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Forest, Ag Project Developers See Opportunity, Concern In California ODS Offset Invalidation


Forest, Ag Project Developers See Opportunity, Concern In California ODS Offset Invalidation

United States-based forest carbon project developers see potential for increased demand for their offsets as a direct result of California regulators’ decision to invalidate some ozone-depleting substances (ODS) offsets. But they also sympathize with their ODS counterparts over the way the regulators arrived at their decision to invalidate the offsets and expressed concern their projects could face similar scrutiny.

17 November 2014 | California regulators shook the North American carbon markets to their core with their plans to invoke the invalidation provisions featured in the state’s carbon offset program for the first time. While the affected producers of ozone-depleting substances (ODS) offsets and their allies loudly lobbied the regulators to change their minds, developers of forest and livestock carbon offsets quietly mulled what the decision means for them.

The ODS invalidation “could be the most important topic affecting California offsets right now,” said Kevin Townsend, Chief Commercial Officer of Blue Source, which develops forestry and other types of carbon offset projects. “This is immensely important for all California offset types, including forestry.” 

The California Air Resources Board (ARB) – the agency tasked with overseeing the state’s cap-and-trade program and its offset component – in May began reviewing 4.3 million offsets issued for ODS destruction events at the Clean Harbors Incineration Facility in El Dorado, Arkansas. These substances, which include foam blowing agents and refrigerants, are much more potent than carbon dioxide in terms of their global warming potential, so the ARB adopted a process to count the greenhouse gas (GHG) emissions reductions associated with destroying these materials in the United States and allow these reductions to be used for compliance in its program.

On Friday, the ARB decided to proceed with previously announced plans to invalidate 88,955 offsets generated from a ODS project by developer EOS Climate. This was the first instance of the regulators invoking the so-called buyers’ liability provisions of California’s cap-and-trade program that allow them to invalidate offsets found to be faulty or fraudulent and require regulated entities to surrender replacement offsets for compliance.

However, the ARB backed away from plans to invalidate 142,199 offsets generated under a project by Environmental Credit Corp (ECC). The ARB ultimately concluded that the destruction activities related to that project occurred outside of the timeframe when the Clean Harbors facility was purportedly out of compliance with its operating permit issued under the Resource Conservation and Recovery Act (RCRA).

The ARB’s final determination clears the way for all but the 88,955 invalidated offsets to be returned to the accounts from which they were removed on May 29 when the investigation launched. 

A new opportunity for forestry?

ODS offsets had been the top choice for California compliance for some time as buyers were reassured by the relative ease of quantifying the emissions reductions created by these projects – a critical consideration when California regulators retained the right to force buyers to replace invalidated offsets. But the preliminary determination demonstrated the inherent risk associated with developing ODS projects when there are only seven commercially available destruction facilities. This could encourage buyers to turn to forestry offsets, according to some developers. 

After a slow start in 2013, the ARB has now issued 6.2 million forestry offsets, accounting for nearly half of all offsets issued and about half a million more than issued ODS offsets, as of November 12. Livestock offsets make up a small percentage of the California program, with only about 665,000 offsets issued to date.

Development of forest carbon projects for California was somewhat constrained initially because the ARB rules governing these projects were incredibly confusing, especially with regard to the buffer pool and the applicability of the invalidation rules to forestry, developers explained. The ARB created a buffer pool to handle unavoidable losses caused by natural disasters such as wildfires, with the pool populated by a percentage of carbon offsets set aside each year after the project is initiated and tapped when such losses occur. And the ARB only recently amended its regulations to put the risk of invalidation on the buyers of forest carbon offsets, rather than the sellers, to ensure consistency in the liability across project types.  

“I think there was a little skepticism of forestry projects when the program first started because buyers did not understand the difference between the different types of reversals and who is liable in each case,” said Sean Carney, President of forest carbon project developer Finite Carbon. “Now buyers understand that intentional reversals are on the landowner, an unintentional reversal is on the buffer pool, and invalidation is on the buyer and they are three separate, distinct acts. Overcoming this confusion was a necessary step for buyers to embrace forestry and I think we are past it now.”

The California offset market has basically been “frozen” since the ARB announced plans to invalidate some of the Clean Harbors ODS offsets, said Steve Baczko, Vice-President of Business Development at ERA Ecosystem Services.

“Forestry hasn’t seen the benefit of this yet in the sense that the market is still not very active because people are still waiting to see how this is going to be handled,” he said. “That said, we have heard from a number of market participants be it buyers or developers that this now puts forestry on more of an even valuation of project performance.”

Blue Source did not perceive a slowdown in demand for its offsets during the investigation or since the preliminary determination was revealed, Townsend said, but he has had more conversations with clients reevaluating what the decision means and whether they want to continue to participate in the California offset market and under what circumstances. “I think it is changing the way some players in the market are thinking about this,” he said. “I think it’s a very big deal.” 

