In Focus: Carbon Offsets under AB 32. From the desk of Carbon Credit Capital team member Yuliya Lisouskaya

Transcription

1 Carbon Offsets under AB 32 In Focus: Carbon Offsets under AB 32 From the desk of Carbon Credit Capital team member Yuliya Lisouskaya Carbon Credit Capital LLC 561 Broadway New York, NY Tel: (Main Office)

2 2 Carbon Offsets under AB 32 AB 32 Cap-and-Trade California s Assembly Bill 32 (AB 32) is a regulation that requires a reduction in California s Greenhouse Gas (GHG) Emissions to 1990 levels by the year California Air Resource Board (ARB) developed a cap-and-trade program aimed at achieving this GHG emissions reduction goal. The first stage of California s cap-and-trade program took effect in early 2012 and the enforceable compliance obligation began on January 1, Under a cap-and-trade mechanism, GHG emissions are capped at a certain level and this cap decreases over time. The cap may comprise a pool of carbon allowances, each representing the release of one metric ton of carbon. Under AB 32, at the end of each compliance period, every entity covered by the legislation must submit a number of compliance instruments equal to its emissions. In order to meet their compliance obligations, companies may surrender allowances and a limited number of offset credits. ARB Offset Credits A carbon offset is a reduction in emissions of GHGs made in order to compensate for or to offset an emission made elsewhere. ARB offset credits are GHG emission reductions or GHG removal enhancements that meet regulatory criteria and may be used by an entity to meet up to eight percent of its compliance obligation under the Cap-and-Trade Program. 1 Each ARB offset credit is equal to one metric ton of carbon dioxide equivalent (MTCO2e) and may only be quantified using an ARB approved Compliance Offset Protocol. Only ARB issues compliance offset credits for use in the Cap-and-Trade Program. Approved Methodologies and Project Types Currently, ARB has adopted four compliance offset protocols that may be used to generate ARB offset credits. 1. U.S. Forest Projects Compliance Offset Protocol 1 Compliance Offset Program, California Air Resource Board,

3 3 Carbon Offsets under AB Urban Forest Projects Compliance Offset Protocol 3. Livestock Projects Compliance Offset Protocol 4. Ozone Depleting Substances (ODS) Compliance Offset Protocol Consequently, the approved project types include: 1. Forest Projects 2. Urban Forest Projects 3. Livestock Projects 4. ODS Projects Early Action Offset Credits and ARB Offset Credits As of now, offset credits are traded on the voluntary market and are registered on approved offset registries. Offset credits that were developed under the four approved mechanisms during the timeframe from January 1, 2005 and December 31, 2014 are considered Early Action Offset Credits. 2 Early action credits result from an early action offset project located in the United States. To be eligible for use in cap-and-trade compliance, Early Action Offset Credits must transition to Compliance Offset Protocols by February 18, All compliance offset projects must be developed in accordance with ARB approved Compliance Offset Protocols. To be eligible for ARB offset credits, offset project operators must list their offset projects with an approved offset project registry. Currently, there are two approved offset project registries: 1. Climate Action Reserve (Reserve) 2. American Carbon Registry (ACR) 2 Early Action Projects, California Air Resource Board, 3 American Carbon Registry and California Early Action Offset Projects, American Carbon Registry Webinar July 1, 2013

4 4 Carbon Offsets under AB 32 The purpose of project registries is to assist ARB with administrative parts of the cap-and-trade program. Offset project registries will help facilitate the listing, reporting, and verification of offset projects developed using the compliance offset protocols. Registry offset credits cannot be used for compliance with the Cap-and-Trade Program, however registry offset credits can be converted to ARB offset credits and will then be eligible for use in the Cap-and-Trade Program. Currently, registry offset credits are in the process of being listed and verified and are expected to be sold by the end of summer In the meantime, registry offset credits can be purchased in the futures markets, and their prices vary from $8 to $12. 4 Table 1. Early Action Process 5 List with any approved Early Action Offset Program (EAOP) -> Registry, CAR Monitor, report and verify according to the approved early action quantification methodologies. -> Use verifier approved by the EAOP Issuance of early action offset credits by EAOP Issuance of ARB offset credits -> Only eligible for compliance after conversion For early action voluntary programs, guidance from Reserve and ACR can be used. For the purposes of the Compliance Offset Program, only ARB-issued guidance for Compliance Offset Protocols is considered valid. Currently, there are 55 registered early action offset projects. 6 4 American Carbon Registry, 5 American Carbon Registry and California Early Action Offset Projects, American Carbon Registry Webinar July 1, Early Action Projects, California Air Resource Board,

