The Emissions Trading Process

In some detail, here are the steps a potential seller could take to negotiate a sale of offset credits in the Canadian market.

 

  1. Evaluate options
  2. Prepare an offer/bid
  3. Negotiate terms
  4. Negotiate contract
  5. Delivery

 

Before rushing into the market, all buyers and sellers should evaluate the options and opportunities before them. Buyers/sellers must evaluate their appetite for risk, the opportunities available and the costs (for the project and transactions) associated with taking action. Entering the negotiating process with a clear understanding of these aspects will ease the negotiation process.

 

Once the buyers/sellers understand their profile, it is time to create an offer to sell or a bid to buy. If creating an offer to sell, the seller would present the type of project, the number of potential offset credits available, the sale price and any specific terms required. These additional terms could include comments related to securities or defaults. A bid to buy offsets will likely include similar information but will state the price the bidder is willing to pay for potential offset credits.

 

Finding the other party (buyer or seller) to initiate a transaction can be as simple as a phone call or as involved as hiring a broker to pitch on the seller’s behalf. Until there is a liquid and spot market, finding the other party to the transaction will likely involve some legwork and a lot of phone calls.

 

The offer/bid produced is not necessarily binding but the final terms of the offer/bid are often agreed to before contracting begins. During this stage, parties may start or even complete the due diligence process. The business terms of the transaction are also signed off by all parties during this stage.

 

Contracting can be a formality once the terms of the offer/bid are negotiated or it could be a more drawn-out process. The transaction speed will be heavily influenced by the sophistication of the parties, the nature of the transaction and the risk sharing profile.

 

Transactions for offset credits can occur at any point in the process. That decision is ultimately up to the seller. Some examples of different times for transactions include:

 

  • Prior to the start of the project – provides upfront funding to Project Proponent but carries a higher risk that offset credits will not be rewarded or the anticipated volume will be less than initially proposed. Will likely take the form of an option purchase and the value will not be as high as reductions/removals sold later in the process.
  • Following Validation – the value of the transaction increases with some assurance the anticipated volume of offset credits will be accepted. This will likely also take the form of options but a forward stream might be expected.
  • After Issuance – once offset credits are actually issued by a designated government authority the value should increase significantly. At this point, transactions are likely to occur on the spot market, in addition to forward stream purchases.

 

Delivery of the offset credits will vary slightly in Alberta. No credits, per se, will be issues. Rather, it will be up to a regulated entity to report the use of offsets in meeting their compliance requirements. These offsets must meet eligibility criteria and quality assurance as laid out in the Specified Gas Emitters Regulation.