Sharing ODS developers’ pain

But even though they see an opportunity, forestry developers do not relish what happened to their ODS brethren. While not wanting to publicly criticize the ARB for fear of jeopardizing their working relationships with regulators, several project developers expressed concern about the seemingly subjective way the ARB reached its decision and the lack of transparency during the investigation process. They also expressed concerns about the possibility their projects could face invalidation for alleged violations unrelated to a project’s emissions reductions activities and whether their projects could even be managed to mitigate those risks.

The ARB indicated its final determination in the Clean Harbors investigation was guided by the language of the ODS protocol,  which states that offset projects are ineligible to receive ARB or registry offset credits for GHG reductions that occur as the result of collection or destruction activities that are not in compliance with regulatory requirements. The ARB interpreted this provision as extending to the operation of the destruction facilities, meaning they must meet all applicable regulatory requirements when the ODS destruction occurs.

However, Clean Harbors handling of byproducts from the incineration process – whether in compliance or non-compliance with RCRA waste-handling requirements – appears to have no connection to offset project activities, said David Williamson, a lawyer representing verifier First Environment, which was not involved in the Clean Harbors situation.

“As an analogy, it would not be warranted under the cap-and-trade rules if ARB were to attempt to invalidate a forestry offset credit where a third-party mechanic were to illegally dispose of oil from trucks used in forest operations, or if offset credits from a livestock methane project were invalidated because of some legal violation elsewhere on the farm such as improperly applying pesticides,” he said. “Any such violations associated with ancillary activities should of course be corrected and would be subject to enforcement by jurisdictional officials, but these activities are not part of the verification process or within ARB’s invalidation authority.”

Unanswered questions 

The final determination did not directly address questions raised by developers of other project types during the public comment period or respond to requests that ARB officials offer guidance on how these projects would be viewed through the invalidation prism. For example, the ARB did not clarify whether it would automatically invalidate all offsets issued during an entire reporting period if it found what appeared to be a limited or isolated cause for invalidation.

Patrick Wood, General Manager of Ag Methane Advisors, raised the point that the reporting period for offsets from ODS projects proposed for invalidation is very short – less than one week. “However, if the reporting period for these projects were a year in length, like for a livestock project, and the permitting violations only lasted three days, it seems it would be unfair to invalidate the offsets from the entire reporting period,” he said. “We understand this is what the regulation currently requires, but also understand that (ARB) has some flexibility in implementation of the regulation.”

This question is relevant to livestock projects in the context of a manure spill, Wood said. Most large farms spread manure on many different fields via trucks and tractors. From time to time due to human or mechanical error, manure from one load on one day may spill while in transit or may be spread at the wrong rate on a field or too close to surface waters bordering a field.

In the case of the ODS projects, although the permitting violation was downstream of the project activity, it was considered related to the project because the violation was related to a by-product of the project activity, he observed. If such as a manure spill happened for a livestock project, would the ARB consider that related to the project and would the ARB invalidate the offsets for the entire reporting period or just the day when the problem occurred?

“That’s kind of the question that remains in our minds,” said Peter Weisberg, Program Manager, The Climate Trust.

For more information on forestry’s role in the California compliance market, please visit the Ecosystem Marketplace website at http://www.forest-trends.org/fcm2014.php  on Friday, November 21 for the State of the Forest Carbon Markets 2014 report. If you are located in or visiting the Washington, D.C. area on Friday, we invite you to join us for our launch event at the World Bank at 4 p.m. We'll present findings from the report, followed by commentary from an expert panel. Forest Trends' President Michael Jenkins will moderate the discussion. If you plan to attend, please email Ben McCarthy at bmccarthy@ecosystemmarketplace.com with your RSVP (please include your name and organization). Details will follow.

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The Science on Blue Carbon Is There, but Is the Market?


The Science on Blue Carbon Is There, but Is the Market?

If you build it, will they come? That’s the question that the authors of blue carbon methodologies are now asking. (Part 1 of 2.)

12 November 2014 | “Blue carbon” ecosystems include seagrasses, tidal salt marshes and mangroves that provide a myriad of benefits: They absorb storm surge along the world’s coasts, provide breeding grounds for fish species that people eat and sell, attract tourists, and – as many groups are now quantifying – store an incredible amount of carbon. These coastal oases are also some of the most threatened natural places on the planet and are being lost at a rate of about 2% per year, due mainly to aquaculture and coastal development. The emissions from blue carbon eco systems are similar to the emissions of Japan.

Despite their importance, the significance of coastal ecosystems to climate change was not widely recognized until recently. The Intergovernmental Panel on Climate Change (IPCC) didn’t release its Wetlands Supplement for national-level wetlands carbon accounting until 2013. Before that, wetlands were not considered to be a “managed” land base.

However, over the last five years, coalitions such as The Blue Carbon Initiative which aims to develop financial incentives and policy mechanisms for restoring and conserving blue carbon ecosystems have emerged rapidly. The group released a manual for measuring blue carbon stocks last month and hopes the guide will be used to produce data that will flow into emerging carbon methodologies, as well as IPCC accounting.

The American Carbon Registry (ACR) released the first carbon methodology for wetlands restoration in the Mississippi Delta in 2012 and now hopes to expand its geographic scope to California. At the global scale, the Verified Carbon Standard’s (VCS) methodology for Tidal Wetland and Seagrass Restoration is wrapping up its first assessment (of two) and is expected to be available early in 2015.

