The Offset Market

10/8/82012 Articles

After some initial fits and starts, the California Air Resources Board is making significant progress in crafting various elements of AB 32 — the state's landmark Global Warming Solutions Act — and in particular, implementing the AB 32 greenhouse gas cap-and-trade program. Cap-and-trade is a central element of AB 32, and covers the major sources of GHG emissions such as refineries, power plants, industrial facilities and transportation fuels.


Cap-and-trade has a number of component parts to implementation, including the compliance offset program. In brief, offset credits are GHG emission reductions, or sequestered carbon, that meet regulatory criteria issued by CARB. The offset credits may be used by a regulated entity to meet up to 8 percent of its triennial compliance obligation under cap-and-trade.


Importantly, only CARB can issue compliance offset credits. Within the 262 pages of the cap-and-trade regulation, set forth in Article 5, §§95800 to 96023 of Title 17 of the California Code of Regulations, or CCR, CARB has devoted a lengthy portion to setting forth the legal requirements for compliance offset protocols, implementation and verification of offset projects, and eventual issuance of CARB offset credits.




The creation and purchase of offsets as part of a voluntary carbon reduction effort, or as a component of a mandatory compliance program (i.e., CARB's compliance offset program), raises a number of different challenges for the offset developer, seller, regulator and buyer. CARB, through the cap-and-trade rulemaking process, has considered and grappled with issues concerning what types of offset projects to recognize, how to ensure their legitimacy, and whether and to what extent they should be used to help meet mandatory emission reduction targets.


It has been long-agreed that offsets must be real, additional, permanent and verifiable. Indeed, CARB has codified these particular concepts in §95972, Requirements for Compliance Offset Protocols, by requiring, among other things, accurate measurement of "removal enhancements" achieved by the offset project, specific data collection and monitoring procedures, project baseline establishment, accountability for activity or market-shifting leakage (defined as increased GHG emissions or decreased GHG removals resulting from displacement of activities or resources from inside the offset project's boundary to locations outside the offset project's boundary), accounting for uncertainty in quantification of the offset project, permanence and geographic applicability (geographic boundaries must be within the United States, its territories, Canada or Mexico).


CARB has to some degree had the benefit of learning from the experience of other functioning offset programs. For example, the East Coast-focused regional greenhouse gas initiative, or RGGI, is a similarly regulatory-focused program, and has operated for a number of years in the context of the RGGI cap-and-trade program. Outside the United States, the Kyoto Protocol's Clean Development Mechanism program has been operating longer than any other program and is generally considered to be the standard-bearer when it comes to a certification structure.




As part of its compliance offset program, CARB has adopted four compliance offset protocols for the regulated community to use to generate CARB-certified offset credits. The four protocols are:


• U.S. forest and urban forest project resources.

• Livestock projects.

• Ozone depleting substances projects.

• Urban forest projects.


These four protocols may later be joined by additional protocols as CARB moves through additional rulemaking.


How exactly will this work? The protocols identified above, which are available for download at the compliance offset program page within CARB's cap-and-trade program website, are the basis upon which specific offset projects are developed. For example, the U.S. forest and urban forest project resources protocol provides requirements and methods to quantify net climate benefits of activities that sequester carbon on forestland. These might include projects involving reforestation, improved forest management or avoided conversion of forest lands. Livestock projects focus on methods to quantify and report GHG emission reductions associated with the installation of biogas control systems for manure management on dairy cattle or swine farms. Similarly, ozone depleting substances projects are associated with the destruction of high global warming potential ozone depleting substances (ODS) sourced from, and destroyed within, the United States that would otherwise have been released to the atmosphere. Typical ODS historical uses include refrigerants, foam blowing agents, solvents and fire suppressants. Lastly, urban forest projects, not surprisingly, are associated with planned tree planting and maintenance activities to permanently increase carbon storage in trees.




Offset projects will eventually find their way into approved offset project registries administered by CARB as part of the compliance offset program. By themselves, registry offset credits cannot be used for compliance with the cap-and-trade program. Rather, the registry offsets must be converted to CARB offset credits to be eligible.


CARB has generated an offset project registry application form to initiate the registry application process. Satisfying the various application requirements will be followed by approved "ARB compliance offset program and compliance offset protocol training classes." This is a work-in-progress, and there are currently no approved offset project registries.


Offset verification through a third-party process as to claimed GHG emission reductions or sequestered carbon is a necessary next step before CARB will issue offset credits. The offset verification process is still a work-in-progress as well. While CARB has initiated training and accreditation for offset verifiers, there are currently no offset verification bodies or offset verifiers.


To the extent a regulated entity has existing offset credits developed, CARB is also working on a process to potentially recognize those early action offset credits for use in the CARB program. CARB has indicated that additional information on recognition of those credits will be coming soon.



Once established, verified and approved, each CARB offset credit will be equal to one metric ton of carbon dioxide equivalent. To put this in perspective, it was recently estimated by the Congressional Research Service that a carbon tax system, as opposed to a cap-and-trade system like California's under AB 32, would generate as much as $90 billion for the federal government based on a tax of $20 per metric ton of emissions. Cap-and-trade, however, appears to be here to stay (and other jurisdictions as well), and is pointed to by CARB as among the key strategies to help put California on the path to meet its goal of reducing GHG emissions to 1990 levels by 2020, and to achieving an 80 percent reduction from 1990 levels by 2050. The compliance offset program will in turn represent a key component for the regulated community to comply with their compliance obligation under AB 32, and to help reduce the emissions that cause climate change.


Robert L. Hines is a partner in and former chair of the environmental law department in Farella Braun & Martel's San Francisco office. He can be reached at [email protected] 415-954-4935.

This article is reprinted with permission from the October 8, 2012 issue of The Recorder. © 2012 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.


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