5 5 Carbon Offsets under AB 32 For the most part, Early Action Offset Credits were mainly purchased by brokers and financial institutions for speculative purposes. There has been a shift in focus to ARB offset credits, which are currently traded on the futures markets. Both ARB offset credits and Early Action ARB offset credits are expected to be sold by late ARB offset credits may be used to meet compliance obligation starting in the current Compliance Period 1 ( ). Table 2. Requirements for Parties Seeking ARB Offset Credits 7 Register with ARB List the early action offset project with ARB Have the project successfully complete a regulatory verification -> Desk review -> Full verification Request issuance Offset Credits Supply and Demand It is projected that over the three AB 32 Compliance Periods ( ), the volume of offsets generated by the four approved protocols would be insufficient to meet total demand for offsets in California, estimated at 208 million offsets over the same period. 8 If the total expected demand is reached, there will be a 29% shortage, or 7.6 million MTCO2e (MMTCO2e), in Compliance Period 1 ( ). This does not include additional demand anticipated from banking of credits in the early years. By Compliance Period 3 ( ), there will be a 67%, 7 American Carbon Registry and California Early Action Offset Projects, American Carbon Registry Webinar July 1, International offsets to play limited role California CO2 market, Climate Connections,

6 6 Carbon Offsets under AB 32 or 134 MMTCO2e shortage. 9 Figure 1. Forecast Cumulative ARB Offset Supply vs. Potential Offset Demand ( ) 10 New Compliance Offset Protocols In order to close the gap between the supply and demand for offsets, ARB established procedures for the approval of new compliance offset protocols as well as requirements for new compliance offset protocols. ARB is working to identify potential Compliance Offset Protocols that may be applicable in California, across the United States and throughout the world. Proposed Project Types 11 : Rice Cultivation Projects Mine Methane Capture Projects There are many carbon offset protocols that were developed in the voluntary market and ARB is considering adding some of them to the cap-and-trade. These voluntary protocols will be assessed against the protocol criteria developed by ARB. Additionally, ARB considers proposed 9 Compliance Offset Supply Forecast For California s Cap-and-Trade Program ( ), American Carbon Registry, Winrock International, 10 Ibid. 11 Compliance Offset Program, California Air Resource Board,

7 7 Carbon Offsets under AB 32 protocols submitted by stakeholders that include elements to ensure any resulting offsets meet the AB 32 offset and ARB protocol requirements. Requirements for New Offset Protocols In order for protocols for new project types to be approved, they must meet certain requirements: The resulting GHG emission reductions are from sources that are not covered by the cap and that are not subject to a compliance obligation. If emissions are shifted from one source under the cap to another source under the cap there is no net reduction, or offset. For example, the installation of solar panels would not be eligible for offsets as the actual emission reductions are associated with power generation and all electricity generation is already covered under the Cap-and-Trade Program. Additionally, ARB will not issue offset credits for reductions from sources that would be covered by the cap but are located outside California or are not covered in this period but will be in the next one. For example, ARB will not adopt a Compliance Offset Protocol for cleaner vehicle fleets because transportation fuels will be covered in the cap-and-trade starting in The GHG emissions reduction must be a direct reduction within a confined project boundary. Recycling activities are not eligible for offset credits as the recycling activities do not have a direct GHG reduction at the recycling facility, but may have an emissions impact upstream when new materials are extracted or manufactured in lieu of the recycling. Currently, to avoid double counting issues in the Cap-and-Trade Program, ARB does not plan to adopt protocols that include a lifecycle analysis. The GHG emissions reduction must be permanent. For example, methane flaring in livestock digester projects destroys methane

8 8 Carbon Offsets under AB 32 permanently. For GHG sequestration, the project must be able to ensure that GHG will not be released into the atmosphere for at least one hundred years. The U.S. Forest and Urban Forestry Projects Compliance Offset Protocols require a commitment to keep any credited carbon stocks sequestered for at least 100 years. The GHG emissions reduction must be conservatively quantified to ensure that only real reductions are credited. A solid understanding of the underlying quantification for all sources is critical to estimating a real reduction in GHG emissions. The GHG emissions reduction must be verifiable and enforceable. Compliance Offset Protocol must have clear monitoring and measurement requirements that can be audited by a verifier and enforced by ARB. The GHG emissions reduction must be additional, or beyond any reduction required through regulation or action that would have otherwise occurred in a conservative business-as-usual scenario. ARB will not adopt a protocol for a project type that includes technology or GHG abatement practices that are already widely used. 12 Linkage of California s Cap-and-Trade with Other Regional Programs California is looking for ways for linking its cap-and-trade with other subnational cap-and-trade programs. California is partnering with Canadian provinces such as British Columbia, Ontario, Quebec, and Manitoba to reduce GHG emissions through the Western Climate Initiative. Carbon markets in California and Quebec will merge, commencing January 1, Carbon 12 California Air Resources Board s Process for the Review and Approval of Compliance Offset Protocols in Support of the Cap-and-Trade Regulation, California Air Resources Board, 13 Western Climate Initiative,