Could carbon finance be a game-changer for these fast disappearing ecosystems? It depends.

“Generally I think the price of carbon is too low to support really most land-use activities, including wetlands. And wetlands projects are expensive,” said Steve Emmet-Mattox, one of the lead authors of the VCS methodology, speaking at the Restore America’s Estuaries Summit last week.

Coastal restoration, especially when it involves actually moving land, can cost up to tens of thousands of dollars per acre, so current carbon prices on the voluntary market (just under $5 per tonne, according to Ecosystem Marketplace’s State of the Voluntary Carbon Markets 2014) likely won’t move the needle.

Some project developers hope that blue carbon restoration methodologies will pave the way for blue carbon conservation methodologies that will function more like the avoided deforestation (REDD) methodologies available for forest ecosystems. One of the first projects to apply REDD principles to a blue carbon ecosystem is the Mikoko Pamoja project in the Gazi Bay of Kenya which aims to generate $12,000 per year in carbon revenue, from the sale of Plan Vivo certificates. Mikoko Pamoja covers just 117 hectares but avoided wetlands conversion projects could potentially be much larger.

Project developers also cite the importance of being able to group blue carbon projects to consolidate validation and verification costs, and the potential to quantify other ecosystem services to tip the cost-benefit analysis.

Part 2 of this article will cover how sea level rise interacts with blue carbon projects, as well as practitioner ideas for achieving economies of scale. It is forthcoming later this week.

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Bunge Jumps into Deforestation-Free Palm Oil with a Splash


Bunge Jumps into Deforestation-Free Palm Oil with a Splash

On Monday, the global agribusiness and food production company Bunge released a commitment to source deforestation-free and peat-free palm oil. The commitment, while not perfect, represents progress in pursuit of palm oil that does not contribute to deforestation.

This article was originally published on our sister site, Ecosystem Marketplace.

30 October 2014 | On Monday Bunge, an agribusiness and food ingredient company based out of White Plains, New York, indicated its intention to ensure the palm oil that it sources will be deforestation- and peat-free. Coming from one of the largest traders of palm oil in the world, Bunge’s announcement is significant for what it means for both the world climate and for ecosystems at risk due to palm oil production. But to me it also signifies that the status quo—palm oil that is linked with deforestation and peatland destruction—is a sinking ship that is increasingly risky to stay aboard.

Bunge eyes the shore

UCS and our allies have been engaged with Bunge for months now. We’ve corresponded with them. We’ve met with them at their headquarters in White Plains. We traveled to Singapore for a conversation with their suppliers. And with your help, we’ve put the pressure on some of the companies buying palm oil from Bunge. Two such companies—Dunkin’ Brands and Krispy Kreme—recently came out with new pledges on palm oil. Meanwhile, two of Bunge’s competitors, Wilmar and Cargill, dove headfirst into zero-deforestation by announcing policies that apply across a range of commodities. Amidst such an atmosphere of change, Bunge is moving forward with its new policy.

Bunge’s new policy protects primary and secondary forests and updates its labor and human rights safeguards. It saves peatlands from development and better manages existing plantations on peat. And because Bunge purchases some of its oil from areas with lots of peatlands, the new commitment has the potential to save huge amounts of carbon. I’ve written before about the importance of peat soils, and particularly the pushback of growers in Sarawak, Malaysia. With proper implementation, Bunge’s commitment could help steer the region towards greater conservation of peatlands.

The realization of each of these measures will mean considerable effort on Bunge’s part. By committing to a new policy, they have signaled to the world that it makes better business sense to move forward even with added costs than to risk doing nothing and falling behind new industry standards.

Or only testing the waters?

However admirable the policy is for the reasons outlined above, the Bunge policy does not set target dates for implementation. It commits only to start to collaborate with suppliers and stakeholders to develop timelines. Timelines are important because they provide a sense of urgency and accountability. And while the policy rightly prioritizes tracing palm oil back to the plantation for areas that are deemed at risk, it makes no commitment to do so with all of the palm oil it sources at any point in the future. Without these timelines, Bunge can be said to be testing the waters, perhaps dipping its toes into the water, but it is not yet swimming to safety.

We will have to wait and watch in the coming months to see whether Bunge makes good on its promise and takes the further step of setting some explicit time deadlines, and then follows through on those timelines, to ensure it is accountable for the palm oil it sources before we can term it safely ashore.

Who is still going down with the ship?

Bunge’s commitment marks yet another trader that will soon be offering palm oil that is deforestation and peat-free. The rapidity with which companies have been making commitments over the past year can be likened to an emergency evacuation. As more companies swim to safety, fewer and fewer are left in the quickly sinking ship, desperately bailing out water. It makes me wonder when these companies who have not yet made commitments—companies like McDonald’s, Burger King, and YUM! Brands (Taco Bell, KFC, and Pizza Hut) are going to take the plunge and swim to shore.

It’s sunny and dry on the beach. We’re saving you a seat.


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