CLIMATE:

Fight brews over offsets in Calif. cap and trade

Correction appended.

If a tree falls in the forest and it was supposed to have canceled out a company's carbon emissions, who bears responsibility?

It's among many dilemmas California faces as it rolls out its landmark climate law.

The state's Air Resources Board (ARB) soon is expected to unveil its proposed rules for enforcing A.B. 32, the law ordering reductions in heat-trapping gases blamed for climate change. ARB at the same time will issue guidelines for the nation's first economywide carbon cap-and-trade program.

But already there is concern about a slice of cap and trade known as offsets, a mechanism that will allow companies to compensate for some carbon emissions by investing in projects that reduce greenhouse gases.

There are disagreements over how many offsets should be allowed, how the state will prove that qualifying programs actually pare greenhouse gases and who should suffer the consequences if an offset turns out to be fraudulent, is destroyed or is changed by the developer.

The stakes are high.

"If we cannot ensure with a high degree of confidence that the offset credits are real," said Brian Nowicki, the nonprofit Center for Biological Diversity's California climate policy director, "then this calls into question whether we are really achieving these reductions and thereby undermines the integrity of the cap-and-trade program as a whole."

While environmental groups seek caution on offset approvals, others argue that a robust offset program is essential for businesses forced to comply with the climate law. Offsets reduce compliance costs for companies, said Josh Margolis, CEO of emissions brokerage firm CantorCO2e.

"If they want to stay in the state of California, [businesses] have to conclude that compliance costs are manageable and that there are not overwhelming benefits to moving their operations outside the jurisdiction of A.B. 32," Margolis said. "If you decide that it's prudent to move operations then that's the low-cost compliance alternative."

A.B. 32 by 2013 will impose the kind of carbon cap-and-trade rules that Congress considered and ultimately let die in 2010. Many in Washington, D.C., are watching closely, seeing the Golden State's plan as a kind of litmus test for climate policy.

California earlier this month delayed full rollout of the program to 2013 from 2012. At the end of next year, businesses that emit more than 25,000 metric tons of carbon dioxide equivalent per year will begin buying and selling credits to cover their emissions reduction obligations in 2013 and later (ClimateWire, June 30).

But the next few weeks will be key in the A.B. 32 transition. After ARB releases its proposed regulations, interested individuals, businesses and groups have 15 days to file comments with ARB. The Air Resources Board meets Aug. 24 on its scoping plan, which includes the actions it will take to cut greenhouse gases.

Leading up to the release of the proposed rules, ARB on July 7 released a "discussion draft" of 274 potential changes to the A.B. 32 regulations, revisions from what it adopted in December. There were some alterations to the offset program but not enough to please either environmentalists or businesses.

"We are so far at least in this draft not getting to the heart of what conservation organizations" believe is needed, Nowicki said.

The regulations "are very sparse in their specific requirements" that ARB will use to ensure offsets actually displace carbon emissions, Nowicki said.

Without that, Nowicki said, there is concern that ARB will be "allowing emissions to occur that are not fully offset." That carries a liability for the whole program, he said.

ARB wants the offsets to be reliable and useable, spokesman Stanley Young said.

"ARB is striving to ensure that the offset credits deliver real verifiable tons of [emissions] reductions," Young said. "We've been engaged in discussions with stakeholders since the beginning of the program and have made our development of the offsets an integral part of the program."

Businesses will be limited in using offsets, Young said. They can use them to cover a maximum of 8 percent of their total emissions. ARB plans to put a number of requirements in place to ensure offsets are lessening greenhouse gases, he said.

"Our goal is to ensure the stringency and the quality of offsets being used in the California program," Young said.

Many problems seen

ARB is aware there are many worries about how well the offset program will work. At an informal hearing in Sacramento earlier this month, participants aired a panoply of concerns.

One provision ARB proposes would require a renewal of permits for sequestration projects every 30 years.

Bruce McLaughlin, of the Offsets Working Group, argued those programs should be allowed to operate longer between verifications. Projects should be able to generate credits for up to 100 years, he said, in order to make it worthwhile to develop them.

"The cost is fantastic to start a project," McLaughlin said.

Sequestration projects can be reverified an unlimited amount of times under the current ARB informal proposal.

Those who would purchase offsets want individual credits to stay valid longer. Under the current outline, businesses required to make emissions reductions will submit information on offset purchases at the end of each multi-year compliance period. The first compliance period is two years while the rest will be three years.

Those with emissions should be able to turn in offsets at any time, argued Frank Harris, an environmental economist with Southern California Edison. That would smooth demand for offsets over time, he said.

