Canada last week marked a major milestone in its move toward establishing a national carbon market by laying down the rules for a federal greenhouse gas offset system.

The offset system will establish tradable credits and encourage  cost-effective domestic greenhouse gas reductions in areas that will not be covered by planned federal greenhouse gas regulations, like the forestry and agricultural sectors, said Canada’s Environment Minister Jim Prentice. For example, potential offset projects could include methane capture and destruction from landfill gas, the creation of new forests, or agricultural soil management.

Prentice released two draft documents that set out which offset projects qualify for the federal system, how others can apply for inclusion, the value of each offset credit, how emissions cuts will be tracked and verified, and other details. He said the final drafts would be published later this year, after a 60-day comment period.

Companies subject to greenhouse gas emissions regulations will be able to purchase offset credits on the carbon market and use these credits for compliance with their regulated targets. In addition, other parties, such as small businesses, individuals, and travelers, will be able to acquire and use these credits to voluntarily offset the greenhouse gas emissions from their activities.

An offset credit is equal to one metric ton of carbon dioxide. The environment minister said the federal government will not set the price of carbon offsets. Market forces will instead dictate the permits’ value. The rules are expected to be effective on Jan. 1, 2011.

Canada’s government has pledged to cut its carbon emissions by 20% from 2006 levels by 2020. As in the U.S., the government plans to achieve this with a cap-and-trade program and investments in renewable energy.

Prentice told Reuters and other media that Canada’s carbon markets and credits system could be affected by whatever direction the U.S. took—that is, whether or not it set up a carbon market. He reportedly said that Canada’s plan was to set up a domestic market first; this would then move to a North American version (with the U.S.), before becoming part of the global market.

Prentice also reportedly said that Canada had postponed plans to impose greenhouse gas emissions cuts on major emitters by 2010, and it would delay those cuts until it saw what Washington planned.

Sources: Canada Environmental Ministry, Reuters