpreaion

o he rules.

We concluded ha he problems in hese projecs were primarily rooed in a lack o

skepicism and common sense being applied by he PC. Te Pacic Carbon russ

main concern seemed o be wih jusiying ha rules were adhered o, and less in

assessing wheher he resuls made sense.

WE RECOMMEND ThAT:Te Pacifc Carbon rus, o beter manage ose purchase risks, ensure ha he resuls

o is due diligence eors are saisacorily analyzed, concluded and documened.

Th Cmat Act Scrtarat t prv sfct vrsght

Te Pacic Carbon russ mandae o build he carbon indusry in B.C. creaes a ension

wih is mandae o purchase credible oses. Te governance arrangemens applied o

purchase oses currenly run couner o good pracice. Te Climae Acion Secrearia

(CAS) is he agency designaed by legislaion o regulae oses. We ound ha, because

i has no considered he ecacy o he credis purchased by he PC, he CAS has

eecively delegaed his work o he PC. Consequenly, he PC acs as a regulaor and

buyer in he marke place. We ound ha he PC has no been diligen in is purchaseo credible oses. Te Climae Acion Secrearia should be more acive in developing

guidance and assessing he PCs ose purchases o ensure hey mee governmens

inenion o achieving carbon neuraliy.


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WE RECOMMEND ThAT:Te Climae Acion Secrearia provide sronger oversigh o ensure ha he

oses purchased on behal o governmen are credible.

Government and te pacifc Carbon Trut reort on teiracievement, but imrovement could be madePublic secor organizaions are required o repor o he Climae Acion Secrearia on

heir GHG emissions as well as he acions hey have aken o minimize hose emissions.

Te organizaions ulll his requiremen by submiting a Carbon Neural Acion Repor.

From hese, he Climae Acion Secrearia summarizes governmens overall perormance

in a repor iled Carbon Neutral B.C. Te rs o hese repors was issued in July 2011. I

was he rs year he provincial governmen was required o measure and repor is GHG

emissions, and i esablished 2010 as a baseline year. In July 2012, governmen repored is

2011 GHG emissions.

We expeced governmen o be evaluaing and reporing on he achievemen o is objeciveo carbon neuraliy. We also expeced his reporing o include he coss and benes

o reducing emissions and o oseting he remainder, providing governmen wih an

opporuniy o evaluae is success owards achieving he oucome o carbon neuraliy.

Requiring he provinces public secor organizaions o ideniy, quaniy and repor heir

emissions was a signican challenge or organizaions. Beore his, GHG consumpion

was no somehing he public secor calculaed. Neverheless, we ound ha governmen

repored on acions aken o reduce emissions, as well as reporing on he oal emissions

generaed, he emissions required o be ose and he oses purchased. Te emissions

or 2010 and 2011 are presened in Exhibi 6. Te oal increase was repored

as a relaive reducion o approximaely 3 percen when normalized or climae variabiliy

(i.e. a colder average emperaure in 2011).

Alhough he repors highligh specic work aking place across he public service,

hey did no sucienly address he risks acing public secor organizaions in heir

coninued work owards reducing GHG emissions, nor did he repors discuss key

barriers o coninued improvemen.

ExhIBIT 6: Grhs gas msss Brtsh Cmbas pbc sctr, 2010 a 2011

Source: Carbon Neutral B.C. reports


30/36



We also ound ha while he Pacic Carbon rus did repor is ose porolio

(including he name o he projec, validaor and verier), he reporing lacked deails

needed o demonsrae he cos-eeciveness o he oses purchased.

Reporting on value- for-moneyAn imporan aspec o ransparen reporing or he Pacic Carbon rus is o

demonsrae how unds spen on behal o he public secor refec good value-or-money.

Te Pacic Carbon rus recognizes ha his is an imporan par o managing public

secor coss and idenies providing cos-eecive oses as a way o achieve is mandae.

In his regard, we noed ha he Pacic Carbon russ annual reporing only saes ha

i pays, on average, less han $25 per onne (a arge ied o he curren price ha public

secor cliens pay o ose heir emissions). Tis measuremen is oo broad o be o any

value he average cos could be anywhere rom $1 o $24, which represen very dieren

views o he PCs purchasing pracices. Greaer ransparency should be provided,

as well as an analysis or comparison o he wider markeplace.

