The federal government is proposing a set of rules for a pollution credit system that could allow a carbon trading market to develop in Canada.

The plan is part of the government’s obligations under the Kyoto commitment to cut greenhouse gas emissions. Yesterday, the government issued a consultation paper setting out the system’s proposed rules. Following consultations with provinces, territories, industry and Aboriginal groups, the system will begin operating early in 2006. Other public comments on the consultation document are invited until September 30.

The proposed system will award pollution credits to companies, governments, organizations or citizens undertaking projects that would cut emissions, provided they meet the criteria to be finalized following consultations. These credits can then be traded. Large polluters may buy them to put towards their emission reduction targets; speculators may buy them; and, the Climate Fund, a new institution established in the last budget to purchase credits on behalf of the federal government.

The government plans to leave it up to the private sector to establish a trading mechanism. “The actual trading of the credits will take place through institutions, such as brokers or exchanges that are set up by the private sector,” the paper notes. “The role of the government will be restricted to tracking the credits through a national tracking system in order to ensure they are not used more than once.” Both the TSX Group Inc. and the Montreal Exchange Inc. have expressed interest in developing a domestic market. It also notes that the government will also be exploring options for linking with other emissions trading systems.

“Enacting this system is a major step forward for our climate change plan,” said Stéphane Dion, minister of the environment. “Consultations will maximize its effectiveness in directing innovation to reduce greenhouse gas emissions for cleaner air, a healthier environment and a strong, sustainable, competitive economy.”