9 9 Carbon Offsets under AB 32 credits purchased in California can be used to offset greenhouse gas emissions in Quebec, and vice versa. To ensure the applicability in regional trading program, California is coordinating the process of approval of new protocols with its Western Climate Initiative partners. In order to avoid adverse consequences, it is critical to ensure the applicability of the approved protocols in all the regions. The linkage with Quebec can provide a small volume of additional offset supply. Three protocols have been accepted by Quebec: methane destruction from manure storage facilities (projects located in Quebec only), methane destruction from small landfills (projects located in Quebec only), and ODS destruction in Canada or in the U.S. from appliance foam only. Linking with Quebec will provide additional supply, but not close to the amount needed to close the offset shortage projected for Compliance Period 3 ( ). 14 Even though ARB approves of offset projects in the U.S. and Canada, it is highly unlikely that ARB will accept many international offsets. 15 Potential for REDD Deforestation now accounts for 15% of all global greenhouse gas (GHG) emissions. 16 For that reason, REDD - Reducing Emissions from Deforestation and Forest Degradation - credits are expected to be accepted for compliance in the system in REDD credits are listed in the cap-and-trade regulation as eligible, although ARB has not yet initiated a rulemaking. The REDD Offsets Working Group (ROW) was established in February 2011 to produce a report outlining options for REDD offsets in California s cap and trade system. On July , ROW offered its final recommendations for incorporating international REDD offsets into California s cap-andtrade program. The ROW recommendations advise only the acceptance of jurisdictional 14 Ibid. 15 International offsets to play limited role California CO2 market, Climate Connections, 16 California, Acre and Chiapas, Partnering Reduce Emissions From Tropical Deforestation, The REDD Offset Working Group,

10 10 Carbon Offsets under AB 32 REDD+ credits, which means the credits must come from states, counties, territories, or countries that, like California, are also reducing greenhouse gas emissions within their boundaries. Furthermore, credits must be recognized in their home jurisdictions, and their emission impacts must be factored into those of the home territory, before they can be recognized in California. Although theoretically open to any states that meet those criteria, the focus for now is on Acre (Brazil) and Chiapas (Mexico). 17 If approved, REDD projects could generate a significant supply and possibly fill the compliance gap after REDD has various pros and cons which has led to controversy in California as opinions vary among different groups. Many people support California s climate change goals and acknowledge the fact that tropical forests can play an important role in combating climate change. Others express concerns that REDD offsets would not provide environmental and health benefits to Californians, protect forests, or avert carbon emissions. However, if approved, California polluters would be allowed to offset just 2% to 4% of their compliance obligations with REDD+ offsets. This means that 92% of a regulated entity s carbon emissions must still be addressed at source. 19 All carbon offset programs suffer from environmental integrity problems, such as non-additionality, and some would argue that sub-national REDD+ credits are the most problematic of all offset types. Emissions reduction from REDD+ projects face inherent risks of leakage, where deforestation merely shifts from one part of the country to another, and impermanence, where the forest is destroyed at a later point. Further, compliance offsets requires precise carbon accounting, which ARB might deem insufficiently 17 Zwick S., Scientific Advisory Panel Offers Blueprint For California REDD, &eod=1 18 Compliance Offset Supply Forecast For California s Cap-and-Trade Program ( ), American Carbon Registry, Winrock International, 19 California Again Leads The Way, This Time With Forest Carbon Offsets, Forbes,

11 11 Carbon Offsets under AB 32 precise for REDD credits as the measurement of carbon stocks in tropical forests is inexact. 20 Claims have also been made that REDD projects are detrimental to native populations by destroying indigenous communities. 21 Conclusion Offset credits are an important element in the implementation of the cap-and-trade program in California. Offset credits help achieve overall GHG emissions reduction. Furthermore, offset credits play a role of price containment, hence the supply and demand for offsets should be adequate in order to avoid sharp price fluctuations. Currently, carbon offsets are traded at a price below the allowances ($14, May 2013) 22 that makes them attractive for the covered companies that have to comply with cap-and-trade. With only four approved offset protocols, the supply of offset credits is significantly lower than the demand. To close this gap, ARB is working on developing new protocols, considering existing voluntary protocols and expanding California s cap-and-trade to larger markets by linking with Quebec, Acre, and Chiapas. Given the novelty of the program, the legislation that supports cap-and-trade is still being finalized. Offset credits that can be used for the compliance are not sold yet. Early Action Offset Credits developed under approved protocols can be converted to ARB offset credits in the future. Additional offset protocols are being developed. ARB is working with partner states to finalize legislation that will be viable in all the states. All this implies the uncertainty about the availability and the pricing of the offsets going forward. It is critical for ARB to carefully develop new offset protocols and necessary jurisdictional frameworks for a cap-and-trade program, which will provide GHG reductions at the lowest cost possible. If implemented correctly, offset credits will ensure a lower cost of the compliance for the companies and residents of California. 20 California groups urge Governor to reject REDD carbon offsets, Redd-monitor.org, 21 Ibid. 22 Auction Information, California Air Resource Board,