Te PC is resriced o purchasing oses generaed in B.C. I had challenges demonsraing

value-or-money in is purchases. For he projecs examined in his audi, we ound ha

he Pacic Carbon rus had o pay more han marke raes or boh.

darkws sts cstsTe Pacic Carbon rus paid $4.5 mill ion or 450,000 Darkwoods oses ($10 per

ose), while one o he projecs developers paid $1.5 million or 250,000 oses ($6 per

ose). Te Pacic Carbon rus suggesed i paid more because he projec developer

would have negoiaed a lower price. Tis ype o arrangemen highlighs he confics o

ineres inheren in carbon markes as a resul o nancial incenives or hose involved

wih developing carbon projecs. Compared o he wider markeplace, he Pacic Carbon

rus paid abou 80 percen more han he average global price ($5.49) or all oresryprojecs and more han double he average price ($4.61) or projecs in regulaed markes.

Te Pacic Carbon russ conrac wih he Naure Conservancy o Canada was based

on escalaing prices, meaning he Pacic Carbon rus paid more or a higher volume

o oses. Had i bough 250,000 or ewer oses, i would have only paid $8 or each one.

Te PC explained ha hey were uncerain wheher hey could acquire he signican

volume o oses necessary o mee governmens carbon neural goal and were hereore

dependen on Darkwoods as he ose supply in B.C. was no exensive.

Te Pacic Carbon rus cied he need o provide incenives or projecs o deliver higher

volumes. As a resul, he PC was willing o pay more o encourage larger volumes be

delivered by he Darkwoods projec developers.

Te value-or-money aspec o he Pacic Carbon russ approach was urher eroded as a

resul o he agency having bough more oses han needed rom he Darkwoods projec.

Tis was a resul o he projecs leakage no being conservaively esimaed. Te leakage

acor reduces he amoun o oses available rom a projec (see sidebar). Te PC old

us ha i was no saised wih he leakage acor calculaed or he Darkwoods projec,

because he amoun was much lower han pending provincial sandards a he ime on

his issue. I was also lower han he amoun esimaed as being appropriae in a sudy

o Pacic Norhwes oress.

LEAKAGE

lakag s a cmpx

ss. Hwvr, smp

trms t rrs t what

happs wh a st

prjct cass a cras

GHG msss at athr

cat. Fr xamp, a

prjct rcs harvstg th prjct ara, t s

pssb that ma r

rst prcts c psh

ggg prats t

athr cat ths

gatg GHG rcts

th rga cat.



31/36



Because he Pacic Carbon rus was unable o negoiae a higher leakage acor,

i purchased 450,000 oses insead o he required 403,112 Darkwoods oses a

an addiional cos o $468,880.

ecaa sts cstsTe conrac wih Encana provided or varying prices depending on he amoun purchased.

Te Pacic Carbon rus paid $20 per ose or he rs 47,000 and $18 per ose or he

balance. In all, he rus purchased 84,671 oses (mos o which were applied o he 2010

carbon neural year) or over $1.6 million. Te average price in he volunary carbon marke

a his ime was abou $10 per ose or similar ypes o projecs.

As he projec developed, Encana became concerned abou wheher he Pacic Carbon

rus would ollow hrough on he purchase agreemen. o provide some level o securiy,

he Pacic Carbon rus agreed o a $30,000 penaly provision, calling or he PC o pay

Encanas projec developmen coss i i did no complee he ransacion. In our view, hisprovision raises quesions abou he Pacic Carbon russ abiliy o be objecive when i

assessed he qualiy o he Encana projec.

WE RECOMMEND ThAT:Te Pacifc Carbon rus provide greaer ransparency abou he cos-eeciveness

o is purchases.

Te Climae Acion Secrearia and he Pacifc Carbon rus ensure ha reporing

on carbon neuraliy assesses he rade-os beween reducing governmen emissions

and oseting hose emissions hrough he purchase o oses.