The right to turn in offsets would not "turn into a pumpkin," Harris said, if emitters were allowed to submit offsets on a rolling basis, rather than per compliance period.

"We could address this problem without any environmental harm, and we would actually see more direct reductions early on," he said, as offset supplies are projected to increase in later years.

Then there's that question of those trees in the forest.

One of the thorniest offset issues ARB faces is liability -- who is responsible if a business invests in a project that ARB approves initially but then later deems not useable? A company, for example, pays for forest preservation but a few years later the owner cuts down the trees or a fire destroys the wooded preserve.

ARB had said that the buyer of the offset would have to compensate for those emissions that a forest or other project was supposed to cancel out.

That is different from how many other environmental market programs are run, said Margolis with CantorCO2e. Once the Air Resources Board deems an offset useable, ARB should have a means of protecting buyers if those offsets later become problematic, Margolis said.

The liability provision will make it difficult for many companies to use the system, said John Melby, managing director at the Green Exchange, a regulated exchange and clearinghouse for environmental products.

"The person who bought it bought it in good faith according to the rules of the state," Melby said.

"If they have unlimited risk on those products, they're not going to buy those products," Melby said, and that limits the ability of offsets to mitigate costs.

Offsets need to be legitimate, Melby said, but "the liability shouldn't be to a party that has limited ability to manage that."

ARB sees buyer liability as an important part of ensuring offsets are only allowed for new programs that reduce greenhouse gases, Young said.

"We felt that it was the most effective way to go," Young said. "We wanted to be sure that the person who held the instrument was liable for it" because that "would put pressure on the project" to be as rigorous as possible in ensuring legitimacy, he said.

"You would only buy from projects that you deem trustworthy," Young said. "They need to be verified. It would put a kind of gold standard on offset credits. Projects that are trustworthy and verifiable would be deemed more worthy of purchase."

Voiding offsets

There is disagreement as well about how long ARB should have to decide that a project no longer qualifies as an offset.

Prior to the July 7 draft revisions, ARB had said that there was no limit to how long it would have to deem a project ineligible as an offset. In the discussion draft ARB changed that to up to eight years.

"That's largely unworkable in a market process," Melby said.

In the marketplaces where businesses and others would be buying and selling offsets, Melby said, "parties aren't known to each other," meaning they would lack a means of seeking redress after eight years.

If the eight-year window stays, offset sales are likely to become deals that happen mostly between companies that know each other or have a business relationship, Melby said. That would create a lack of price transparency on a larger market, he said, and would block many small companies from participating.

"We're worried that people understand the rules by which they're operating," Meyers added, and that "when someone buys something and uses it for compliance, that it's real, that it's approved, that they don't have to worry about fallback, that they can make those decisions with confidence. It's important to make sure that once its set up and running that people don't have to worry about look backs."

There is potential to game the system, said Nowicki with Center for Biological Diversity. A forest owner, for example, could say he has set aside trees for preservation when in fact he never had plans to cut those trees because they were hard to reach or otherwise less profitable.

The state needs to make sure that offset products or programs are new, Nowicki said, instead of allowing people to earn money for projects that would have happened anyway.

But he admitted that doing so will be challenging.

"The ways to clamp down on such gerrymandering are difficult to write," Nowicki said, especially if ARB is "trying to maximize the ways that people can register their forest in the project." Some forest conservation projects "start to get excluded if they clamp down on gaming. It's tricky."

A verification process will help ensure the offsets start out legitimate and remain useable for the life of the contracts, said Young with ARB.

There will be verification before each offset can be used, and there will need to be a new verifier after six years, he said, so that there are at least two analyses during the eight-year window ARB has to question the programs.

As well, there is the possibility outside insurance companies will come in, he said, and offer products that limit liability to those buying offsets. Businesses want to be able to use more offsets. That would lower the cost of the cap-and-trade program, Margolis said.

"The 8 percent limit is established by the Air Resources Board with the intent that you make most of the reductions you can on site or use allowances," Margolis said. "That has the effect of limiting your ability to reduce your costs."

Companies are cognizant, he said, of the fact that there are other places they could operate that do not have the same requirements that California is imposing under A.B. 32.

But Young with ARB said an increase in the allowable amount of offsets probably is not going to happen.

"We ran some economic analysis of the program at 8 percent, 4 percent and zero percent," Young said. "We determined that 8 percent provides the most feasible level of offsets that enable the facilities to comply with the program in a cost-effective manner.

"It's unlikely there will be any change at this point," Young said.

Reporter Debra Kahn contributed.

Correction: This story was corrected to state that the 8 percent limit on offsets applies to total emissions, not reductions.

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