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L O O K I N G A h E A D

We will follow up on he implemenaion saus o he recommendaions in ourApril 2014 ollow-up repor. Given he naure o he ndings in his repor, we will

consider examining oher ose projecs such as he Grea Bear Rainores projec.

Te credibiliy o oses is imperaive i he expeced environmenal benes areo be realized.

Many organizaions are already volunarily reducing heir emissions and some are

ollowing governmen in becoming carbon neural. However, purchases o carbon

oses alone will no lead o governmen meeing is climae change objecives or

he province. Governmen has a goal o a 33 percen carbon emissions reducion

by 2020. A comprehensive suie o policies and programs will need o be implemened

o mee his goal. We will consider examining he eeciveness o plans and programs

ocused on ha goal.

Even i he provincial emissions reducion goal is being atained, climae change will

sill have impacs on our economy and sociey. All levels o governmen will need oundersand hese impacs and implemen appropriae adapaion measures o reduce

he risks. Tis also is an area ha we will look ino or uure audi work.

Source: Ofce o the Auditor General


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AppEN D Ix 1: DE F IN I T IONs OF AD D IT IO NAL I T y

While there are a number o denitions o additionality, they all ocus on the need or

showing that ofset benets were a serious consideration in the decision to implement

the project. Ofsets are meant to be the tipping point to make projects happen.

The Pacific Carbon Trust - news release, May 5, 2011Real GHG reducions or removal ha would no have occurred wihou he revenues

associaed wih he purchase o oses.

Clean Development MechanismTe CDM Execuive Board deems a projec addiional i is proponens can documen

ha realisic alernaive scenarios o he proposed projec would be more economically

atracive or ha he projec aces barriers ha CDM helps i overcome.

Climate Action Reserve program manualGHG reducions mus be addiional o any ha would have occurred in he absence

o he Climae Acion Reserve, or o a marke or GHG reducions generally. Businessas usual reducions i.e., hose ha would occur in he absence o a GHG reducion

marke should no be eligible or regisraion.

Climate Action ReserveMeans ha he emission reducion is no required by law and would no have occurred

bu or he incenive provided by he carbon marke. Presiden CAR, June 29, 2011.

Electric Power Research InstituteA GHG emission reducion projec designed o creae oses is considered o be

addiional i he reducions creaed by he projec aciviy would no have occurred bu

or he implemenaion o he projec and he incenives creaed by he ose program.

Offset Quality InitiativeTe revenue rom he projecs emission reducions should be reasonably expeced o have

incenivized he projecs implemenaion or an ose projec o be considered addiional.

Pembina Institute and the David Suzuki Foundationo be addiional, an ose projec mus no have happened wihou he incenives arising

rom he ose marke.

Stockholm Environment InstituteWould he projec have happened anyway? I he answer o ha quesion is yes, he projec

is no addiional.

UK Department of Energy and Climate ChangeProjecs mus demonsrae ha hey produced a saving in carbon ha would no have

happened oherwise i.e. he projec could no ake place wihou he carbon nance

rom selling credis.

U.S. Government Accountability Office (GAO)An ose is addiional i i would no have occurred wihou he incenives provided

by he ose program.


34/36



A p p E N D I x 2 : G L O ss A Ry

Additionality:Te principle ha only hose projecs ha would no have happened anyway should be

eligible or carbon credis. Addiional emission reducions are hose emission reducions

ha would no have occurred under business-as-usual or in he absence o acions associaedwih an ose projec. Pacic Carbon rus requires proponens o demonsrae ha he

incenive o having projec emission reducions recognized as oses helps he projec

overcome, or parially overcome, obsacles o carrying ou he projec. See Appendix 1.

Baseline scenario:A scenario ha reasonably represens he emissions by sources o greenhouse gases

(GHGs) ha would occur in he absence o he proposed projec aciviy.

Carbon Dioxide (CO2):

Tis greenhouse gas is he larges conribuor o human-induced climae change.

For example, CO2

is emited by deoresaion and he burning o ossil uels.

Carbon Dioxide Equivalent (CO2e):

A measure o he global warming poenial o a paricular greenhouse gas compared o ha

o carbon dioxide. One uni o a gas wih a CO2e raing o 21, or example, would have he

warming eec o 21 unis o carbon dioxide emissions (over a ime rame o 100 years).

Carbon offset:A carbon ose represens a reducion or sequesraion o greenhouse gas emissions generaed

by aciviies such as improved energy eciency ha can be used o compensae or, or

ose, he emissions rom anoher source, such as a plane rip. One carbon ose represens

he reducion o one onne o carbon dioxide (or is equivalen in oher GHGs).

Carbon neutral:Te concep o achieving carbon neuraliy involves purchasing carbon oses or any

emissions generaed o achieve ne-zero greenhouse gas (GHG) emissions.

Conservative:A principle or se o pracices designed o avoid overesimaing emissions reducions.

In he Emission Oses Regulaion he erm conservaive is used o mean a GHG

reducion ha is unlikely o have been overesimaed.

Greenhouse Gases (GHGs):Gases ha absorb and emi radiaion a specic wavelenghs wihin he specrum o

inrared radiaion emited by he earhs surace, he amosphere and clouds. For purposesoGreenhouse Gas Reduction Targets Act(GGRA), greenhouse gases are limied o he six

main GHGs whose emissions are human-caused: carbon dioxide (CO2); mehane (CH

4);

nirous oxide (N2O); hydrofuorocarbons (HFCs); perfuorocarbons (PFCs); and sulphur

hexafuoride (SF6).


35/36



Greenhouse Gas Reduction:For he purposes o he Emission Oses Regulaion, he deniion is a reducion o GHG

emissions or an enhancemen o GHG removals.

Kyoto Protocol:An inernaional reay ha requires paricipaing counries o reduce heir emissions

by 5 percen below 1990 levels by 2012. Te Proocol, developed in 1997, is adminisered

by he Secrearia o he UN Framework Convenion on Climae Change.

Leakage:Leakageisdenedasthenetchangeofhuman-causedemissionsbysourcesofgreenhouse

gases (GHGs) which occurs ouside he projec boundary, and which is measurable and

atribuable o he projec aciviy.

Offset Project:

A discree acion underaken o achieve a GHG reducion (Emission Oses Regulaion de-niion), which includes boh enhancemen o GHG removals and reducions in emissions.

Project Plan:Plan prepared by or on behal o a Proponen and in accordance wih Secions 3 or 7

o he Emission Oses Regulaion.

Project Protocol:A documen ha provides specic principles, conceps, and mehods or quaniying,

monioring and reporing GHG reducions or a projec.

Proponent:Person who proposes eiher o carry ou or o engage anoher person o carry ou a projec

o generae emission oses or he purposes o he Ac.

Regulated Market:Te marke or carbon credis used o reach emissions arges under he Kyoo Proocol or he

European Union Emissions rading Scheme (EU ES). Also called he Compliance Marke.

Validation:An iniial assessmen o an ose projec agains a se o crieria. Under he Emission

Oses Regulaion his is esablished hrough assurance by an independen, ISO 14065

accredied rm or organizaion ha he conen and asserions o he Projec Plan comply

wih he requiremens o he regulaion.

Verification:In he conex o reducions associaed wih an ose projec, vericaion is he assessmen

and conrmaion ha he claimed reducions have occurred. Under he Emission Oses

Regulaion his is esablished hrough assurance by an independen, ISO 14065 accredied

rm or organizaion.

Voluntary Market:Te non-regulaed marke or carbon credis ha operaes independenly rom Kyoo and

he EU ES. Also called he Non-Regulaed Marke.

A p p E N D I x 2 : G L O ss A Ry


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Location:8 Basion Square

Vicoria, Briish Columbia

V8V 1X4

Oice hour:Monday o Friday

8:30 am 4:30 pm

Teleone: 250-419-6100oll ree hrough Enquiry BC a: 1-800-663-7867

In Vancouver dial 604-660-2421

Fa: 250-387-1230

Email: [email protected]

Webite:Tis repor and ohers are available a our websie, which also conains urher inormaion

abou he oce: www.bcaudior.com

Reroducing:Inormaion presened here is he inellecual propery o he Audior General o

Documents

An Audit of Carbon Neutral Government